Siemens India impresses with all-round growth

Street turns positive on stock as valuations become attractive

Siemens India seems to have benefitted from earlier setbacks. The engineering major announced its December quarter (Q1; fiscal year starts from October) on Wednesday and made it public that the European Commission (EC) has rejected the proposed merger of the mobility businesses of its German parent, Siemens AG and France’s Alstom SA.

If the results were a sweetener to investors, the retention of its mobility business was an unexpected bonus. Consequently, Siemens India’s stock gained over 4 per cent in two sessions, after the results.

As for the numbers, it was a quarter led by improved execution, with revenues up 15.5 per cent year-on-year (YoY) to ~2,807 crore and net profit up 20 per cent to ~228 crore. Operating profit margin continued to be on the mend, improving by 198 basis points YoY to 13 per cent.

An all-round betterment in execution and operations helped Siemens do well. Segments such as power and energy management, which have seen unsteady performance in the past owing to delayed execution, witnessed an uptick in Q1 revenues — up 17.7 per cent and 1.5 per cent respectively.

The two divisions account for half of Siemens’ revenues. While their relevance to Siemens’ earnings was high in Q1, newer divisions such as digital factories, processes and drives, and mobility are catching up. Of the lot, the mobility unit particularly has higher relevance, given the thrust on orders from Indian Railways, where Siemens is among the top manufactures.

Consequently, analysts at Antique Stock Broking welcome the EC’s decision to set aside the mobility business sale. “This development has come as a breath of fresh air,” they note. Unless Siemens has other plans for this unit, the markets are likely to take this development positively.

Investors must, however, reset their order inflow expectations. As Siemens increases its focus on technology-driven end-to-end project orders across divisions, the days of relying heavily on lumpy large orders may become history.

In other words, short-cycle orders (execution within a year) will be more relevant to Siemens’ order inflows. This is already reflecting in the order book — at ~13,200 crore in Q1, which projects earnings visibility for just a year.

Whether it impacts profitability in the long run is a monitorable, given margins are relatively lower in shortcycle orders. For now, with valuations down to 32.7x its FY20 earnings (historic P/E band of 40-50x), the Street is turning positive on the stock.