Siemens: Gaining from higher govt spends

Order inflow highest in 8 quarters, led by demand in railways, power transmission

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On a day when the stock market was choppy, better-than-expected order inflows in the December quarter (Q1FY16) helped Siemens gain 1.1 per cent on Monday. Siemens’ accounting year ends in September.

A 65 per cent year-on-year (y-o-y) increase in order inflow in Q1FY16 is the company’s highest growth in eight quarters. Robust demand from railways and power transmission & distribution (T&D) pepped up the order inflow for the quarter.

Earnings for the quarter were marginally ahead of expectation. Revenues at Rs 2,314 crore increased six per cent y-o-y, while profit adjusted for sales of metal technology business in FY15 increased four per cent y-o-y. Operating margin was largely flat at 8.4 per cent versus 8.6 per cent a year ago.

Revenue growth was largely driven by energy management (T&D) and mobility businesses, which grew 19 per cent and 39 per cent, respectively, y-o-y, while health-care business (Rs 339 crore) doubled y-o-y. Revenues of the key power and gas business registered a 37 per cent y-o-y decline in Q1FY16, and building technology business (down six per cent) continue to remain stressed. The earnings before interest and tax (Ebit) margin halved for the power & gas segment (5.2 per cent in Q1FY16 versus 11 per cent in Q1FY15). The contrasting performance across businesses is not surprising given the subdued economic environment and that Siemens caters to a range of sectors.

While the management's outlook appears to have improved a bit in Q1FY16, the overall business sentiments could take time to firm up as recovery in private sector capex cycle might be six-to-eight quarters away. The order book at Siemens also paints a cautious picture. Despite order inflows hitting a record in Q1FY16, order book at Rs 10,800 crore is down 11 per cent y-o-y. This translates to one-time bill book ratio according to Motilal Oswal Securities (versus 1.2 times in Q1FY15) — a sustainable earnings recovery might be some time away. This explains why 11 analysts of 16 polled on Bloomberg after Q1FY16 results continue to have negative view on the stock, also due to rich valuations. At current price, the stock is valued at 44-45 times FY17 earnings, expensive, given the benign returns (return on equity) profile.