Growth-valuations mismatch continues at Siemens
Operating margins improved in key business areaspower and gas, energy, mobility, digital and process industries; so, despite a sharp increase in finance costs, net profit rose 9.6%
Siemens Ltd reported strong operating performance for the March quarter. Earnings before interest, taxes, depreciation and amortization (Ebitda) jumped 22% from a year ago. Margins expanded 1.5 percentage points to 11%.
Operating margins improved in key business areas—power and gas, energy, mobility, digital and process industries. So, despite a sharp increase in finance costs, net profit rose 9.6%. If we exclude the one-off gains in the year-ago quarter, then the growth in profit will be 13.7%, better than Street estimates.
Where it trailed estimates, however, is in sales. Against a forecast of about 7%, sales grew 5%, reflecting subdued business conditions. Order inflows rose by about 10%. But the order backlog declined 9% from the year ago, Religare Capital Markets Ltd points out.
The government’s efforts to push infrastructure spending is beginning to show results but no such signs are visible yet in the private sector, said the Siemens management in its results statement. Last month, another capital goods maker ABB India Ltd said that large orders, especially those based on industry capex, remained scarce as customers continued to delay investment decisions due to low demand and free capacities.
Siemens and ABB India are using the current phase to improve internal efficiencies, which is helping them improve profitability. But subdued sales growth, though up a bit in the recent quarters, is making analysts wary about these stocks. “Overall revenue growth of 5% year-on-year leaves much to be desired,” Religare Capital Markets said in a note. “While our estimates factor in a continued improvement in operating metrics, we think the current stock valuations (62x FY17E) are not justified, given the company’s returns and growth profile.”
The transfer of the healthcare division to its parent firm is expected to further aid Siemens Ltd’s profitability as the division has very low margins. But the business generated around 13% of the company’s revenues last fiscal and grew 4.6% in the past quarter. Though only marginally, the divestment is estimated to weigh on Siemens earnings. While the coming quarters will reflect the impact of this sale, a revival in private capex and an improvement in sales growth will be crucial for stock returns.
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