Expensive valuation likely to keep Siemens stock under pressure

December quarter was mixed with steady revenue, but margins were a miss

Siemens India (SIL) reported Octo­ber-December (first quarter of 2021-22 since the company has a Septe­mber year ending) revenue of Rs 3,240 crore. This was slightly more than the consensus estimates, but impa­cted by Covid-19 and supply-chain issues due to global chip shortage.

The operating and net profit missed Street estimates by around 11 per cent apiece due to higher input prices. Operating margins contracted both on year-on-year (YoY) and sequentially.

SIL is a 51 per cent subsidiary of Siemens AG; 24 per cent is owned by Siemens Energy.  The company could be considered a bellwether for the capital goods sector, with products and solutions in power generation, oil and gas, power transmission and distribution, mobility, building technologies, urban infrastructure, and digital industries.

On a YoY basis, all segments saw growth, with the mobility division (which contributes only 6 per cent of revenue) gaining the most. Energy contributed 37 per cent of revenue. Digital (21 per cent), too, reported robust performance.

Order inflow remained strong for SIL standalone at Rs 5,300 crore, up 65 per cent YoY, with the order book at a record Rs 15,580 crore.

One key contract for SIL was the Rs 900 crore order for Pune Metro Line 3 Corridor for electrical and mechanical systems as part of a consortium, including Siemens AG, Siemens Mobility GmbH, and Alstom Transport India.

SIL has low spending on capital expenditure (capex), compared to its peers. Capex has been below depreciation for the last four financial years. 

The lack of pick-up in revenue is as worrying as the margin contraction. One may argue that the escalated raw material costs and supply-chain issues, such as semiconductor shortage, are global problems, impacting margins across a variety of industries.

The low top line growth YoY and the contraction sequentially do suggest a slowdown in domestic private investment. However, the record order book backlog could comfortably translate into 20 per cent revenue growth in the current and subsequent financial years.

Margin recovery could take time. SIL has a strong balance sheet being zero-debt and it had 10.5 per cent return on equity in the last financial year.  

 The stock is highly valued. The pr­ice has hovered over the Rs 2,425-2,435 range since the results, with most analysts placing fair value low­er at around Rs 2,150. There could be an upside if margins expand due to easing of raw material prices and/or easing of supply-chain problems.