Siemens: decent show, fancy valuations

Like other multinationals in the capital goods sector, Siemens’ strong parent helps tide over near-term challenges, unlike domestic firms that have been caught in a quagmire of mounting losses. Photo: Bloomberg

Siemens Ltd posted a dull performance for the September quarter, with the operating performance falling short of the Street’s forecast. At 8.6%, the company’s operating margin was only a tad higher than a year ago, and significantly lower than the Bloomberg consensus estimate of 9.8%. Higher other expenses offset the reduction in raw material costs that benefited firms in the capital goods sector.

Yet, the stock trades at a fancy valuation of about 50 times the estimated earnings per share for 2016-17. Perhaps the analysts’ conference call, although not euphoric but signalling an improving economic environment, was reason enough for the stock to sustain its outperformance. Lower interest rates and crude oil prices, along with benign commodity rates, reduce downside risks to profitability.

Meanwhile, order inflows during the quarter grew 6.2% from a year ago, although they have been flat for 2014-15 (Siemens’ accounting year ends in September). The multinational capital goods maker appears to be better poised than its counterparts to cash in on public sector spending. Still, it is a long shot.

Traction in public sector spending is being seen only in railways and energy transmission. There is hardly any contribution from the private sector to the company’s business because many core industries are constrained by overcapacity.

Some analysts say the increasing proportion of products in Siemens’ revenue mix, compared with projects, is favourable in the long run. Project cash flows are hampered by delays and long-gestation periods, they point out. Another positive is that the firm has discontinued its loss-making metals business.

That said, revenue growth of 10% year-on-year was driven by energy, building technologies and healthcare. Profit margins were healthier in the power and gas segment, too, in addition to building technologies.

Overall operating profit grew 14% but was substantially lower than Bloomberg’s forecast for the quarter. Net profit halved to Rs.219.1 crore but included exceptional items, which if adjusted for, reflects a 13% year-on-year growth.

Siemens’ stock has outperformed benchmark indices in the past 52 weeks mainly on the back of the company’s consistent strategy of focusing on profitability. Like other multinationals in the capital goods sector, its strong parent helps tide over near-ter
[“source -financialexpress”]


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