Private sector's cost efficiency drive aiding Siemens' profitability

Acquisition of C&S Technologies is seen margin accretive and will augment exports

Siemens India’s December quarter results (Q1; it follows October-September financial year) showing 15 per cent revenue growth and a 6 per cent YoY increase in order inflow indicated that the worst of the Covid impact could be behind it.

With the engineering major closing in on the acquisition of C&S Electric from its promoters, it is expected to give a further leg-up to the firm’s power and gas segment in the ongoing financial year. Focused on low-voltage switchgear with a strong presence in the infrastructure sector, Sunil Mathur, MD & CEO, Siemens, says the deal will bring in synergies in terms of the market scope and help address the exports market. “The acquisition will be margin accretive and help us meet the targeted return ratios,” he explains.

What’s helping Siemens beat the persisting lull in the capital goods space is its focus on private players. Amid weak momentum in government tenders over the past few years, the share of private contracts to Siemens’ book continues to increase — from 71 per cent in FY19 to 75 per cent in Q1FY21. Segments — such as data centres, steel manufacturers, food and beverage, and health care — upgrading their efficiencies and productivity by way of technological enhancement is keeping Siemens’ order book busy. At Rs 12,800 crore, the order book provides nearly a year’s revenue visibility.

The good part about this tech enhancement is its rub-off on operating margins. While on a sequential basis, the operating margin shrunk 42 bps, on a YoY basis at 12.4 per cent in Q1, the number has held up quite well. Also, from FY19’s 10.8 per cent, the operating margin has significantly improved. Analysts expect Siemens to close FY21 with an 11.6-12.2 per cent operating margin.

That said, gross margin in Q1 contracted by over 500 bps YoY due to higher cost of raw materials and logistics pressures. While much of the cost-saving efforts of the firm have yielded the desired benefits, margin expansion here will depend on how input costs shape up in the coming quarters.

The thrust on infrastructure spending in the Budget is also anticipated to revive government spending. While the Street isn’t factoring for any major gain immediately as yet, Mathur believes the commitment to spend by the government will restart the private capital expansion plans significantly. “Factoring in better-than-expected performance, and impetus towards investments in FY22 Union Budget, we raise earnings estimates by 11.5 per cent and 11.4 per cent for FY21 and FY22, respectively,” say analysts at ICICI Securities.

In all, macroeconomic factors are turning positive for the Siemens stock, which was up 3 per cent on Monday. Valuations, too, at 42x FY21 estimated earnings, despite the recent run-up, are better than a year ago’s 68x, thus making the stock suitable for long-term investors.