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Siemens orders vault, well poised to ride the capex cycle recovery

LiveMint logoLiveMint 15-05-2017 Vatsala Kamat

After ABB Ltd staged a powerful performance in the March quarter, it was Siemens India’s turn to surprise investors.

The big improvement was the 96% year-on-year (y-o-y) jump in Siemens’ order inflows during the quarter. Often referred to as the trains-to-turbines company, Siemens bagged orders from diverse sectors such as railways and metros, power transmission, power turbines and substations. Of course, the largesse was evident in public sector capex while the private sector spends remain subdued.

The order book, therefore, rose by a healthy 17% to Rs12,800 crore that tantamounts to about a year’s revenue. So, the stock’s outperformance to the benchmark cap goods index is not surprising. It did shed a bit of its gains though, as its results showed weak profitability.

Naveen Kumar Saini/Mint

This was despite the robust revenue growth of 24% y-o-y (excluding health care) that surpassed analysts’ expectation of a 14-15% growth. Unfortunately, profit (before interest and tax) margins posed a concern, though it is reckoned to be the outcome of a change in accounting norms to the Indian Accounting Standards. Power and gas, mobility and energy management posted the biggest drop in margins, although the decline was seen across segments.

Naturally, the operating margin dropped noticeably by about 210 basis points (bps) y-o-y to 9.5%. Raw material cost as a percentage to sales was the main reason for this drop as it rose by 200 bps. Other expenses dragged it further, although staff costs offered some relief to profitability. One basis point is one-hundredth of a percentage point.

From an investor standpoint, the jump in order inflows scores over the drop in margins and profit. Net profit reported for the quarter was slightly lower at Rs186.3 crore. According to a report by Emkay Global Financial Services: “the company has consistently been reporting 40%-plus growth in order intake, which could result in higher revenue growth from FY2018. We expect a 27% compounded annual growth in revenue and 37% profit after tax (adjusted) between FY2016 and FY2019.”

Optimism about the green shoots of recovery in the capital goods sector has driven the stock up by around 25% since January.

Its current market price of Rs1,371.90 has taken the valuation upward of 40 times the estimated earnings for FY2018, which is no doubt expensive. But then, multinational capital goods firms’ have typically enjoyed a higher valuation compared with domestic peers.

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