On Mobility - given the strong order book of more than 50 billion and 1.8 book-to-bill, even excluding the 9,000 HP loco order and the expected supply ramp-up in the 9,000 HP loco, with 35 train/loco sets to be delivered in the near term, should we expect greater than 20% CAGR in revenue in the next couple of years and double-digit margin with revenue improvement?
Yes, the loco project will contribute to growth and margin going forward. It will be a kind of a step-up process. So most probably you will not see the growth consistently on the same level. Whenever we reach the next level of delivery, the delivery schedule, the revenue of course will ramp up because the costs are coming in. So yes, we will see significant growth in the next couple of years. Definitely double-digit going forward, and it also should contribute to the margin expansion. Sunil added: contract requirements are 40 to be delivered for the next two years, then steps up to 80 for two years, then 100 for two years, then 160 for the rest. Every step-up brings a step-up in volumes and continuous growth. With delivery of locomotives, the service part of the contract will kick in as well.
On Digital Industries - Siemens Xcelerator was launched a few years back in India to have the complete ecosystem of hardware, software, services alongside partners. What have been the adoption levels in India and what proportion of DI business now comes through this route?
We today have over 500 customers who have used, who have received orders or who have given us orders through the Siemens Xcelerator platform. We don't measure digitalization per se as a separate metric because Xcelerator runs across all of Siemens - it's not only DI or SI portfolio, it covers both and runs across multiple subsegments. What we do measure is the number of customers getting interested in solutions we are offering on Siemens Xcelerator, which is increasing. Example: a Dairy manufacturer asked us to reduce fat content from milk-to-tetra pack with no human intervention. That involves DI process knowledge but could also involve heating ventilation/air conditioning. So we look at it customer inwards - can we deliver that solution and bring together the complete offerings of Siemens.
On Smart Infrastructure - what would be the size of India's Building Automation market in your assessment? With the current portfolio, what proportion are we able to address and how will we fill the white spaces?
Building Automation market is the entire commercial buildings, new commercial offices, complexes that are coming up. It is malls, stadiums, airports, ports, factories. All of these first require electricity which we deliver via Low Voltage, Medium Voltage products, then air conditioning and energy management which we deliver, and finally an overall platform to bring energy consumption down. The size of the market is huge and growing. 70-80 airports coming up in next 4-5 years. Every airport requires electrification, energy savings. Hospitals, all of these are part of that portfolio.
On capital allocation - we have almost 70 odd billion of cash, will get 22 odd billion from sale of LV, do 20 billion of PAT every year. Fixed assets are 11-12 odd billion. You mentioned strategic M&A. From localization perspective, especially in DI where it seems chicken-and-egg (India not scaling so we don't localize, India not scaling because we don't localize) - given strong balance sheet, can we upfront some investments to localize and then look at profitability over a 5-10 year perspective?
Capital allocation: M&A is one. Second is continuous investments in Mobility - not only CapEx, we are adding hundreds of people every year for engineering, signaling, etc. Localizing ahead of the curve is ambitious - putting money on the table because we expect volumes to come. The question is when will that volume come? Because that has a different impact on IRRs. We expected private CapEx to kick in 3 years ago. Had I invested 3 years ago, we would have had a challenge right now. Some products are already manufactured globally - either parent sells to us at competitive Indian price, or we manufacture. Goa factory is exporting substantially to the parent company - we are integrated into the global supply chain. The critical discussion is meeting price level in the market. If we can meet price level and continue to deliver margin improvement by importing or buying, that's a preference. Wolfgang added: it's a question of global demand - in energy environment globally demand is rising, which makes it easier to make investment decisions in India.
On Mobility - what was the share of locomotive in revenues last year? In one of the conference calls you had mentioned that locomotive margins would be equal to company margins (10-11% then). Now that you have finished construction, how do you see margins now versus your anticipation?
I don't want to go into that granularity on revenue share. On margins - this is a POC contract. The project has been calculated at the right margins. It has met our margin hurdle targets, taking into account the volume of business. Now it's a question of over the lifecycle of the project, delivering on those margins, which is a function of the cost. Wolfgang added: project ramp up is on track, no areas of concern, so we continue this way.
On Mobility - a year and half or two back the narrative was around big bang large loco orders, Vande Bharat orders, etc. Today it seems the market has moved more towards subcomponent and subsystem orders. Do you envision larger orders coming back? Also on exports - I understand exports have started, anything big bang anticipated over a 2-3 year period?
The challenge is Railways takes a decision on a case-by-case basis. There was 12,000 HP, 9,000 HP, 6,000 HP locomotives, Vande Bharat, Vande Metro, MRVC tender for commuter rail. Every tender is unique - some say supply components, some say do the whole thing, some say supply parts and we'll do the rest. Different models for different tenders, makes it difficult for any supplier to plan. Will more cities require suburban trains? Yes. Intercity trains - NHRCTL between Delhi-Varanasi, Delhi-Agra are coming. But everyone is different - it's a mixture. They need to upgrade the technology - it's a question of where do they do it. On exports - we have done two major export deliveries in our bogie factory, looking at future opportunities. We are exporting propulsion equipment. Big bang export doesn't happen necessarily in railway business - you won't export a series of Metro trains, you will export 5 cars, 6 cars.
Taking cue from your slides on the 3 key segments - over the last 5 years industry was growing 5-8%, you grew faster. With your better industry growth estimates and private sector CapEx pickup, can we assume SI continues at 20% plus and overall business at high teen to 20% growth from a topline perspective over a 3-5 year scenario?
I'm not going to give a number - not because I don't want to, just that visibility in these projects is very short term. SI business depends on how much investment will go and when it will happen in airports, ports. As and when an airport gets built, hotel gets built, port, stadium, mall gets built, we will be there. We have an element that feeds into private sector CapEx - same electricals are used in factories. There are a lot of variables closely interlinked into India's growth story. I don't go out deliberately giving a number because it has to be linked to India's growth story - the Indian investment pattern will determine our growth story.
On margins - you talked about DI margins between 6-8%. Do you have any number for SI and Mobility, any range?
We're not giving guidance. He gave guidance on 6-8% because it's transfer price driven - there's not much we can do over there unless we increase service business. But on the rest, we don't give guidance.
Given the company is now ex-Energy, can you give us a broad split of revenues - projects vs products, ex-Energy? Also you spoke about solution selling - which of the 3 segments is more indexed to that, and does it have a revenue or margin impact? And on government-facing side - between SI and DI, which is more direct government facing?
On government-facing - Mobility is entirely government facing. SI is to the extent of power utilities, the distribution business, that is government facing. The rest of SI is a mixture of government and industries. Digital Industries is no government, it is 100% private capital. Wolfgang added on project/product split: take what we showed in last Analyst Meet, it hasn't changed significantly - that's why we decided not to show again because there was no major movement between project and product business. On solutions - it varies. Some solutions we go to system integrator providing products - then our margins are product margins and the integrator gets a solution. Some customers want us to stitch the whole thing - then we buy everything in and it becomes a solution. We prefer not to do that unless we are able to develop a scalable model. Most of the solution, primarily DI and SI, would be the kind where we offer products and the system integrator stitches it together.
On Mobility side - the pipeline from a 2-3 year view, I understand Railways is unpredictable, so Metros, Indian Railways and the semi-high-speed and the locos. You must be having a 3-4 year glide path of pipeline?
On Mobility side, our visibility is there for the next 2-3 years. Kavach is definitely. The question we can't answer is when will the next bunch of tenders come out. The opportunity on Kavach is there. When will the next bunch of signaling tenders come out? When will the next bunch of commuter rail come out? Usually they do 1 or 2 a year but a lot depends on States - it's not only Central subject, it's also a State subject. Then you have main line, mainly Railways, looking at semi-high-speed. They are adopting different business models - do they want only components or the complete wagon, complete car. The need and the market is visible. The timing for when tenders will come is not visible. We know what is coming in the next 3-6 months - that is the timeline to prepare the tender. Beyond that we don't really have visibility.
On Smart Infrastructure - it has done pretty well for the last five years. Can we sustain double-digit growth and see margin improvement, given that global reports 18% EBIT margin in the same segment and we are at 65% localization level?
The growth will continue as India continues to grow. Discoms, the moment they get privatized and the more privatized they get, the more they will need to upgrade their equipment. The entire space in terms of buildings and so on will increase. So, the topline growth we definitely do expect. The bottom line growth, yes, the global achievement is 18%. We are not 100% localized yet in that business. But the intent is to continue to expand the bottom line as well.
Just one clarification on Mobility piece - given percentage of completion methodology, will profit margins be in line at step-ups, give or take few basis points? Or will it also be in step-up form? Theoretically services should be higher margin than delivery of loco - so will cost recognition be in line?
Of course, the margin will develop somehow close to the development of the revenue. When we see a step up in revenue, then you will also see an increase in margin. If I look at the overall business of Mobility, the contribution to overall profitability of Mobility may be a little bit less than specifically only for the project piece. But expect also a margin expansion going forward from the project. If you really look long term, there is 11 years of delivery of locomotives and during this period the service part will partially kick in and then later. So you would see more margin in the outer years. Sunil added: even when we deliver the 40, the service starts for those 40, so there will be that increase over a period of time.
On the large electrification order - press reports say the gap between you and L2 was pretty large. Does that give a sense that your cost efficiency vs competition lets you be extremely competitive in signaling? And on electrification, with 50% market share in metros, is that market share sustainable as India electrifies more in Railways?
Yes. Our intent is to continue to gain market share, our intent is to continue to grow the topline but to grow the bottom line along with it. So, we will not sacrifice the topline at the cost of the bottom line. We have not done that in the last 10 years, we won't do that in the next 5 years. The critical factor is, every now and then you have to take a strategic call on one or the other project. But so long as the general trend continues - continuous growth in the topline and the bottom line - we will continue to take those calls.
When we virtually met last year, your outlook on private CapEx was not so positive - how do you see that now? How positive are you versus last year? With the impediments around tariffs, on a 1-year and 3-year horizon, how positive are you - high, low or medium? What's driving the change in view?
A year ago I was cautious because consumption story was not kicking in - capacity utilizations at 80-85%. Government came out with two interventions - reduction in income tax rates and GST in September. There is a lag period. In medium term, I am optimistic. I believe by April to June we should start, with everything the government has done - PLI in place, reduced income tax, reduced GST. The only thing not rounded is the tariff. With reduction in income tax and GST, there should be an uptick in private sector. 2-3 years out, I am very positive. Discussions with US and Europe, FTA discussions will get resolved. Whether 1, 3 or 6 months is detail. On medium term horizon 2-3 years I believe should get resolved and I hope tariffs will come down from US. If they come down substantially, that should contribute to uptick in GDP and private sector CapEx.
Mobility has the highest level of localization and manufacturing intensity, but margins are lowest amongst all 3. To us that seems disappointing - shouldn't they be at least high teens or low teens? How do you see margins over 2-3 years given the investments?
It's CapEx. Look at the amount of CapEx we've put in in the last 2-3 years. In Mobility, we opened a bogie factory, invested in the locomotive factory, continue to invest in Kavach signaling, electrification - continuous CapEx going in. So it's a CapEx cycle that we are putting in there. Wolfgang added: look at margins of other companies in Mobility business - global Mobility business has a margin of double-digit, 10%, 9.9%. Other competitors are more in the range where we are right now with 7.7% or 7.8%. So I believe we are not bad with the 7.7%. We will see revenue going up and margin expansion. Our aspiration is to get to the same level as the global business at some point in time.
On Digital Industries - we had low teens margins over previous 3 years. My understanding was the product may be sold free but money is made in services, which you said is 20%. How does the margin range of 6-8% reconcile with the past higher margins?
The high margins in the past were related to special circumstances - lots of demand from customers because they were afraid they don't get any shipments because of supply chains. Prices were skyrocketing. The transfer price model didn't work the other way around - we didn't transfer profits back to headquarter but kept it here. That's why margins were significantly higher than normal cycle. The margin range we expect is 6-8% plus/minus. The more we grow, in absolute terms margin will grow. But margin ranges will be in similar range unless we grow service business significantly. Sunil added: that's not the business model here - we won't sell 5 crores or 8 crores automation system for free just to expect potentially service project later on.
Specifically in SI, any levers for further margin expansion?
Localization, we've talked about. The more you grow the topline, it's a volume game - Low and Medium Voltage is a volume game. The more you grow the topline, the cost degressions happening over there will help. We are looking in all our businesses, DI as well as SI, to get broader in our offerings and deeper in the offerings. That should also help in that process.
On M&A strategy - is it more bolt-on acquisitions or bigger acquisitions as well? Will it be driven by global or local management?
We are looking for everything, to be honest. We have a deal book, we've scanned the entire market and this ranges from very small to very large. It is more driven by needs in the local market rather than global requirement. What we look at: will this acquisition give us a product that we don't have? Or access to a market we are not present in? Or a technology we don't have, which we can scale up not only in India but globally as well? It has to meet our margin hurdles. We have a deal book continuously reviewed - not only internally but the board reviews it, globally they review it as well to see what opportunities there are.
On Kavach, what is the strategy? Are you bidding for Kavach orders or is it just for your locomotives or something like that?
We want to be a serious player in Kavach. We already have a first developmental order from the Indian Railways in Bangalore. And we will definitely be a player in the Kavach market.
On cashflows - operating cashflows versus what Siemens used to do in past are much weaker, less than 20% of EBITDA. Any specific reason? And as Mobility share goes up, would working capital need keep increasing?
Sunil is right - on one hand we have CapEx with regards to investments in manufacturing. We also have OpEx related to these investments. And one big portion is also we invest a lot in working capital right now for Mobility business. On Mobility share going up - honestly no. This was related to ramp up of 9K horsepower project and other larger projects. Right now the majority is done, so it will stabilize. We should see a more positive development on cashflow side going forward. To clarify - it's not that you will see now something you won already. I'm talking about the full fiscal year.
On Mobility front - on percentage completion method, it's a contract with two parts - O&M as well as product delivery. When you consider margins as IND AS 115, are these considered two separate obligations? Do you first recognize margin only on products or include entire lifecycle including O&M?
It is considered as two separate contracts. There's a supply contract and there's a service contract. Both of them are POC. And as and when the cost comes in for each of them, the revenue is recognized.
On Smart Infra - since you took over C&S, a lot of cleansing has happened and profitability is up. But the revenue momentum of C&S integrating and marketing Siemens, and Siemens marketing C&S portfolio globally and locally, we're yet to see the best of it. How are we geared up on capacity side for C&S and non-C&S portfolio? When C&S markets Siemens to infra customers and Siemens markets C&S to energy customers - what would be the rationale?
On C&S, the volumes are not too bad. We have plus 20% volume increases in C&S. What we don't do, deliberately, is we will not get C&S to market Siemens products and Siemens to market C&S. Otherwise we cannibalize each other's markets. We are keeping a very clear firewall between C&S and Siemens Limited in the market. At the back end we coordinate but we make sure you don't get a C&S salesman and a Siemens salesman going to the same customer. We have identified clear markets for C&S to enter - mid-level markets where Siemens is in any case not competitive, which is why we bought it. Siemens stays in the premium markets where C&S can't get a foothold. On exports - the export process has taken time to pick up because every country requires qualification of products. Domestic business of C&S is doing very well.
Which all segments of Siemens got impacted by QCO norms? Is it possible to quantify the impact on overall cost? Is it over or may continue for another few more quarters? And are they now fully compliant and no more incremental investments needed?
We had one quarter where there was a slowdown because of QCO but then we picked up afterwards and we haven't had any impact of QCO since, in none of our businesses. We started this process - we were the first company to get the license from QCO authorities. It took 2-3 months, that one quarter, not because of us but because of government's internal processes. Over a period of time we have continued localization - so impact for us has not been very high. Where impacted: primarily Low Voltage business, very negligible in Mobility. Both up and running after that first bump in Q1. Now we are okay. The QCO has now been lifted indefinitely and we will continue our process of localization, not knowing whether they will bring it down again. We are working with BIS and others. It has not impacted us. We are not worried.
Can you share an update on the ongoing CapEx, the likely commissioning timelines? And on Mobility side, in Aurangabad certain CapEx?
The ongoing CapEx is basically the Medium Voltage GIS and the Vacuum Interrupters. We will start commercial production in October '26 on the Medium Voltage and a couple of months earlier, plus/minus couple of months, on the Vacuum Interrupters. Those are the major ones happening, the rest are routine in capacity. On Aurangabad - that is bogies, we have done it already. We are looking now how we need to do that. We are even considering whether it really makes sense to do it ourselves, do we work with partners instead, how much to localize. Those are the discussions we are having right now.
On Discom privatization - just wanted a sense of how meaningful it could be given that already 75% or more of the Discoms are using your switchgears. Can it be very meaningful from these levels already?
I didn't say the market for Discoms is over, quite to the contrary. I only said the installed capacity has got a lot of our switchgear in it. All the installed capacity needs to be upgraded - the Discoms weren't able to do it, didn't have the financial capability. All of that needs to be upgraded. You need fresh switchgear, fresh SCADA systems. As privatization comes in, the first thing developers do is to see how to cut losses - both transmission/commercial losses and distribution losses. That is where we come in - on switchgear, circuit protection, automation, networking.