Nomura Sees Siemens' Margins Improving Amid Strong Order Inflows

Nomura raised the target price of Siemens Ltd. while downgrading the automation company to 'neutral' ratings as improving operating margins are offset by modest revenue cuts.

The key upside, according to Nomura, is the stronger-than-estimated order inflow growth and stronger pick-up in execution in project-type businesses in mobility and energy.

While the downside risk is non-materialisation of Ebitda margin improvement despite softening commodities and depreciation of the rupee versus the other currencies as Siemens is a net importer, the research house said in a Nov. 24 note.

Adding to this, the core order inflow growth is expected to slow to lower-double digits as commodity deflation impairs any possibility of further price hikes, the note said.

"We expect core order inflow growth (ex-large orders) to slow to 12-13% in FY23F, as commodity deflation is no longer supportive of pricing. This is based on the expectation that FY23F may witness commodity moderation (copper and aluminimum), which may prevent further hikes," the research house said in a Nov. 24 report.

Nomura estimates that there is an increasing scope of order inflow disappointing from the second half of the fiscal as unlike FY22 there is no advantage of a weaker base.

Despite that, the research house expects Ebitda margins to improve over FY23-24 due to the impact of operating leverage and a decline in prices of key commodities such as copper by 14% and aluminum by 17% since May.

However, Nomura noted that "Ebitda margins significantly disappointed in Q4 FY2022, as other expenses rose versus our estimate."

"As travel likely recovers, we expect a 50-60 basis points impact on FY23F Ebitda margin," Nomura said.

Nomura has raised the target price of Siemens to Rs 3,008 apiece, implying an upside of 6.8%.

Of the 30 analysts tracking the company, 21 maintain 'buy', seven suggest 'hold' and two recommend 'sell'. The return potential of the stock is 8.1%, according to Bloomberg data.