Siemens: Results don’t support rich valuation

Siemens Q2 results failed investor expectation on all fronts, undermining hopes of a strong revival at the company and in the economy


Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Multinational capital equipment manufacturer Siemens Ltd’s September quarter (fourth quarter of fiscal year 2016) did not sustain the strong comeback in performance seen in the earlier three quarters. It failed investor expectation on all fronts, undermining hopes of a strong revival at the company and in the economy.

Not surprisingly, the stock reacted adversely on Wednesday, closing at Rs1,055, about 2% lower from the previous day.

In spite of this and the steady decline in the stock price over the last one year, Siemens trades at a rich valuation of 47 times estimated FY18 earnings.

The September quarter’s performance did little to justify the valuation as the company disappointed on profits and margins. At 7.8%, the operating margin was 130 basis points lower year-on-year (y-o-y) and 120 basis points lower than forecast. A basis point is one-hundredth of a percentage point.

Of the six business segments, the energy segment that makes up nearly a third of total revenue was the bright spot, posting a strong 11% jump in revenue and a decent operating margin at 6.5%. The deplorable state of the power and gas industry is well delineated in the company’s performance—net revenue contracted by 63% y-o-y and profitability dipped by 820 basis points. Other segments that faltered were mobility and building technologies, again mirroring the subdued environment in construction, real estate and logistics.

Given the pessimism on the Street on economic growth following the demonetization drive, there may be little interest in the stock in the near term. The quarter’s huge 11-fold increase in net profit includes a Rs2,992 crore exceptional gain on sale of its healthcare business. Adjusted for this, the net profit rose by just 5.8% to Rs170 crore when compared to a year back. Note that it was 22% below Bloomberg’s average estimate for the quarter.

If the stock has any positive news to ride on, it is the Rs10,800 crore order book at the end of the year, 13% higher from the year-ago level. Otherwise, the quarter’s order inflows were 21% lower. It was the earlier quarters’ performance that added up to close the full year with new orders of Rs12,064 crore, about 19% higher y-o-y.

Be that as it may, interest in the stock has dwindled over the years given the lack of consistency in segmental performance that makes it hard to extrapolate future earnings.

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