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Siemens: Subdued performance - Views on News from Equitymaster
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Siemens: Subdued performance
Feb 5, 2014

Siemens has announced the first quarter results of financial year 2014 (September ending fiscal). The company has reported 4.1% YoY decline in sales while net profits have increased 2.7% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Sales decline by 4.1% YoY in 1QFY14.
  • The company reported operating margins of 6.2% in 1QFY14 which was the same in 1QFY13.
  • Net profits of the company increased marginally by 2.7% YoY.
  • The company registered an order inflow of Rs 20.05 bn during the quarter.
  • Amalgamation of Winergy Drive Systems Pvt Ltd (Winergy), a 100% subsidiary of the company, concluded during the quarter. As such, the current quarter results include the performance of Winergy.

Consolidated financial performance
(Rs m) 1QFY13 1QFY14 Change
Sales 24,618 23,605 -4.1%
Other operating income 343 334 -2.8%
Expenditure 23,406 22,449 -4.1%
Operating profit (EBDITA) 1,556 1,490 -4.2%
Operating profit margin (%) 6.2% 6.2%  
Finance costs 89 17 -80.8%
Other income 69 76 9.8%
Depreciation 588 564 -4.1%
Exceptional item   0  
Profit before tax 948 985 3.9%
Tax 314 334  
Profit after tax/(loss) 634 651 2.7%
Net profit margin (%) 2.5% 2.7%  
No. of shares   356  
Basic & Diluted earnings per share (Rs)   5.5  
P/E ratio (x)*   99.7  
*On trailing 12-month basis

What has driven performance in 1QFY14?
  • Siemens' top-line fell 4.1% YoY as the execution traction of industry, energy and infrastructure & cities segment (collectively accounting for 90% of revenue) slowed owing to a weak opening order book and likely deferral in customers' project off-take in the wake of a challenging macro-economic environment. While the energy and industry segments posted a fall in revenue by 11% and 3% YoY, respectively, the infrastructure & cities segment registered modest growth of 4% YoY.

    Segment-wise performance (Standalone)
    (Rs m) 1QFY13 1QFY14 Change
    Infrastructure & Cities
    Revenues 5,360 5554 4%
    % share 20% 22%  
    PBIT margins 0% 1%  
    Energy
    Revenues 9,329 8261 -11%
    % share 35% 32%  
    PBIT margins 4% 12%  
    Industry
    Revenues 9,480 9197 -3%
    % share 36% 36%  
    PBIT margins 4% 1%  
    Healthcare
    Revenues 2,244 2492 11%
    % share 8% 10%  
    PBIT margins 5% -13%  
    Others
    Revenues 109 104 -4%
    % share 0% 0%  
    PBIT margins 127% 104%  
    Total*
    Revenues 26521 25610 -3%
    * Excluding inter-segment adjustments & unallocable operating revenue

  • The operating profits of the company declined 4.2% YoY. Company was able to improve gross margin by 210 bps; however, a 25% YoY increase in other expense led to a 30 bps YoY decline in EBITDA margin to 6.2%. A provision reversal of Rs 164m led to higher-than-expected margin in the quarter.

  • The net profits of the company increased 2.7% YoY. Profits were solely driven by the energy segment. Despite an 11% YoY decline in revenue, the EBIT of energy segment jumped 155% YoY and 54% QoQ which we believe is partly because of write-back of provisions. Energy segment's EBIT exceeded total EBIT of Rs 912 m, as the healthcare segment reported an operating loss while the industry and infrastructure & cities segments' operating profit was subdued.
What to expect?
At the current price of Rs 542, the stock is trading at a multiple of 247 times its trailing twelve month earnings. However, the high multiple should be seen in the context of impairment and provisioning losses that were incurred in the past which impacted earnings adversely.

The current economic downturn has led to continued delays by customers in project completion, hence, adversely affecting profitability. Order inflows at Rs 20 bn in 1QFY14 was flat YoY. For FY13, inflows were up 7% YoY. Order backlog at the end of the quarter stood at Rs 113 bn, keeping the order book-to-sales ratio around 1x.

Siemens India has been struggling for some time now in the face of intensifying competition and relatively weak demand from end-user segments. While the rationalization of its inefficient cost structure seems to have borne fruit in the quarter in the form of stabilized margins, we believe that an adverse import policy still poses a credible threat to profits in the near term. While the low base of FY13 would serve to magnify the extent of improvements in the operating performance, we expect Siemens to continue to be faced with trouble over the next few quarters in the form of constrained demand for its products.

Taking into consideration the expensive valuations and uncertain macro-economic environment we do not feel that the company will be able to post a turnaround pretty soon. As such, we maintain our Sell view on the stock.

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