Supply chain, margin woes for Siemens, but strong order flow a positive

Global headwinds may weigh on the sector and company's prospects; strong order flow is a positive though

The market had a negative response to engineering major Siemens Limited’s third-quarter results (this is Q3 for Siemens which has a September year-ending). The electrical engineering / capital goods major has clearly been badly affected by supply chain issues and margins have been hit by inflation. The management guidance was notably cautious with a lot of focus on risks in the near-future pointing at “Global headwinds impacting (future) demand”.

The consolidated revenue was around Rs 4,258 crore, up 8 per cent on the quarter-on-quarter (QoQ) basis and up 45 per cent year-on-year (YoY). But (earnings before interest, tax, dividend and ammortisation (Ebitda), at Rs 412 crore, was down 15 per cent QoQ and up 68 per cent YoY. The margin, at 9.7 per cent, was down from 12.3 per cent in last quarter. The profit after tax (PAT) was at Rs 302 crore, which was up 118 per cent YoY and down 11 per cent QoQ. The standalone order Inflow for the quarter was Rs 4,992 crore, taking the order book to Rs 18,000 crore. Employee-related expenses were up and other expenses were up to 12 per cent of revenues, a rise of 3.5 per cent QoQ.

The company could benefit from the decarbonisation drive which could bring in orders and the mobility segment is also expected to see high growth but margins there have fallen. Overall, the gas & power segment contributed 35 per cent of total revenue. Its revenue was up 22 per cent QoQ and the earnings befoe interest and tax (ebit) margin came in at 8.55 per cent, which is down from 13.5 per cent QoQ.

Smart infrastructure has a 29 per cent revenue contribution with Ebit margin, at 9.4 per cent, which is 190 basis points up QoQ. The mobility segment has a 9 per cent revenue contribution, but the ebit margin is only 2 per cent, and was down 720 basis points QoQ. Digital Industries contributed 24 per cent to revenue with ebit margin at 8.3 per cent, which is a fall of 300 basis points QoQ.

The stock fell by 4.5 per cent after the results. Looking at the electrical capital goods segment in a broader sense, the global headwinds could have a negative impact across the sector. But the strong order flow for Siemens may indicate ensuing margin pressures, rather than an immediate fall in demand.

Siemens has always had a high valuation and comparisons to ABB and BHEL would also indicate that the sector will continue to be highly valued, because growth should come back by end of this fiscal or by the first half of 2023-24.

Analysts’ valuations don’t indicate much upside for the stock, one is at Rs 2,350, with the stock at Rs 2,612. Another valuation stands at Rs 2,770 and a third at Rs 2,882. Recommendations range from “reduce” to “add”, but the consensus seems to be negative.