Siemens Sept quarter numbers instil hope, but core segments remain laggards

What lies ahead for Siemens India in the ongoing restructuring exercise of its German parent is a key question for Indian investors. 

In March 2016, when the health care unit was hived off into a wholly-owned subsidiary of Siemens AG, investors were worried about the role of the listed Indian company: Was it only a facilitator to nurture businesses, only to sell them to its parent later? The question resurfaced in February this year, when Siemens India's mobility business was being hived off.

Multiple restructuring measures left investors confused. "It is becoming tough to assign values to the subsidiaries as we don't know how long they will be left with the Indian company," says an analyst.

This is why despite the July-September quarter (Q4; Siemens' financial year starts from October) being operationally strong, the Street didn't give it a thumbs-up. Its Q4 revenue, at Rs 39.4 billion, grew by 25 per cent year-on-year (YoY), while core operating profit rose by 32 per cent YoY to Rs 4.2 billion. Adjusted for the year-ago period's one-off gain of Rs 5.6 billion, Q4 net profit grew by 39 per cent to Rs 2.7 billion. Order inflows also rose 4 per cent.

Yet, Siemens' stock discounted these positives, and fell by about 4 per cent on Monday, because its core businesses - energy management and power segments - are not providing comfort. While revenues of energy management and power segments rose by 21 per cent and 38 per cent, respectively, their Ebit (earnings before interest and tax) margins remained under stress. The energy segment saw 40 basis points (bps) YoY shrinkage in Ebit margins, and power division's margins too were under pressure - down 190 bps in Q4.

As these core businesses are likely to remain the mainstay of the listed entity, their performance will assume greater relevance in the coming quarters.

For now, analysts at Antique Stock Broking say, "the bigger upside is a recovery in growth, and profitability improvement is expected over the next two-three years." 

Valuations are also more attractive at 33x 2018-19 earnings after the 24 per cent year-to-date correction. If no fresh surprises unfold, Siemens India may find increased appeal among investors.