Why valuations matter less for Siemens stock

With the order book rising to a comfortable level, the firm is among few promising capital goods players

With the infrastructure theme catching investors’ fancy, and considering the macros, prospects appear bright for Siemens India. For one, its order book rose to a comfortable ~12,300 crore in its September quarter (Q4; Siemens follows October-September financial year), which gives investors about a year’s revenue comfort. Second, operating margins that were patchy in the past are beginning to strengthen, with Q4’s margins touching 10 per cent; an improvement of 120 basis points year-on-year (y-o-y).

The two factors reiterate that Siemens is not compromising growth for profitability, which is reassuring for investors. In fact, despite Q4 revenues being flat at ~3,142 crore, operating profit rose 17 per cent y-o-y to ~317 crore on other expenses being low; an indicator of cost efficiency.

Nonetheless, net profit adjusted for certain one-offs, remained flat at ~201 crore against ~204 crore a year earlier. Q4 numbers were helped by exceptional gains of ~560 crore from the sale of Siemens’ Worli property in Mumbai, while the comparable numbers were also boosted by oneoffs totalling to ~2,992 crore.

Going ahead, with the teething troubles of the newlyintroduced goods and services tax (GST) beginning to recede, investors should expect a brighter FY18. The pending order book also provides reasonable strength. The share of products business, at about 60 per cent of Siemens’ order book, is positive, as this business is more profitable since it involves the core segments of Siemens — energy management, power and gas, and mobility verticals.

Projects business, which is largely short-cycled (execution tenure of less than a year), accounts for the remaining order book. While projects business draws strength from private sector orders, Siemens’ innovation in the digital factory and drives segments has helped it stay afloat, and secure reasonable margins despite competition for such private sector orders.

However, Siemens India Managing Director and Chief Executive Officer Sunil Mathur emphasises that government business is growing at a faster pace than private sector orders. Therefore, the core segments will remain business drivers for the company.

Mathur expects the power generation sector to add up significantly to the order book going ahead, given the opportunity in the form of mandatory refurbishment of aged coal-fed plants. Orders from the Indian Railways also offer promise, though Mathur prefers to be cautiously optimistic on this segment.

Overall, the improving margin profile and the order book are key positives. Siemens India scores better than its close competitor, ABB India, on both counts. Trading at 35x FY18 earnings, the asking rate is well off the peak valuations of over 40x. Therefore, the valuation correction, coupled with strengthening fundamentals, add sheen to the investment rationale around Siemens India stock.