Investors in shares of Siemens Ltd have had a remarkable 2023 so far with the stock rising 29%. The company’s robust order and focus on high-growth areas such as digitization, automation and energy efficiency products boosted sentiments. Moreover, improving prospects in the capital goods sector had a positive influence on the stock.
On Tuesday, Siemens announced a good set of numbers for the September quarter (Q4FY23). The company follows the October-to-September financial year. Consolidated revenues rose 25% yoy (joy) to Rs5,808 crore led by healthy growth across segments including energy, smart infrastructure, mobility and digital industries. Gross margin fell but lower other expenses meant a 98 basis point widening in the Ebitda margin to 12.1%.
The order backlog as of September 30 stood at Rs45,518 crore, down 2% from June-end. However, the order book provides revenue visibility of 2.5 times FY23 sales, which is higher than the level seen last year – 1.1 times FY22 sales. Additionally, the company may see additional strong order inflows. Nuvama Institutional Equities has identified a large future order pipeline in HVDC (high voltage direct current), transmission, and railways, evident from Siemens’ capital expenditure (capex) plans.
The company announced investments worth Rs416 crore in expanding the capacity of power transformers for the power transmission business and vacuum circuit breakers for medium voltage switchgear in the power distribution sector. This would help Siemens to meet the growing demand both in India and globally.
Meanwhile, the spin-off of its energy business has caught attention recently. This is expected to be completed by December 2025, much earlier than planned. The energy segment, which includes gas or steam turbines, and electricity generators, formed the largest part of the company’s consolidated revenue – 34% in FY23.
Kotak Institutional Equities said in a report that Siemens was considered a better play against ABB India because of its diversified businesses across industry and power. But now, the separation would lead to a more comparable set of entities in Siemens and ABB.
“The long and complicated process of the separation and transfer of investments may also dilute benefits for the unbundling of the two businesses,” Kotak said. The parent, Siemens AG, will buy Siemens Energy’s stake in Siemens. This implies acquiring an 18% share of Siemens Energy, increasing its ownership to 69% from 51% currently. Siemens Energy’s investment in Siemens would be reduced to 6% from 24%.
Investors would do well to monitor how the separation is progressing and the execution of the company’s capex plans. Certainly, Siemens has reasonable exposure to export markets and, therefore, a prolonged slowdown in key export markets, including the Middle East, could be disruptive.
In addition, minority shareholders rejected Siemens’ proposal to sell its low-voltage motor business for Rs2,200 crore. This leaves the company with two alternatives: revise the terms of sale or continue to operate the business as is. So, lack of clarity on how the company intends to sell its low-voltage motor business remains a vital overhang. This could possibly explain why Siemens shares have underperformed the S&P BSE Capital Goods index this year.
However, investors are sitting on nice gains. “A reasonable valuation compared to ABB India helped Siemens’ stock rally,” notes Harshit Kapadia, analyst at Elara Securities (India). As things stand, Siemens’ stock trades at 41 times while ABB’s trades at 71 times. one year forward basis, he added.