Is the tide turning for Siemens?

Siemens is showing signs of acceleration in orders and revenues, and it is favourably placed for more large orders including a railway project, which should enhance earnings visibility, says a broking firm


The Siemens Ltd stock has gained 24% from the November 2016 lows. Photo: Bloomberg
The Siemens Ltd stock has gained 24% from the November 2016 lows. Photo: Bloomberg

The Siemens Ltd stock has gained 24% from the November 2016 lows. The latest bout of gains was triggered by the announcement last week of an order won worth Rs1,682 crore, the single largest win in recent years.

The order win reignited optimism about earnings. Antique Stock Broking Ltd says Siemens is showing signs of acceleration in orders and revenues. According to the broking firm, the company is favourably placed for more large orders including a railway project, which should enhance earnings visibility.

The improvement in order inflows can have a disproportionate impact on the earnings. According to Rohit Natarajan, analyst (institutional equities) at IDBI Capital Markets and Securities Ltd, the company’s factories, on an aggregate level, are running below 65% utilization levels. This gives ample scope for operating leverage, even though competition can keep a check on pricing power. “With 35% gross margin, the operating leverage thesis is compelling,” he notes.

Further, says Antique Stock Broking, Siemens has significantly improved localization, which should give it a competitive edge. “We believe that given the company’s clear focus on profitability, earnings growth in FY17-18 will be very strong led by margin improvement,” adds the broking firm. With the broadest product portfolio, Siemens is seen to be best placed to benefit from the current investments in the infrastructure sector.

Even though the argument sounds compelling, not everyone is convinced yet. One, the order inflow recovery is not broad-based. Two, the stock, priced at about 50 times price-to-earnings multiple (based on current fiscal year earnings estimate), is discounting the order inflow recovery, says an analyst with a domestic institutional broking firm.

Three, one large order win does not imply the turn of the business cycle. To confirm that, Siemens has to report strong double-digit growth in order inflows for four consecutive quarters. Order inflows in the December quarter grew 5%. They dropped in the previous quarter (July-September 2016). And the company sold a business segment in 2016, so the historical order inflows are strictly not comparable.

Natarajan of IDBI Capital says order inflows are lumpy on a quarterly basis. Yearly growth in order inflows can provide a better picture and strong double-digit growth here will portend better prospects. Siemens is expected to hold an analyst meeting in May where it may provide further clarity on business prospects and pipeline. A strong order inflow guidance will not only strengthen revival hopes but also provide justification for the “lofty” stock valuations. “If the prospective growth in order inflow is in excess of 25-30% annually, the future looks bright,” adds Natarajan.

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