Why Siemens is a good long-term buy

The worsening slowdown and the delay in investment cycle revival have impacted manufacturing companies over the past two to three years.

In a bid to tide over weak demand and structural challenges, many firms have been streamlining their processes through technology and digital solutions, to improve profitability.

Siemens, backed by the strong R&D capability of parent Siemens AG, is well-positioned to tap this segment and offer digitisation and automation solutions to manufacturing companies.

Siemens has also seen a notable shift towards digitalisation, in terms of its order intake.

The company is also set to emerge as the market leader in the low-voltage switchgear segment, with its recent acquisition of C&S Electric’s business verticals (for ₹2,120 crore).

Backed by sound financials and a strong cash flow position, Siemens appears a good long-term bet at this juncture.

At the current market price, the stock trades at an EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) of 25 times, which is lower than its three-year average of about 30 times.

The stock is also well-placed to gain from a significant pick-up in investment cycle over the next two years. Investors with moderate to high risk appetite can consider this stock for the long run.

Sound business

Siemens provides various industrial solutions, including digitisation and automation, to several companies across 18 industries —- metals, chemicals, construction and cement, power utilities, oil and gas, pharmaceuticals, automobile and hospitality services, among others.

Operating in segments such as gas and power, smart infrastructure, mobility and digital industries, the company gets majority of its impetus from the Centre’s programmes on Make in India, Digital India, Power for All and Smart Cities.

That said, its direct reliance on government orders is only at 25-30 per cent (of the order book) currently.

Domestic business constitutes 80 per cent of the orders.

Also, the company will gain significant market share with the proposed acquisition of select business verticals of C&S Electric, providing electrical and electronic equipment for infrastructure, power generation, transmission and distribution industries.

Post the acquisition, Siemens (both companies continuing to operate with existing brand names) is likely to emerge a market leader (after L&T and Schneider-combined, and ABB) in the low-voltage switchgear segment.

The deal, awaiting CCI’s (Competition Commission of India) approval, is valued at ₹2,120 crore. Siemens has a healthy cash balance of ₹4,891 crore as of September 2019.

The company has seen a steady growth in its order intake — at 7 per cent compounded average growth rate (CAGR) over the last four years.

Given the relatively low execution cycle, Siemens’ revenue growth has also been healthy. Revenue grew by 7 per cent CAGR between FY15 to FY19 (year ended September 2019).

EBITDA grew by a higher 13 per cent during the same period, due to a tight leash on expenses.

Localisation

Also, since the company relied heavily on imported inputs in the past, localisation across several segments (such as gas and power, mobility and smart infrastructure segments) in recent years has led to a 290 basis points (bps) increase in operating margins to 13.7 per cent in FY19, from FY15.

That said, in the latest December quarter, revenues saw a 4.5 per cent drop (y-o-y) due to lower customer off-take.

However, the post-tax profit of the company grew by 15.2 per cent y-o-y on the back of lower tax outgo and a favourable mix in order intake — higher share of digital industries, mobility and other segments. As of the December quarter, the order book was healthy at ₹12,400 crore, which provides revenue visibility.

The company managed to improve its operating margins by 170 bps y-o-y in the December quarter, indicative that the company is desisting from aggressive bidding, despite the challenging environment.

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