Siemens’ hive offs, capex plans in spotlight

Siemens reported a 25% y-o-y jump in revenue for Q4FY23 led by healthy growth across segments including energy, smart infrastructure, mobility, and digital industries. (Reuters)
Siemens reported a 25% y-o-y jump in revenue for Q4FY23 led by healthy growth across segments including energy, smart infrastructure, mobility, and digital industries. (Reuters)

Summary

  • Siemens was considered a better play than ABB India owing to its diversified businesses, but the demerger of the energy business will result in a more comparable set of entities

Investors in shares of Siemens Ltd have had a remarkable 2023 so far with the stock rising by 29%. The company’s robust order backlog and focus on high growth areas such as digitalisation, automation, and energy efficiency products has boosted sentiments. Plus, improving prospects in the capital goods sector has had a positive bearing on the stock.

On Tuesday, Siemens announced a good set of numbers for the September quarter (Q4FY23). The company follows the October-to-September financial year. Consolidated revenue rose by 25% year-on-year (y-o-y) to Rs5,808 crore led by healthy growth across segments including energy, smart infrastructure, mobility, and digital industries. Gross margin fell but lower other expenses meant a 98 basis points y-o-y expansion in the Ebitda margin to 12.1%.

The order backlog as of 30 September stood at Rs45,518 crore, lower by 2% versus June-end. Still, the order book provides revenue visibility of 2.5 times FY23 sales, which is higher than the level seen last year–1.1 times FY22 sales. Moreover, the company may see further strong order inflows. Nuvama Institutional Equities has identified a substantial future order pipeline in HVDC (high voltage direct current), transmission, and railways, evident from Siemens’ capital expenditure (capex) plans.

The company has announced investments worth Rs416 crore in expanding the capacity of power transformers for the power transmission business and vacuum interrupters for medium voltage switchgear in the power distribution sector. This would help Siemens meet the growing demand both in India and globally.

Meanwhile, the demerger of its energy business has caught attention lately. This is expected to be completed by December 2025, much earlier than planned. The energy segment, which includes gas or steam turbines, and power generators, formed the largest share of the company’s consolidated revenue–34% in FY23.

Siemens was considered a better play versus ABB India owing to its diversified businesses across industry and power, Kotak Institutional Equities said in a report. But now, the demerger would lead to a more comparable set of entities in Siemens and ABB.

“The long and complicated process of the demerger and stake transfer may also dilute benefits for the unlocking of the two businesses," Kotak said. The parent, Siemens AG, will purchase Siemens Energy’s stake in Siemens. This involves acquiring an 18% stake from Siemens Energy, increasing its ownership to 69% from 51% currently. Siemens Energy’s stake in Siemens would reduce to 6% from 24%.

Investors would do well to monitor how the demerger progresses and the execution of the company’s capex plans. To be sure, Siemens has a reasonable exposure to export markets and, hence, a prolonged slowdown in key export markets, including in the Middle East, might be a dampener.

Furthermore, minority shareholders have rejected Siemens’ proposal to sell its low-voltage motors business for Rs2,200 crore. This leaves the company with two alternatives: revise the terms of sale or continue to run the business as is. So, a lack of clarity on how the company intends to sell its low voltage motors business remains a key overhang. This could perhaps explain why Siemens shares have underperformed the S&P BSE Capital Goods index this year.

Still, investors are sitting on handsome gains. “Reasonable valuation when compared to ABB India has aided the rally in Siemens stock," notes Harshit Kapadia, an analyst at Elara Securities (India). As things stand, shares of Siemens trade at 41 times while that of ABB trades at 71 times on a one-year forward basis, he added.

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