Jefferies says that 2QFY21 (Mar’ 21) results were above Jefferies expectations. Revenue recovery started from Sept’ 20 qtr, post the national lockdown. Management retained most of the cost control benefits by reporting 13% margins (v/s 8% YoY) and higher than 10% in Mar’ 19. Order flow is up 13% YoY. Jefferies upgrade FY21E-23E EPS (September Y/E) by 8-16% reflecting better revenues and margins and the stock to Buy from Underperform with Rs 2500 PT (v/s Rs 1320).

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Jefferies says that Siemens' revenue recovery started in Sept’ 20 qtr, post the lockdown, and is up 8% YoY in Sept’ 20-Mar ‘21 qtrs. Staff cost in this period is up just 2% YoY and other expenses down 31% YoY. EBITDA margins are up 130 bps YoY to 12.8% and higher than the 11.0% seen in Sept’ 18-Mar’19 (2-yr period). Mar' 21 revenues are still 3% below Mar’19 and 13% below Sept’ 19 revenues, leaving room for further operating leverage to play out. Travel, external software, packing, office stationery, legal and audit fees tend to be 50-60% of the costs in other expenses.

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Jefferies says that Siemens FY20 (Sept year/end) gross margins improved 380 bps YoY to 36% primarily due to the improvement seen in the lockdown impacted Apr-June 2020 period. Jefferies maintained that gross margins would normalise back to 32-33% with the revenue ramp-up as selective execution of favourable margin projects in the lockdown would have given some unsustainable boost. This is driving our 150-200 bps margin upgrade to 12-14% in FY21E-23E and the EPS upgrade. If it wasn’t for the 2nd COVID wave, our FY21E revenue estimates would have been 5-7% higher.

Jefferies says that India’s capex cycle has been in a broader downturn since FY 08-09 and Siemens traded at an average PE of 50x in this period. The band is quite wide between 10-85x, but in the last 5 years it has traded above 35x PE and re-rated higher each time earnings visibility improved. Jefferies' earlier multiple of 33x 1-yr forward PE factored a discount to the average as we believed margins would remain subdued as the gross margin recovery reversed. Jefferies believes over the next 12-24 months, capex outlook should improve backed by infrastructure spend, PLI linked incentive capex and housing recovery. Siemens is among the top 3 automation players in India. Directionally, as revenues mirror the macro trends, margin outlook should sustain/improve and see the stock re-rate.