Siemens: Growth concerns cloud outlook

Order flow pick-up, higher proceeds from businesses transferred to parent act as triggers

Siemens has shed more than 7 per cent following a subdued performance in the March quarter, results of which were announced last week. The disappointment was on muted order inflows and lack of clarity on large projects. Order recovery growth remains tepid for want of significant industrial recovery. Further, the fact that Siemens is planning to transfer some segments to its parent Siemens AG is adding to the concerns.

Like-to-like order intake declined by about 4 per cent yearon-year to ~29 billion, after adjusted for a large order received a year ago from Power Grid Corporation of India. Order backlog was marginally up by 1 per cent year- on-year (~129 billion), and is equivalent to only one-time FY19 order estimates.

According to the management, while the base business orders have exhibited robust growth at 22 per cent, there is no clear visibility of large projects in the piepeline as the government has slowed down on tendering of large projects in power generation, transmission and distribution. Analysts at Emkay Global observe that the company needs to record strong order intake over the next few quarters to ensure stable revenue and profit growth in FY19 and FY20.

This is because two of its businesses, which include the mobility business, are to be transferred to its parent company.

These two businesses accounted for 15 per cent of its FY17 revenue and 10 per cent of its operating profit in the period. While the transfer of segments may bring down revenues, the transfer has not been finalised yet.

According to Antique Stock Broking, based on an earlier sale of the health care business (for ~30.5 billion) to its parent, the Indian subsidiary expects to get around ~40.6 billion, or ~114 per share, for the mobility business. This may lead to a rise in other income, with increased cash on books, and a special dividend too.

Given the lower revenue and profitability assumptions for the remaining businesses, analysts at Emkay Global have cut their earnings estimates over the next couple of years by 8-11 per cent. A similar cut in earnings estimates came in from Motilal Oswal Securities, given weak execution in the mobility, power and gas, process industries, and the drives businesses.