Siemens India: Hopes hinge on sustained manufacturing sector revival

Riding on improved profitability, stock rose 12 per cent on Thursday

A stock like Siemens India dramatically reacting to its quarterly results was pretty much unheard of till Thursday. Even as the global engineering major’s net profit for the September quarter (Q4; the company follows October to September accounting year) declined by 4.7 per cent year-on-year (YoY) and revenue at Rs 3,422 crore fell short of previous year’s number by nine per cent, the Siemens India stock soared by 11.6 per cent on Thursday. Siemens announced its results on Wednesday, after market closing.

What has enthused the Street is the 12.9 per cent operating profit margin in Q2, higher by 180 basis points (bps) YoY. More encouraging is the fact that all segments have contributed to the margin expansion. At 12.13 per ce­nt, Q4 operating margin of en­e­rgy segment (led by power and gas), though buoyed by pent-up service requests from state distribution companies, bodes well for investors as Siemens India did not give way to the global restructuring exercise pertaining to this division. However, much of it will depend on the market dyna­mics going forward, said Sunil Mathur, chief executive officer, Siemens India.

The other important aspect is the sharp profitability improvement in segments such as smart infrastructure, mobility and large drives, which have become focus areas in the recent years (see table). This once again reiterates that the company’s decision to become technology driven and not take the traditional bricks-and-mortar route. This is helping it stay nimble and productive. Hence, even though Siemens India incurred Rs 285 crore of additional costs due to lockdown-related disruptions in Q4 (Rs 208 crore in Q3), which resulted in lower net profits in the quarter, analysts are willing to look past it as a one-off.

Another positive is with an order backlog of Rs 12,360 crore, Siemens India’s revenue is secure for a little over a year. Sectors such pharmaceuticals, data centres are largely contributing to order inflows. According to Mathur, while the cement sector showed some green shoots in June, demand has subsequently tapered. The steel sector, though, is showing signs of gradual improvement. Railway signalling tenders are also keeping the mobility business intact.

While Mathur sounded more optimistic than earlier, he says it is still early to second guess how much of the pent-up demand will spill over till December. “Sustainability of demand needs to be seen,” he affirmed.

Valuations at 36x FY22 estimated earnings seem to be more affordable than 50-60x seen in the past. However, seen against the tone of cautious optimism, 18 per cent rally in the past month positions Siemens India stock as priced to perfection. Correction may renew the buying interest.