Slowdown is hurting Siemens India stock, despite a business reorganisation

The bill-to-book ratio in the September quarter fell to the lowest since 2015-16, indicating that underlying economic conditions are unfavourable even for smaller orders

Siemens India has been undertaking a business reorganisation to make itself better suited for the current environment and improve its overall profitability. The latter seems to be falling into place — its operating profit margins improved to 10.8 per cent in 2018-19 from 10.3 per cent a year earlier, even as it dropped to 9.8 per cent in the September quarter, or Q4, as Siemens follows an October-September financial year, due to certain one-offs. In fact, over a two-year period, its operating profit margin has increased from 9.5 per cent in 2016-17. However, the problem seems to lie in unpredictability of business considering how the dynamics of the order composition have changed.

At Rs 13,240 crore, the engineering major’s order book gives just about 12 months’ revenue visibility. In other words, Siemens’ bill-to-book ratio works to 1x, the lowest since FY16. The metric assumes importance as it gives the much-needed comfort on revenue predictability to investors. In Siemens’ case it also rekindles the fear that analysts had expressed in the past on its business reorganisation — that the company pursing smaller orders with higher component of digitalisation and service contracts means its order book might turn unpredictable.

chart

Also, while Siemens’ decision to move away from bulky orders was to hedge itself from market vagaries, the current bill-to-book ratio indicates that mopping up smaller orders might be equally challenging if the underlying economic conditions remain unfavourable. Analysts at ICICI Securities have cut Siemens India’s earnings estimates for FY20 by five per cent, considering the current slowdown.

ABB India’s September quarter numbers also threw up similar concerns, indicating that the business reorganisation being undertaken by both companies might show up the desired results only if the downturn reverses convincingly.

But the good news for now is that Siemens India will not hive off the mobility and mechanicals drive businesses from the listed entity — a move that was proposed by its German parent. With these segments important for the railways and automation orders, Siemens India’s decision to retain these divisions instils hope for investors. That said, considering its 42 per cent year-to-date stock price rally, investors might book profit at current valuations of 45 times its FY20 earnings.