Siemens: Increasing signs of a recovery

Order book expansion after a long gap, and sustained growth, will provide support to the stock

Keeping pace with the sign of a turnaround in the December quarter, Siemens delivered good results for the March quarter (Q2FY16). Its accounting year is from October to September. Though net revenues at Rs 2,725 crore (up 5.3 per cent year-on-year) were a bit short of Bloomberg estimates of Rs 2,765 crore, net profit and operating margin growth for the quarter exceeded expectations. Net profit adjusted for one-offs at Rs 177 crore, which grew 14.6 per cent year-on-year, is among the best performances in the recent quarters. The year-ago quarter had an exceptional income of Rs 7.5 crore, excluding which analysts peg the adjusted profit at Rs 154.4 crore.

Operating margins, up 150 basis points over year at 11.23 per cent, show sustained improvement. As for segmental performance, revenue growth in Q2FY16 is largely from digital factory, process industries and drives, and power and gas segments which grew six-11 per cent over year. Among these, the performance of power and gas segment, which accounts for 11.5 per cent of total revenues, is distinctive as Ebit (earnings before interest and tax) margins shot up to 19.1 from 14.1 per cent a year ago. Rohit Natarajan of IDBI Capital says localisation and operating margin expansion from the power and gas segment helped garner higher operating margins this quarter. Margins have risen across all divisions over a year, except for health care, sale of which has been approved to a subsidiary of Siemens AG. Exclude health care, which reported an Ebit loss of Rs 1.04 crore versus a profit of Rs 8.45 crore a year ago, and the overall Ebit margins increase to 9.78 per cent from 7.86 per cent a year ago.

Note the 10.5 per cent year-on-year increase in order inflows at Rs 2,939 crore in Q2FY16. Though order inflow growth was stronger at 61 per cent (Rs 3,400 crore) in the December quarter largely due to low base, orders pending execution (order book) are up seven per cent to Rs 10,900 crore as on March 31. Renu Baid of IIFL says the order book has shown signs of growth after 13 quarters. "If Siemens has managed to post order book growth despite not winning major orders in the first half of FY16, the second half may be better," she says.

For now, Siemens trades at 40 times its FY17 price-earnings and is among the expensive stocks in the capital goods space. But, stocks of multinational subsidiaries tend to trade at significant premium to domestic peers. Therefore, with signs of recovery pointing northwards and operational metrics beginning to improve at a noticeable pace, investors with a long-term horizon may consider accumulating the stock on declines.