Siemens Gets Boost From Digitization Contracts, But Analysts Advise Caution

After a long hiatus, Siemens India reacted positively to its quarterly results. Its stock closed with 3.7 percent gains on Tuesday as the engineering major’s March quarter results (Q2; financial year starts from October) were ahead of expectations on all counts.

More importantly, with its order book touching Rs 16,835 crore, it potentially secures six years’ earnings visibility for the company. Orders for Q2 increased by 24 percent to Rs 3,635 crore.

With this, analysts say the quarter has turned out to be one of the best in recent times for Siemens. It also revealed that some of the critical decisions taken at its global head office in Germany, such as focusing on digitalization orders, was working well.

On the whole, revenues at Rs 3,461 crore grew 9.1 percent year-on-year (YoY), while net profit expanded by 28 percent to Rs 280 crore.

Overall profitability also witnessed sharp improvement, with operating margins increasing from 9.8 percent a year ago to 11.5 percent in Q2 — largely helped by the power & gas, and energy management segments, in which earnings before interest and tax margins grew 200-400 bps YoY to 16.3 percent and 10.7 percent, respectively, in Q2.

With these segments doing well, analysts say Siemens’ bet to go slow on capital expenditure-heavy business and instead focus more on the operating expenses model — where service component and digitalization opportunities are high — is working well.

“Siemens has a large cash reserve that has helped it negotiate better contract terms with customers as compared to competitors,” says Renu Baid of IIFL Institutional Equities.

Sharp improvement in profitability also indicates that the increased focus on short-cycle or service contracts is providing better earnings visibility for Siemens.

“Our short-cycle businesses did exceptionally well this quarter and we are seeing an acceleration in interest and demand from customers for our digitalization portfolio,” said Sunil Mathur, managing director and chief executive officer of Siemens India. This, analysts say, allays concerns over the lack of predictability of short-cycle orders.

However, how the restructuring exercise was undertaken by its parent company pans out in India will be a major overhang. The power and energy management segments account for close to half of Siemens India’s revenues and profitability, unlike for its parent. Until clarity emerges on this front, analysts advise investors to be on the sidelines.―Business Standard