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Siemens: Margins nosedive on cost pressures - Views on News from Equitymaster

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Siemens: Margins nosedive on cost pressures

Feb 10, 2012

Siemens has announced the first quarter results of financial year 2012 (1QFY12). The company has reported 7.6% YoY and 70.3% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales decline by 7.6% YoY in 1QFY12 (September ending fiscal).
  • Operating margins decline to 5.1% in 1QFY12 from 14.3% in 1QFY11 on account of rise in overall expenditure as a percentage of sales.
  • Bottom line declined 70.3% YoY due to muted performance at the operating level. Decline in interest income and increase in depreciation expenses further impacted profitability during the quarter.
  • During 1QFY12, the company booked orders worth Rs 28.3 bn, a growth of 11% YoY.

Standalone financial performance
(Rs m) 1QFY11 1QFY12 Change
Sales 25,559 23,610 -7.6%
Other operating income 245 358 46.1%
Expenditure 22,116 22,737 2.8%
Operating profit (EBDITA) 3,688 1,231 -66.6%
Operating profit margin (%) 14.3% 5.1%  
Interest income, net 258 249 -3.3%
Other income      
Depreciation 345 431 25.0%
Profit before tax 3,600 1,049 -70.9%
Tax 1,220 342 -71.9%
Profit after tax/(loss) 2,381 707 -70.3%
Net profit margin (%) 9.2% 3.0%  
No. of shares   340.3  
Basic & Diluted earnings per share (Rs)   2.08  
P/E ratio (x)*   39.9  
*On trailing 12-month basis

What has driven performance in 1QFY12?
  • Siemens reported 7.6% YoY decline in sales during 1QFY12. It may be noted that there was a re-organization of business segments during the quarter. Decline in revenues from the Infrastructure (-10% YoY), Energy (-10% YoY) and Industry (-5% YoY) segment impacted the top-line growth. However, revenues from the healthcare segment increased 10% YoY.

    Segment-wise performance (Standalone)
      1QFY11 1QFY12  
    (Rs m) Sales % of total PBIT margins Sales % of total PBIT margins Sales growth Margin change
    Continuing operations                
    Infrastructure & Cities 7,012 26% 13.0% 6,325 25% 6.2% -10% -6.7%
    Energy 10,763 39% 16.6% 9,706 38% -0.2% -10% -16.9%
    Industry 7,776 28% 7.6% 7,352 29% 3.0% -5% -4.6%
    Healthcare 1,844 7% 2.2% 2,020 8% -1.7% 10% -3.9%
    Total* 27,396 100.0% 12.2% 25,403 100.0% 2.2% -7.3% -10.0%

  • Siemens' operating margins declined to 5.1% in 1QFY12 from 14.3% in 1QFY11 on account of rise in raw material expenses (including stock adjustments and purchase of traded goods) as a percentage of sales. The raw material expenses increased from 71.9% in 1QFY11 to 78.4% in 1QFY12. The Energy and Infrastructure segment with a big fall in PBIT margins, contributed towards the overall margin erosion during the quarter.

  • Siemens' net profits declined 70.3% YoY during 1QFY12. Muted performance at the operating level, decline interest income and increase in depreciation expenses impacted profits.

What to expect?
At the current price of Rs 782, the stock is trading at a multiple of 20.9 times our estimated FY13 earnings. While order inflows were healthy during the quarter, margin erosion in the infrastructure and the energy sector was a huge disappointment. While Siemens can emerge as a good play once there is a recovery in industrial capex, considering the expensive valuations and margin concerns, we continue to maintain our negative view on the stock.

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