Bull vs bear: What's the outlook for Siemens now?

Engineering and automation major Siemens reported a 9.6 percent rise in standalone net profit to Rs 177.42 crore for the second quarter ended March. In an interview to CNBC-TV18, Gaurang Shah of BNP Paribas said with a vast area of presence, the company is well positioned to exploit new government initiatives in rail infrastructure, building smart cities and in promoting domestic manufacturing.  The only setback that the company may face is in case if the government delays its execution cycle. He is of the view that the company may post margins better than 11 percent going forward and that capital goods engineering space will not be a dragger going forward. He expects that the parent company will always be there to back Siemens in new technologies in a growing market like India. However, Prakash Diwan of prakashdiwan.in says the company is undergoing huge transformation, bottlenecking its manufacturing line and downsizing its people and facilities. He believes Siemens' valuations are very expensive in comparison to likes of ABB and Crompton Greaves.Below is the transcript of the interview on CNBC-TV18.Nigel: You believe in fact the numbers looked good. What is your take? The stock still trades at around 45 plus times its forward earnings. You believe it is still a buy?Shah: Yes, and if you look at the 52-week low, it is somewhere close to about Rs 970 and if you look at the last four quarters, the margins have come at a higher level and we believe that the entire capital goods engineering space has been an underperformer because of the fact that the ground level positivities have not come out and execution of projects are a little bit of a hurdle as of now. But given the fact that the government is doing everything right and making the right noise in taking the right steps, we do not think that those days are far away, wherein all those hurdles in terms of execution are going to be a thing of the past. And if you look at this company, it has presence in all diverse verticals, right from making industrial equipments, right to execution of turn-key projects to making equipments for power generation, transmission and distribution. It also makes compressors, motors and dryers for industrial use and it also has presence into making scientific and medical equipments. Given the kind of opportunity and the company is well positioned itself to take advantage of the initiatives that the government has taken. The only drawback over here is that the ground level implementation and of course, if there is any delay by the government in its policies to work out from a long-term point of view for capital goods engineering space, this particular company might have a setback if those implementations are not done on time. But, nevertheless, having said that, on the numbers front, last four quarters have been very good numbers and our sense is that possibly, those bad days are over for the capital goods engineering space and you might see execution picking up steam as well along with an increase in order book.Reema: Just one more answer. Since the biggest positive in the quarter was the margins at 11 percent, you believe this is sustainable?Shah: True. Even if the worst case scenario, if they have clocked 11 percent, and if the ground realities are going to improve for the better, I do not think that you will see sub-11 percent margins. And it might have even a chance to better it going forward from here on. And it is almost about 75 percent subsidiary of Siemens AG and the parent company is always there to back in terms of any kind of new technology or implementation of those technologies into a market like India, which is a growing market.Reema: Same question to you on margins. Gaurang believes that the margins are sustainable. If not, it will only improve from here on. You have a deferring view on that. Why is it?Diwan: Essentially, what I think has happened is the margins have peaked out because in the last 18 months, the company has undergone a huge transformation and downsizing in terms of people, facilities, deep bottlenecking a lot of the manufacturing lines. And after that, they have managed to clock these margins. So, I feel the margins are more or less peaked. You could probably have an incremental improvement of 15-16 basis points, that is about it. But it is not going to be like a empirical growth that you will see from here on that it will go into the mid-teens or something. So, 11 percent probably is a very good peak that Siemens has touched. That is the reason why I do not think I would play a very huge premium for the stock.Nigel: But you have given us a couple of alternatives, I believe. Do you believe there is, if you want to play this space, are there other listed stocks that would be better placed, which you would say, hey there I will go and buy that one instead of buying Siemens?Diwan: Exactly. I fully agree with Gaurang. He has postulated so much of the positives that this environment is going to be witnessing. Now who is in a more advantageous position to take advantage of this, it is going to be the likes of Crompton. Now that they are very clear with their consumer division out and the power engineering division being separated or it could be an ABB, because ABB, while Siemens was struggling, has been very active in terms of supplying to its parent. Now, that is one of the reasons why it has had very decent utilisation levels and it has not struggled. So, there is no drag on it. So, that is the reason they are more competitive than Siemens when it comes to participating in all these high voltage, high capacity transformers and the power side of the business. Siemens has an advantage on the medical units, medical devices, but that is a very small niche area. It does not contribute very significantly and 51 times, FY17, do I want to give it to a capital goods company that is just kind of starting to take off? My answer is not really. I would take a Crompton at 26 and ABB at 32. Not Siemens at 51.Reema: The other concern was that while the order inflows went up by 10 percent year-on-year, the order backlog declined by 9 percent. Would that not be a concern about the revenue visibility for the coming year?Shah: I guess, there has been an issue with the entire sector – capital goods engineering space – in terms of order execution backlog and to a certain extent, certain orders getting pulled back because of issues of execution with certain companies. So, I would say that yes, from a short to medium-term, this would be a overhand, but from a long-term I do think that this will be a great concern.Reema: Since all the positives that you laid out were largely for the sector, would Siemens be the best play in the capital goods sector?Shah: Let me elaborate over here. Right from Siemens to Larsen and Toubro to ABB to possibly, Alstom, we are positive on all these companies and like I mentioned, yes, last one year, one and a half year has been very difficult for the capital goods engineering space in terms of execution, getting new orders, etc. But, slowly and steadily, as we see ground level implementations working out favourably, I do not think that capital goods engineering space would be a dragger going forward.