Do Siemens’ growth prospects in India justify its rich valuation?

Siemens follows an October to September financial year. For FY24, Siemens’ Ebitda increased 25% to ₹3,100 million. With the company expected to maintain its growth momentum, investors face a tough decision with the stock trading at a pricey valuation of around 87 times its estimated FY25 earnings.

Revenue growth stood at 11% following a slight increase of 6.6% in the June quarter. Ebitda margin increased by 246 basis points, driven by lower raw material costs and other expenses. One basis point equals 0.01%.

Order intake increased by 37% year-on-year to reach ₹6,160 crore, a strong recovery after average growth of less than 10% in the first three quarters. However, the backlog of unfulfilled orders remained moderate at ₹21,600 crores, which is less than 1 times the turnover of the last 12 months (excluding locomotive order to be executed over 35 years).

Siemens is focused on increasing its presence in the domestic renewable energy market and expanding its share in exports through integration with the global supply chain of its parent company, Siemens AG.

It will spin off its energy business, which represents 28% of revenue and 33% of Ebit (earnings before interest and tax) in FY24, into a separate entity, mirroring the global split of the energy business in Siemens Energy AG in 2020. The demerger would help the Indian entity source renewable energy technologies from Siemens Energy.

“We remain positive on Siemens India from a long-term perspective given: 1) its strong and diverse presence across sectors with a focus on electrification, digitalization and automation, 2) product localization, 3) a strong balance sheet, 4) healthy public and private sectors. investments and 5) unlocking value through demerger for the energy sector,” PL Capital analysts said in a Nov. 27 report.

Adding capacity

Siemens is increasing its capacity for several products, with its Indian facilities expected to serve as a supply hub for its parent company, in addition to serving the domestic market. These include the doubling of its transformer manufacturing capacity, which is expected to be completed by December next year, for which it also announced additional investments to expand the product portfolio.

Other projects involve the expansion of its gas-insulated switchgear manufacturing plant and the construction of a new metro train manufacturing plant, although these will only come into operation from exercise 27.

However, the company’s high valuation remains an obstacle. Nomura Global Markets Research has assigned a “Reduce” rating to the stock with a sum-of-parts target price of ₹6,000, which implies a multiple of 60x its estimated earnings per share for the 12 months ending September 2026.

Siemens shares are now trading at around ₹7,500. For further clues, investors may have to wait a long time until the split is finalized and the performance trends of the energy sector are clear.