Notwithstanding the slowdown in capital expenditure (capex) and weak order flows in the last few quarters, the Indian units of multinational capital goods firms have been trading at rich valuations. The one-year forward price-to-earnings (P-E) ratio of ABB India Ltd, Siemens Ltd and Honeywell Automation India Ltd range between 40 and 60 times earnings. This is significantly higher than the 18 times P-E ratio of the BSE Capital Goods index and their domestic counterparts.
This is not without reason. Multinational companies (MNCs) have deftly reinvented themselves to cater to the paradigm shift in capital goods and infrastructure opportunities. With the pace of capex in greenfield and brownfield projects falling, they charted a new course to cater to industry’s operating expenditure (opex) through digitalization and automation, and smart city infrastructure.
For instance, a year ago, ABB India’s Swedish parent sold its stake in the power grid business, stating limited incremental growth opportunities. As part of the deal, the power grid business was axed in India too. However, ABB India still managed double-digit revenue growth in Q2 FY20, powered by its new motion, robotics and electrification business that comprises three-fourths the total revenue.
Likewise, a few months ago, Siemens AG hived off its power and gas business as it steered into smart infrastructure, mobility and digitalization. The India arm notched up 8.5% growth in FY19 revenue (September year-ended) and robust cash flows amid a capex slowdown. “The company’s focus on efficiency/productivity-based products/solutions across sectors is helping it grow the product business recognising the manufacturing sector’s inclination to incur higher opex than capex," says a report by Edelweiss Securities Ltd.
Another report by Motilal Oswal Financial Services Ltd shows a 14% growth in FY19 revenue from products and services businesses (data is aggregate of ABB India, Siemens and Honeywell Automation India).
Of course, one cannot debate that a strong parent which sources products from the Indian arm has helped offset weak domestic demand. Aggregate exports, albeit lower in absolute terms, have risen from 15.3% to 20.4% of sales over a period of five years.
That said, the latest results of these firms also reflect a slowdown in opex spending by customers. ABB India’s order flows rose by 5% year-on-year, while that of Siemens fell 14% in the September quarter from a year ago. Both firms displayed a contraction in order book due to restrained spending by user industries.
In spite of weak order flows and the risk of depleting order book, the Indian arms of MNCs enjoy higher valuations than domestic counterparts such as KEC International Ltd and Thermax Ltd.
Analysts reckon short-cycle opex orders give confidence that fresh order flow will bounce back sharply as the economy recovers. Further, orders in automation and digitalization come with higher margins, which is also boosting returns.