Stock Fundamentals

Siemens: Counting on infra

Seetharaman R | Updated on January 20, 2018 Published on May 15, 2016

Increased focus on infrastructure should improve demand

Siemens provides digitisation and automation solutions to companies in the manufacturing and infrastructure segments. The company is well placed to benefit from the increased thrust on infrastructure in recent times.

Strong domestic demand from public spending in infrastructure and low capacity utilisation levels in its manufacturing units should help boost revenue as well as the net profit, going forward. The proposed sale and transfer of the healthcare business to Siemens Healthcare, a subsidiary of Siemens AG, in March this year, will generate funds to be used for capital expenditure. The strong R&D capability of its parent, Siemens AG, also gives it a competitive advantage.

The company’s power and gas business has however, been facing a slowdown due to problems in the power sector. This has dragged revenue and order book growth in the recent past. The stock now trades at ₹1,156, nearly 22 per cent lower than its peak of ₹1,495 in August 2015. It trades at a P/E multiple of 35 times. While this is much below the peak of 59 times recorded in August 2015, it is slightly above the three-year average. The positives appear priced in, but given the company’s good prospects, investors can continue to hold the stock.  

Improving domestic outlook

The energy, power and gas sector, which contributes nearly half the company’s top-line, saw a drop of about 16 per cent in its order book in the year ended September 2015 compared to the year earlier.

The overall revenue growth in this segment was tepid at 4.6 per cent in FY15; also, in the six months ended March 2016, it was 0.46 per cent compared to the year earlier.

But while the power and gas segment, that caters to power producers, has recorded fall in revenue, the energy management segment that caters to the power transmission and distribution segment, recorded healthy revenue growth of 25 per cent in the March 2016 quarter. The energy management business contributes almost a third to the company’s revenue.

The process industries and drives segment (that provides solutions for improving productivity in various industries through automation) also appears well positioned with 10 per cent increase in the order book in FY15. This segment accounts for 20 per cent of the company’s revenue. 

The mobility segment (10 per cent of revenue) recorded the strongest growth in order book in FY15; at 118 per cent to ₹950 crore. The orders can be expected to increase further with the Centre’s focus on the Railways and transportation sector.

Siemens has managed to control costs by decreasing the share of equipment parts purchased from other suppliers. The recently sold healthcare segment used a substantial 87 per cent of imported parts in manufacturing.

The proposed sale of the healthcare business is expected to generate ₹3,050 crore. The company plans to allocate 50 per cent of the amount for future capital expenditure, with the remaining proposed to be distributed as special dividend to shareholders.   

Reining in costs

The company has been facing pressure on revenue, with an average annual decline of 6 per cent between FY12 and FY15. Tight leash on expenses has however, helped it grow operating profit at 3.1 per cent in the same period. Net profit grew 13.7 per cent in this period.

The transfer of nearly 880 employees from the proposed sale of healthcare division to the parent company and the sale of the non-performing metals division last fiscal year should help reduce costs further.

The company’s revenue has grown 5.4 per cent year-on-year in the first half of FY16 ending March 2016. Revenue improved across all segments except power and gas. Operating profit increased 13.7 per cent with operating margin improving to 9.8 per cent in this period from 9.1 per cent in the year-ago period.

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