Margin pressure may trigger earnings downgrades for Siemens in FY27

Siemens' Q1FY27 revenue met estimates, but commodity inflation, currency fluctuations and elevated input costs weighed on margins and profitability across segments

Siemens reported 1QFY27 results that were a mixed bag, with revenue meeting consensus estimates while profitability disappointed, with a miss on margin. Margins were hit by commodity inflation and currency fluctuations. Adjusted for one-off items in the mobility vertical, margins were in single digits. Order inflow increased by 16.5 per cent Y-o-Y (though it was down 6 per cent sequentially) to Rs 6,330 crore, taking the order book to Rs 46,700 crore, up 10 per cent Y-o-Y. Revenue at Rs 4,714 crore was up 15 per cent Y-o-Y, with the digital industries (DI) segment being the strongest performer (up 25 per cent Y-o-Y). Revenue from smart infrastructure grew 11 per cent Y-o-Y, while mobility reported 13 per cent Y-o-Y growth. Gross margin expanded 265 basis points Q-o-Q, despite commodity cost inflation, but was down 170 basis points Y-o-Y at 28.9 per cent. Peers such as ABB and Cummins India reported contractions of 200 basis points Q-o-Q and 150 basis points Q-o-Q, respectively, in gross margins in Q1FY27.

 

The earnings before interest, tax, depreciation and amortisation, or EBITDA, margin was 9.1 per cent, down 345 basis points Y-o-Y. EBITDA, at Rs 431 crore, was down 17 per cent Y-o-Y (down 3 per cent Q-o-Q). Higher other expenses at Rs 469 crore, up 40 per cent Y-o-Y, contributed to margin pressure.

 

The EBIT margin for digital industries was 5.1 per cent, smart infrastructure had an EBIT margin of 7.6 per cent, and the mobility EBIT margin was 10.2 per cent and included a one-time forex gain of Rs 39 crore. Adjusted for that, the EBIT margin was 6 per cent. Order inflow grew by 16.5 per cent Y-o-Y to Rs 6,328 crore, up 43.9 per cent Y-o-Y adjusted for a large mobility order in Q1FY26.

 

Growth in smart infrastructure (SI) was driven by data centres, grid modernisation projects and commercial real estate, and SI is also likely to continue generating the most orders in future. Within DI, automation solutions for solar cell manufacturing and across metals, electronics, pharmaceuticals and water market segments drove order inflow. The mobility business showed good growth in the rolling stock business. The large order book offers revenue visibility for the next 10 quarters and, given strong execution, could lead to revenue growth of over 20 per cent for the next three fiscals. 

 

Revenue across segments was broadly in line with estimates. SI revenue increased 11 per cent Y-o-Y to Rs 2,630 crore. Mobility revenue rose 13 per cent Y-o-Y to Rs 930 crore, and DI revenue grew 25 per cent Y-o-Y to Rs 1,140 crore. At the EBIT level, profitability was impacted by volatility in commodity prices, foreign exchange and an increase in material costs.

 

The SI EBIT margin contracted 580 basis points Y-o-Y, while the mobility EBIT margin expanded 640 basis points Y-o-Y. The DI EBIT margin contracted 560 basis points Y-o-Y. DI received orders for automation solutions for solar cell manufacturing and across metals, electronics, pharmaceuticals and water market segments. The SI segment witnessed growth across grid modernisation projects, data centres and commercial real estate, while mobility saw healthy growth in the rolling stock business.

 

SI will continue to benefit from increased spending in key areas such as power transmission and distribution, grid automation, data centres, e-mobility and industrial infrastructure, among others. Margins in this segment may recover once commodity inflation eases. In the mobility division, locomotive deliveries are expected to ramp up progressively.

 

Margins are expected to remain protected despite commodity cost inflation by price escalation clauses in contracts. DI segment inflows have moved up and margins have improved Q-o-Q. Private sector demand recovery can push orders up, but limited localisation and elevated input costs, especially in semiconductors, put a ceiling on margin gains.

 

Due to weaker-than-expected margins in SI, adjusted net profit came in lower. Adjusted net profit declined 17 per cent Y-o-Y to Rs 350 crore, while reported PAT was down 19 per cent. Siemens received Rs 1,800 crore (adjusted for tax) from the sale of its low-voltage motor (LVM) business, which was recorded as an exceptional gain.

 

Order deferral on large price hikes and continued commodity inflation is a key downside risk, and aggressive bidding in competitive segments could also hurt. Related-party transactions at low margins are another monitorable. Siemens is historically a high-valuation stock and is trading at 75 times estimated FY27 earnings. Trends in margins, commodity inflation and currency pressures may lead to downgrades in earnings estimates in FY27.