Stock in the green, strong order momentum to power gains for Siemens

Product mix, operating leverage, and price hikes to help expand margins

Record order inflows, improving business outlook, and prospects of margin expansion led to an earnings upgrade for capital goods major Siemens. The positive outlook on the stock follows management commentary on growth opportunities in an analyst meeting last week. Given the outlook, the stock was in the green over the past two trading sessions amid weak market conditions.

A key takeaway was the all-time high order book at Rs 17,170 crore at the end of the second quarter of 2021-22 (FY22). This was up 61.4 per cent year-on-year (YoY).

Its financial year ends in September.

The order book is 1.3x the company’s trailing 12-month revenue and offers revenue visibility. The order inflows in the first half of FY22 stood at Rs 10,640 crore, with growth coming in from multiple segments.

All its key verticals, including energy (up 28 per cent), smart infrastructure (up 37 per cent), digital industries (up 78 per cent), and mobility (391 per cent), contributed to its growth.

While the order book largely caters to small and mid-cycle orders, the company is also witnessing revival in large orders, especially in the cement and metal sectors. Larger orders have picked up after remaining at subdued levels in 2016-17 through 2018-19. These orders are expected to further advance its project business, which currently accounts for 36 per cent of its portfolio and rose 600 basis points (bps) over the past year.

The triggers for the energy segment (largest vertical) are increasing investments across decarbonisation solutions, renewable projects (transmission), waste heat recovery plants, biomass, and grid strengthening infrastructure. The segments driving growth in this vertical are sugar, cement, steel, and oil and gas.

Data centres (with capital expenditure, or capex, to be driven by 5G roll-out), network revamp of private distribution utilities, and infrastructure investments aided the growth of the smart infrastructure vertical.

While the mobility business saw sharp growth on a low base, it is likely to witness strong growth, led by pick-up in Metro-related orders, electrification, and signalling modernisation projects.

Say Priyankar Biswas and Neelotpal Sahu of Nomura Research, “The plan for 400 additional Vande Bharat trains is an incremental opportunity for Siemens over the next few years. This is in addition to the robust outlook for Metro Rail tendering as these are expanded to more towns. The entry into electric locomotives is also a key step to benefit from the Indian Railways’ decarbonisation drive.”

Although order growth remains strong, supply-chain disruption (semiconductors) saw its revenue growth capped at 10 per cent in the first half of FY22. In addition to semiconductor components, the company highlighted higher raw material costs and rising interest rates as key headwinds.

Operating profit margins fell 190 bps YoY to 11.3 per cent due to increased logistical costs. While margins are expected to be under pressure (at current levels) due to raw material cost inflation and supply-chain issues, analysts at PhillipCapital Research expect it to expand 150 bps by 2023-24. The same is expected on the back of scale-up of higher margin digital portfolio, higher share of services and exports, better operating leverage, and stringent cost management, as well as price hikes.

Analysts at Antique Stock Broking believe the company will be among the most significant beneficiaries of capex recovery, with potential annual orders reaching Rs 40,000 crore over the next two/three years.

Most brokerages have a ‘buy’ rating on the stock, with target prices ranging between Rs 2,600 and Rs 2,900. This offers an upside of 9-17 per cent from the current levels.