Revival of orders to boost project business, drive gains for Siemens

Siemens' product mix, operating leverage and price hikes to help expand margins.

The Siemens logo is seen on a building in Siemensstadt in Berlin, Germany
The Siemens logo is seen on a building in Siemensstadt in Berlin, Germany
Ram Prasad Sahu
3 min read Last Updated : Jun 14 2022 | 11:26 AM IST
Record order inflows, improving business outlook and prospects of margin expansion led to earnings upgrades for capital goods major, Siemens. The positive outlook on the stock follows management commentary on growth opportunities in an analyst meet last week. Given the outlook, the stock was in the green amid weak market conditions on Monday.

A key takeaway was the all-time high order book at Rs 17,170 crore at the end of Q2FY22 (financial year ends in September) and this was up 61.4 per cent y-o-y. The order book is 1.3 times the company’s trailing twelve months revenues 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) contributing to the growth.

While the order book largely caters to small and mid-cycle orders, the company is also witnessing a revival in large orders especially in the cement and metal sectors. Larger orders have picked up after remaining at muted levels in the FY17-19 period. These orders are expected to further boost the project business which currently accounts for 36 per cent of its portfolio and had risen by 600 basis points 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 capex to be driven by 5G rollout), network revamp of private distribution utilities and infrastructure investments aided the growth of smart infrastructure vertical. While the mobility business saw a sharp growth on a low base, it is likely to witness strong growth led by a pick-up from 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 railways tendering, as these are expanded to further towns. The entry into electric locomotives is also a key step to benefit from the Indian Railways’ decarbonisation drive.”

Though 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 going ahead.

Operating profit margins fell 190 basis points y-o-y to 11.3 per cent due to increased logistics 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 by 150 basis points by FY24. 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 that the company will be among the most significant beneficiaries of capital expenditure recovery with potential annual orders reaching to Rs 40,000 crore over the next two to three years. Most brokerages have a buy rating on the stock with target prices ranging from Rs 2,600 to Rs 2,900. This offers an upside of 9-17 per cent from the current levels.

One subscription. Two world-class reads.

Already subscribed? Log in

Subscribe to read the full story →
Subscribe to Business Standard digital and get complimentary access to The New York Times

Quarterly Starter

₹900

3 Months

₹300/Month

SAVE 25%

Smart Essential

₹2,700

1 Year

₹225/Month

Save 46%

Super Saver

₹3,900

2 Years

₹162/Month

Subscribe

Renews automatically, cancel anytime

Here’s what’s included in our digital subscription plans

Access to Exclusive Premium Stories Online

  • Over 30 behind the paywall stories daily, handpicked by our editors for subscribers

Complimentary Access to The New York Times

  • News, Games, Cooking, Audio, Wirecutter & The Athletic

Business Standard Epaper

  • Digital replica of our daily newspaper — with options to read, save, and share

Curated Newsletters

  • Insights on markets, finance, politics, tech, and more delivered to your inbox

Market Analysis & Investment Insights

  • In-depth market analysis & insights with access to The Smart Investor

Archives

  • Repository of articles and publications dating back to 1997

Ad-free Reading

  • Uninterrupted reading experience with no advertisements

Seamless Access Across All Devices

  • Access Business Standard across devices — mobile, tablet, or PC, via web or app

Topics :SiemensCapital goods

Next Story