Siemens split: Energy arm looks bright, but residual businesses face a bumpy ride

Siemens Ltd and its demerged business, Siemens Energy India Ltd (SEIL), which split from it on 7 April, are now aligned with the operating structure of their parent entity. Globally, Siemens Energy AG was carved out from Siemens AG in 2020 to focus on the energy business.

While the demerger is expected to bring greater synergies for SEIL’s business, the crucial question is whether it will help accelerate Siemens’s growth as some of its residual businesses face near-term headwinds.

Siemens had a market capitalisation of almost ₹1.77 trillion before the demerger. It now stands at ₹97,000 crore. This implies a market cap of ₹80,000 crore or about 45% of the pre-merger market cap for SEIL, which is expected to be listed in a month.

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For context, the energy business had a 28% revenue share in the December quarter, the same as in FY24, and 29% in adjusted net profit. The company follows an October-to-September financial year, so the December quarter was the first quarter of FY25. A higher share in the market cap than in revenue and profit means investors are projecting faster growth for the energy business.

A PL Capital report dated 7 April projected SEIL's revenue would increase at a compound annual growth rate (CAGR) of 19.6% over FY24-27, while the Ebitda margin would touch 17%. It projected 13% CAGR revenue growth and margin for Siemens over the same period.

Wind in its SEIL

SEIL is expected to benefit from continued momentum in the domestic transmission & distribution segment and a strong order book. The business, classified as ‘discontinued operations’ in the Q1FY25 results, recorded 28% year-on-year revenue growth.

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According to the PL report, cumulative order inflow for the energy segment during FY22-24 stood at ₹22,000 crore against ₹16,000 crore for rivals Hitachi Energy India Ltd and ₹11,000 crore for GE T&D India Ltd. SEIL’s order book stands at over ₹10,000 crore, about 1.5 times trailing-12-month sales. Two high voltage direct current (HVDC) transmission projects based on VSC (voltage source converter) technology, each worth about ₹10,000 crore, are expected to be awarded in the next 12 months, which could further boost its business.

Residual worries

However, some of Siemens's residual businesses, comprising smart infrastructure, mobility, digital industries and low-voltage motors, continue to face headwinds. Digital industries, which contributed nearly 25% of FY24 residual revenues, is particularly affected as private capex remains muted. The business also faces destocking by customers, after a build-up during the pandemic, which is putting pressure on prices and affecting margins. The segment’s revenue fell by 24% in Q1FY25, with a sharp 650 basis points drop in the Ebit (earnings before interest and taxes) margin.

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The mobility segment, which contributed 18% of FY24 residual business revenue and has an Ebitda margin of only about 6%, is facing delays in orders from railways for high-value 6,000 or 12,000 horse power locomotives. While the longer-term pipeline from railways is healthy, considerable uncertainty remains with regard to the timeline of awards. The segment also recorded a marginal (4%) drop in Q1 revenue.

Amid the subdued outlook, the stock fell by 25% from 1 January to 7 April, when the demerger took effect. A pick-up in high value government orders is essential for Siemens to accelerate its growth going forward.