Siemens: Slowing order flows could trim earnings

Slowdown in pace of government tenders and private sector participation remain pain points

Siemens tracked the market, gaining marginally on the back of the September quarter results, which were in line with analyst expectations. Total income was up 3.4 per cent to Rs 3,300 crore, while operating profits at Rs 282 crore were up 27 per cent. The silver lining was operating margin expansion, which increased 150 basis points year-on-year (y-o-y) to 8.5 per cent. This comes at a time when most heavy electrical equipment manufacturers witnessed deterioration in margins in the quarter. While earnings before interest and taxes increased 21 per cent y-o-y (Rs 275 crore), profit after tax at Rs 219 crore, almost halved compared to a year ago. Siemens had recognised income from exceptional items amounting to Rs 367 crore in the quarter. With this excluded, net profit at Rs 148 crore (unadjusted for taxes) is better than Rs 70 crore in the year-ago quarter.

Compared to Bloomberg’s sales estimates of Rs 3,175 crore and Rs 180 for net profits, the results were largely in line with the Street’s expectations. That said, analysts appear unimpressed, mainly on account of weak order inflows, the impact of which was partly felt in the quarter. For instance, order receipts in the energy management division, 30 per cent of revenues, were down three per cent at Rs 960 crore. Power, gas, process industries and drives, which together contribute 28 per cent of revenues, saw two per cent y-o-y growth in order inflows. Pockets such as healthcare, mobility and digital factory managed to keep the order flows buoyant.

Increasing orders from the government for the railways and power transmission segments are likely to provide some cushion to the order book size (now Rs 10,000 crore). However, analysts feel a sluggish order inflow situation is likely to persist in near term, as there is no significant improvement from other government undertakings, and private sector participation in capex-heavy projects continues to be negligible.

The stock has outperformed the broader markets since January and gained 35 per cent in trade year-to-date. Trading at 37.5 times the 12-month price earnings, Siemens appears to be at a significant premium compared to the BSE Sensex (20.76 times). Nineteen of 25 analysts polled on Bloomberg have a ‘sell’ recommendation.