Siemens’ order inflow momentum robust, but watch the execution


The government’s increased thrust on infrastructure development is likely to come as a shot in the arm for capital goods and engineering companies, including Siemens Ltd. The company is in the spotlight after it bagged a contract worth about 26,000 crore from the Indian Railways to deliver 1,200 electric locomotives of 9,000 horsepower. The deliveries are planned over an 11-year period, and it will also provide full-service maintenance for 35 years.

“This is a long-term contract, so the ramp-up, execution and deliveries will happen at regular intervals, which means that the company’s order book will go up gradually. This will be build-into earnings estimates as and when execution happens,” said Parikshit Kandpal, institutional research analyst at HDFC Securities Ltd. This order gives the company’s overall outlook a boost, he said. According to Siemens, this is the single biggest order in the company’s history in India.

Further, with many tenders lined-up for locomotives and Vande Bharat trains, more large-ticket orders could fall into the company’s kitty. According to Kandpal, there is not much competition in the mobility space, so Siemens’ order inflow momentum would remain robust, thus pushing the share of the mobility segment in its overall revenues higher.

For now, the company’s order inflow is also likely to be driven by short-cycle orders on the back of increasing thrust on digital and sustainability solutions.

In the December quarter earnings, Siemens is expected to report revenue growth of 15% year-on-year (y-o-y), aided by healthy growth across digital, smart infra and mobility segments, said Kotak Institutional Equities. “We expect an 11.2% Ebitda margin, up 90 basis points y-o-y, to account for easing of raw material price pressures and logistical issues, which impacted performance last year,” said the report. Meanwhile, in the past year, the Siemens stock has rallied by 24%, outperforming the S&P BSE Capital Goods Index’s 11% gain. Valuations are not cheap. Based on Prabhudas Lilladher’s estimates, the stock now trades at 52.1 times FY24 earnings (September year ending).

Pent-up demand and expectations of increased government and private capital expenditure have buoyed sentiment towards the sector. But with recession fears looming large, global orders could see some softening and could be a dampener. In that context, the management’s commentary on the demand outlook is important. That apart, the pace of execution and revival of the operating margin trajectory would be crucial parameters.

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