SIEMENS: DOUBLING OF NEW ORDERS LENDS COMFORT

After ABB India’s results, the share price of Siemens India had rallied about six per cent since Monday, in anticipation of good March quarter results. These did bring much needed visibility on order inflow and implementation but the numbers appear distorted due to adoption of the new IndAS accounting norms.

The March quarter (the second or Q2 for Siemens India, as it follows an October to September accounting year) saw order inflow increase by 96 per cent over a year before to ~4,725 crore, including an ~1,682 crore one from Power Grid. The current order book is estimated at ~15,525 crore and provides earnings comfort of 18 months.

While this is on the positive side, there is some surprise on earnings. Despite revenue for continuing operations growing at 24 per cent to ~2,983 crore, the net profit growth remained flat at ~186.3 crore over the year-before period. A large part of the earnings miss could be attributed to a nearly 50 per cent year-on-year increase in other expenses (~320 crore). While management commentary on this is awaited, analysts believe that adoption of IndAS might have resulted in the disturbance.

“Higher other expenses mighty have been on account of provision for credit losses or foreign exchange fluctuation,” says Rohit Natarajan of IDBI Capital. He says the management guidance expected in a few days will provide clarity on whether one should remain cautious of such spikes. As operating profit dipped by five per cent year-on-year, operating margins fell a little over 250 basis points (bps) to 7.7 per cent. Much of the revenue growth was propelled by the energy management and mobility verticals, which saw 33 per cent and 45 per cent growth, respectively. Others such as power and gas, building technology and digital factory grew by 14-17 per cent; the drives vertical posted the slowest growth of 3.5 per cent in Q2. However, erosion in profitability was across the board, with the earnings before interest and tax (Ebit) margin down by 188-660 bps. While the Ebit margin in energy management fell by 188 bps to 7.4 per cent, it was an improvement over the 6.7 per cent in Q1. As the latter business remains the bread and butter of Siemens in India, this offers hope in a lacklustre situation.

Still, Natarajan says investors shouldn’t look at margins on a quarterly basis. “If the performance in Q2 was disturbed due to credit losses and provisioning, a reversal of these costs is likely in the next 12-15 months, which is positive,” he points out. Also, with the order mix likely to be in favour of short-cycle projects, with execution tenure of 12 months, steep variations in the quarterly performance should be factored in.

On the whole, even if the margins disappoint, analysts are pleased with Siemens’ ability to expand its order book. However, stock valuations have been a concern, as with ABB India. The sharp 31 per cent year-to-date gain might limit a big upside from current levels. Nonetheless, with indications of growth in areas such as railways, road construction and, more important, power transmission, long-term investors could use any fall in the stock price to accumulate.

March quarter earnings weaker due to change in accounting norms and composition of orders; analysts suggest longerterm view