Limited visibility may hurt ABB, Siemens more than Thermax or Cummins

An analyst at a domestic brokerage said that Siemens is a highly cyclical stock, due to the high correlation between the company's revenue growth and India's gross fixed capital formation

Stocks of private sector capital goods majors such as Siemens and ABB, which were investors’ favourites not long ago, have seen significant correction after the Covid-19 outbreak.

Shares of ABB and Siemens are down 37-44 per cent from their January highs. Thermax and Cummins, too, have lost 35-41 per cent during this period. 

However, the relatively lower order book/revenue ratio means that ABB and Siemens could face more heat, if the economic slowdown prolongs.

The lockdown has impacted most companies at a crucial time in March, when typically new orders and execution gain momentum. 

ABB and Siemens, which are close peers, saw revenues fall 17-20 per cent in the March quarter (Q4). The firms are estimated to have lost Rs 350-400 crore of revenue each in Q4 due to the lockdown.

The impact on operating performance got accentuated as sales declined and fixed costs remained high. The two firms saw 43-90 per cent YoY decline in operating profit and 46-78 per cent fall in profit before tax. Not surprisingly, Street sentiment has been significantly hit.

 

 

Fresh order inflows have also been lower than expected. ABB saw just 10 per cent rise in the order book. The current order backlog at Rs 4,444 crore is 0.65 time CY20’s estimated revenue, indicating low revenue visibility. Thus, analysts at Emkay Research expect moderate-to-severe impact in the medium term for ABB. ABB follows the January-December financial year, and Siemens October-September.

For Siemens, too, a challenging environment for sectors such as infrastructure, auto and industrial capex impacted its FY20 order inflows, which declined by 19 per cent YoY, say analysts.

An analyst at a domestic brokerage said Siemens is a highly cyclical stock due to the high correlation between the firm’s revenue growth and India’s gross fixed capital formation. Moreover, both firms have a large share of short-cycle and/or low-ticket orders, which could hurt during times of slowdown.

Arafat Saiyed, analyst at Reliance Securities, agrees there are more near-term concerns for firms such as ABB. Comparatively, he is more confident on larger, more diversified players like Larsen & Toubro (L&T), which has higher visibility. Private capital expenditure (capex) is likely to weaken further, while government spending on capex may not support significantly in view of the diversion of state funds for Covid relief.

Recently, L&T top management said it does not see significant capex by the private sector for the next 12 months at least. But, its sizeable order book of over Rs 3 trillion provides good revenue visibility.

Naveen Kulkarni, chief investment officer at Axis Securities, feels that slowing capex cycle and execution headwinds will weigh on medium-term prospects of ABB and Siemens.

With both stocks trading at rich valuations — Siemens at 47x FY20 estimates and ABB at 40x CY21 estimates — further underperformance is not ruled out.

Although Cummins and Thermax are yet to declare their March quarter results, Motilal Oswal Financial Services estimates their revenues will decline by a lesser rate of 12-17 per cent.

After disruption, manufacturing units, however, are restarting work. Thermax said its international operations in Denmark, Germany, Indonesia and Poland continued without major disruption. However, uncertainties prevail for Cummins, which said as the Covid-19 situation is evolving, its impact on operations cannot be estimated.