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Siemens India delivered a jolt to investors with its net profit for the December quarter plummeting 70 per cent from a year ago. The company's sales too dipped by 8 per cent during the period. A delay in financial closure of projects by clients appears to have slowed the pace of conversion of orders into revenues. Higher cost of raw material and traded goods, besides higher inventory costs have crimped margins.
Barring its healthcare segment, Siemens saw revenue declines across segments – infrastructure, energy and industry.
Financial closure delays
Slower booking of revenue does not come as a surprise as Siemens' business, like many other large capital goods players, is dependent on the power, and transmission and distribution (T&D) space, now reeling under a slowdown.
Siemens' problems were compounded by higher cost of raw material, which, as a proportion of sales, increased to 68 per cent from 58 per cent a year ago. A high import component, given the depreciating rupee, escalated costs.
Order scenario
Siemens received new orders worth Rs 2,834 crore in the December quarter, 11 per cent higher than a year ago. However, this is after excluding a large power order win last year. The earnings report of the parent company Siemens AG states that the Indian unit's order flows have declined 64 per cent year-on-year.
Siemens has maintained a good market share in substation orders from PowerGrid. But the opening up of this space for Chinese and South Korean players has increased competition.
Siemens missed out on some opportunities in the railway space too. Orders to the tune of Rs 2,000-2,300 crore from the Mumbai Railway Vikas Corporation was won by Bombardier, as Siemens was under a temporary global ban on bidding for World Bank funded projects.
Siemens may yet be able to drive its volumes through its low-cost products across its industry automation and drives segment, which contributed 10 per cent of new orders last fiscal. The company expects to launch 48 such products and sees a €70-billion market potential in India for base-level products. While these products would be high volume, with limited margins, local sourcing could lower costs. The units would also be an outsourcing base for the parent.
A strategy that relies on products rather than projects (now 60 per cent of revenues) may also help protect its revenues from the swings in the capex cycle.
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