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Philips: Margins on the move - Views on News from Equitymaster
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  • Feb 13, 2002

    Philips: Margins on the move

    Philips India has reported a 2% rise in sales and a sharp rise in operating margins for the full year ended December 31, 2001. Net loss has also come down notably in the same period despite higher provisioning towards employee separation costs.

    (Rs m) FY01 FY02 Change
    Sales 15,066 15,424 2.4%
    Other Income 18 22 24.4%
    Expenditure 14,591 14,640 0.3%
    Operating Profit (EBDIT) 475 784 64.9%
    Operating Profit Margin (%) 3.2% 5.1%  
    Interest 238 159 -33.3%
    Depreciation 293 260 -11.3%
    Profit before Tax (39) 387  
    Extraordinary items (356) (788) 121.3%
    Tax (53) (190)  
    Profit after Tax/(Loss) (342) (212) -38.1%
    Net profit margin (%) -2.3% -1.4%  

    This was primarily led by a better than expected performance of its consumer electronics segment. Consumer electronics and appliance divisions together accounted for 35% of FY01 net sales. Reportedly, the company has managed to increase market share in the CTV segment (16% of FY01 sales) to around 5% in the current fiscal. This was led by higher sales from new model launched in the current fiscal. The performance of the consumer electronics division is commendable given the fact that the CTV industry is expected to register a 14% drop in sales volumes to around 5 m units this year. Thanks to an encouraging performance of the agricultural sector, demand for CTVs in the festive season seems to have gone up (festive season demand generally accounts for almost 25% of industry volumes). Though demand during the start of the season i.e. August and September 2001 remained lacklustre, it gained momentum towards the later half of 3QFY02.

    Sales mix…
    (% of sales) FY01 FY02 Change in sales
    Lightning 46.1% 44.1% -2.1%
    Consumer electronics 37.0% 40.1% 10.9%
    Other segment 16.9% 15.8% -4.4%
    Total 100.0% 100.0% 2.3%

    In light of a weak auto demand and the general slowdown in the industrial sector, the lightning division of Philips has suffered on two counts. This division registered a 2% fall in turnover in FY02 and as a result contribution of overall sales fell from 46% in FY01 to 44% in the current calendar year. Price realisations also seems to have come under pressure and is vindicated by the fact that PBT margins have declined from 5% in FY01 to 4% in FY02.

    (PBT margin) FY01 FY02
    Lightning 4.9% 4.0%
    Consumer electronics -2.2% 0.8%
    Other segment 0.1% 0.2%
    Total 2.8% 5.0%
    While Philips is one of the market leaders in the audio segment, it has been losing market share in the appliances segment, which has exercised a downward pressure on divisional margins. Operating profits for the calendar year have increased by 65% on account of a sharp rise in margins. However, it needs to be mentioned that operating margins are still at the lower end of the spectrum when compared to its peers like BPL and MIRC. But we expect margins to rise in the coming years on account of various cost cutting initiatives taken by the company, which includes a voluntary retirement scheme (VRS). Employee costs as a percentage of sales have come down by 20 basis points to around 7% and the trend in expected to continue in the coming years as well.

    Exceptional items in the current calendar year include Rs 818 m towards VRS and loss of sale of machinery to the tune of Rs 56 m. Sale of assets have resulted in lower depreciation charges in FY02. Net loss has also declined on account of release of provision for deferred tax to the extent of Rs 204 m. We expect the company's operating margins to touch around 6% levels in FY03 and excluding extraordinary items, the company is expected to be back in the black. The stock currently trades at Rs 97 implying a market capitalisation to sales ratio of 0.3 times.



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