Siemens: troubles at home won’t affect the Indian unit
The September quarter (Q4) performance for Siemens Ltd fell slightly short of the Street’s expectations. Only the 10% growth in new orders and consequent 24% rise in order book when compared to a year ago were impressive.
Yet, the capital goods maker stands tall among industry peers. Further, growth prospects are reasonably good even as its German parent Siemens AG wades through turbulent waters, what with the proposed cutback of nearly 7,000 jobs (reported last week) from its energy business.
However, the performances by Siemens India and its parent are rather different.
In Indian operations, the flattish 1.4% year-on-year (y-o-y) revenue growth in the September quarter was only due to far-reaching changes like the goods and services tax (GST) that the nation is still aligning with. This pulled down execution of projects and billing, resulting in weak sales for most business divisions.
Sales grew only in the energy management and digital factory segments.
But, with the GST challenges waning, Siemens’ revenue growth should get better soon, especially on the back of a Rs12,263 crore order book.
The parent firm’s problems, meanwhile, are not to do with revenue and profits, which anyway grew during the quarter. Rather, they are to do with changing dynamics of the energy industry in Germany, where there is a clear shift from fossil fuels to renewables. This has impacted revenues of its power and gas segment. Therefore, the parent is mulling over strategies to restructure and trim costs, mainly through employee layoffs.
These issues could spark off issues between the management and employees at a global level. The question for investors here is—will these troubles for the parent spill over to the Indian arm? Unlikely. In fact, analysts reckon that it may gain in the long term from the parent company’s focus on Asia, Latin America and Africa.
Moreover, the Indian entity, which went through business restructuring a few years ago, is back on a profitable track. In spite of the weak ramp-up in revenue, Siemens India posted a decent 120 basis points (bps) rise in operating margins. The 10.1% operating margin was a tad lower than the Bloomberg’s consensus. Interestingly, profitability across most segments rose significantly, with power and gas, energy management and mobility outshining the others.
Yet, weak revenue during the quarter weighed on profits. Both operating and net profits (adjusted for exceptional items) were below Bloomberg estimates. The firm’s reported profit after tax included a profit of Rs560 crore booked on sale of property. The year-ago period also had exceptional income that was about five times higher. Adjusted profit was nearly 75% lower y-o-y, although details for this steep drop may be known following the analysts’ conference call on Tuesday.
In any case, Siemens shares had rallied for several quarters as it posted a steady pace of growth. However, the stock price of Rs1,188 discounts the 12-month forward earnings estimate by a huge 44 times, among the highest valuations attributed to capital goods firms in Indian bourses. What may turn into a blessing, however, is any decision by the global management to move work from high-cost countries to low-cost ones.