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Miss on profitability

Siemens Ltd’s results were weak on profitability as lower margins and lower other income weighed on overall profitability. Execution scale-up was good in smart infrastructure and mobility, while it remained weak in digital industries. Overall margins came in lower than our estimates due to weak margins in mobility. Order inflows were good for Siemens Ltd at INR57b (up 13% YoY) and included two large orders from the railways for mobility divisions. The company has also transferred pending cash and cash equivalents worth INR24b to Siemens Energy during the quarter. It has also taken approval for changing the financial year from Oct-Sep to Apr-Mar. Thus, FY26 will include 18 months from Oct’24-Mar’26. Going ahead, we would watch out for 1) a broad-based recovery in inflows across all divisions, and 2) margin improvement, particularly in mobility and digital industries. We incorporate the changes related to the change in financial year and 3QFY26 performance and roll forward our TP to 45x Sep’27E EPS. We retain our Neutral rating on the stock with a revised TP of INR3,300.

Profitability below our estimates

Siemens reported a weak set of results with a miss on PAT, while revenue and EBITDA were in line with our estimates. Revenue grew 16% YoY to INR43.5b, which was broadly in line with our estimates. YoY growth was led by strong growth across Smart Infra and Mobility segments, while weakness in Digital Industries continued, albeit it improved from 1Q levels. Absolute EBITDA at INR5.2b increased 7% YoY, in line with our estimate. However, EBITDA margin contracted 90bp YoY to 12.0% vs. our estimate of 12.6%. Margin was lower than our estimate largely due to higher-than-expected other expenses. PAT declined 3% YoY to INR4.2b, which was 12% below our estimate due to lower-thanexpected other income. Order inflow was up 13% YoY at INR56.8b, leading to an 8% increase in the order book to INR428.5b.

Segmental performance remained strong from Smart infrastructure

Smart infrastructure segment continues to be the key growth driver for Siemens, growing 21% YoY to INR23.8b, while EBIT margin contracted 70bp YoY on a high base to 13.4%. Mobility revenue grew 34% YoY to INR8.3b, with margins improving 130bp YoY to 3.9%, which was still much lower than our estimates. Weakness in Digital Industries continued, with revenue declining 5% YoY to INR9.2b, though it improved from the 1Q levels, showing signs of recovery. EBIT margin of Digital Industries recovered from the lows of 1HFY25 and expanded 140bp YoY to 10.8%. LVM segment was broadly flat YoY at INR2.4b, with EBIT margin of less than 1% during the quarter.

Outlook across segments

We expect Smart Infrastructure revenue to continue to benefit from investments in power distribution, data centers, and semiconductor infra. The company had earlier highlighted that it would keep focusing on increasing the share of exports and services in this segment. Mobility segment is getting the benefit of large-sized order inflows from metros and high-speed rail, and hence, the order book build-up is healthy. The company’s production of locomotives for a 9000HP locomotive order has commenced and a further scale-up in production will help in better absorption of costs. Digital industries segment is dependent on private capex growth, but it is bottoming out in terms of a decline in inflows and margins.

Financial outlook

We incorporate the changes related to the change in financial year and 3QFY25 performance and expect revenue/EBITDA/PAT to grow at 11%/14%/9% over FY24 (Sep-ending)-FY28 (Mar-ending). Overall we expect smart infrastructure segment to maintain its growth trajectory and we expect a gradual improvement in digital industries and mobility. EBIT margins of both these divisions are lower than smart infrastructure margins.

Valuation and view

The stock is currently trading at 45.3x/38.9x P/E on FY27/28E earnings. We maintain Neutral rating on the stock with a revised TP of INR3,300, based on 45x Sep’27E earnings on estimated financials of Siemens Ltd.

Key risks and concerns

1) Slowdown in order inflows from key government-focused segments, 2) aggression in bids to procure large-sized projects would adversely impact margins, 3) relatedparty transactions with parent group entities at lower-than-market valuations to weigh on the stock performance.

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