Markets
Siemens in uncertain waters in India, but charts a global voyage
Summary
- The Siemens Ltd stock has gained over 70% this year, but analysts are divided over its prospects.
- While Siemens faces near-term uncertainties in India, it is preparing to increase its presence in the export market with the support of its German parent.
Siemens Ltd’s consolidated Ebitda for the quarter ended June was sharply below analysts’ estimates despite growing 22% year-on-year. Growth was aided by lower raw material cost and ‘other expenses’, but fell short of estimates due to a sharp drop in revenue growth.
The Indian unit of Siemens AG, a German industrial technology conglomerate, seems to be facing headwinds in project execution and could see lower growth in the near-term. Some analysts have lowered their earnings estimates for Siemens Ltd by up to 10%.
Revenue growth was just about 7% in the June quarter, down from 19% in the October -March period. Siemens follows an October-September financial year, so the June quarter is its third.
While the order inflow rose by 18% year-on-year to ₹6,250 crore, order backlog, excluding a ₹26,300-crore locomotive project to be executed over 35 years, stands at a modest ₹21,700 crore–equal to trailing 12 months revenue–providing limited revenue visibility.
Buy or sell? Analysts divided
Analysts’ opinions on Siemens are divided.
Motilal Oswal Financial Services has reiterated its ‘Buy’ rating on the Siemens Ltd stock. At the same time, it has lowered its Ebitda projections for FY25 and FY26 by 9.8% and 10.4%, respectively, to factor in lower execution and margins.
Ambit Capital isn’t as optimistic on the stock. “While we believe in the near-term triggers in the form of demand from data centers and railways are positive for order inflows, we remain Sellers," said Ambit Capital.
It added that while reverse discounted cash flow implied an 18% revenue compound annual growth rate over from FY24 to FY45, and a free-cash-flow-to-sales ratio of about 8.9%, it appeared stretched.
Nuvama Institutional Equities has retained its ‘Buy’ rating on the stock, expecting large-size order inflows for Siemens over the next 18–24 months (4–5 high-voltage direct current loco/trainset orders), given a capital expenditure super-cycle across transmission and distribution, and railways projects.
Kotak Institutional Equities has a ‘Sell’ rating on the Siemens stock, citing expensive valuations.
Global integration
While Siemens faces near-term uncertainties in the domestic market, it is preparing to increase its presence in the export market with the support of its German parent, Siemens AG.
It has taken several steps in that direction, the first being the demerger of its energy business, which was announced in May and is to be completed in 2025.
The energy business contributed about 32% both to the company’s revenue and net profit last year. The demerger would help domestic businesses align with the global business structure, which has two separate entities–Siemens AG and Siemens Energy AG.
Siemens AG is the main shareholder of Siemens India, but the technology in the energy space, including renewables, is available with Siemens Energy AG.
The demerger will reduce the complexity in decision-making and help Siemens Energy India bid for energy-related projects in the Indian market with technology sourced from Siemens Energy AG.
Siemens Ltd is also undertaking significant investments targeted at the Indian market as also to meet its parent’s needs. These include a plan to double its power transmission capacity and another for metro trains assembly.
“In transmission space, our capacity utilizations are already maxed out and it makes sense for Siemens Energy at a global level to use India as a manufacturing base to serve their global requirements as well," Siemens’ management said in its March-quarter earnings call.
Further, the factory for manufacturing gas insulated switchgears (GIS) will be commissioned in FY27. The factory will also manufacture components for Blue GIS, which will be supplied to Siemens globally, integrating the Indian business into Siemens’ global supply chain.
Blue GIS uses clean air as an insulation medium instead of harmful fluorinated gases, reducing the adverse impact on the environment.
So far in 2024, Siemens shares have gained over 70%. The stock trades at a rich valuation of about 80 times its FY25 estimated earnings, showed Bloomberg data. Further movement in the stock would depend on the company securing some big-ticket, short-cycle orders.
