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Siemens: Execution issues take toll
Apr 28, 2008

Performance summary
  • Sales grow less than 1% YoY in 2QFY08 (September ending fiscal), 8% YoY in 1HFY08. Sales impacted by discontinuation of three businesses. Sales also impacted by an accounting adjustment relating to anticipated losses on specific projects. On a like to like basis and excluding the one time adjustments, sales growth stands at 11% YoY for the second quarter.

  • Operating margins contract to 0.1% on account of higher raw material and other costs (as percentage of sales).

  • Net profits decline by 99% owing to flat topline performance, lower operating margins and lower other income.

Standalone financial performance
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 21,292 21,424 0.6% 37,561 40,568 8.0%
Expenditure 19,675 21,394 8.7% 34,774 39,041 12.3%
Operating profit (EBDITA) 1,617 30 -98.1% 2,787 1,527 -45.2%
Operating profit margin (%) 7.6% 0.1%   7.4% 3.8%  
Other income 117 137 16.5% 331 203 -38.7%
Interest expense/(income) (105) (54) -48.7% (231) (184) -20.1%
Depreciation 109 149 37.1% 212 300 41.6%
Profit before tax 1,730 71 -95.9% 3,137 1,615 -48.5%
Extraordinary income/(expense) - -   - 1,246  
Tax 650 55 -91.6% 1,075 873 -18.8%
Profit after tax/(loss) 1,081 17 -98.5% 2,061 1,987 -3.6%
Net profit margin (%) 5.1% 0.1%   5.5% 4.9%  
No. of shares       168.6 337.2  
Diluted earnings per share (Rs)*         17.5  
P/E ratio (x)*         36.9  
* On a trailing 12-months basis

What has driven performance in 2QFY08?
  • Siemens reported a flat sale performance during 2QFY08. This was largely due to discontinuation of three businesses – building technologies, information & communication and automotive. As a matter of fact, while the building technologies business will continue to exist in the consolidated entity (as it has been transferred to a subsidiary of the company itself), the automotive business will now be a part of the parent, Siemens AG. As for the information & communication business, it was sold with effect from August 2007 to Siemens Enterprise Communication Pvt. Ltd., a wholly owned subsidiary of the parent company.

    Sales also impacted by an accounting adjustment relating to anticipated losses on specific projects. The management has, however, indicated that the company has charted out corrective measures for better risk management in future. However, this incidence shows the execution risks associated with long gestation contracts of engineering and capital goods companies. On a like to like basis and excluding this one time adjustment, Siemens’ sales growth stands at 11% YoY for the second quarter. At the end of March 2008, Siemens’ unexecuted order book stood at Rs 95 bn, or 1.2 the company’s FY07 revenues.

    Segment-wise performance (Standalone)
      2QFY07 2QFY08    
    (Rs m) Sales % of total PBIT margins Sales % of total PBIT margins Sales growth Margin change
    Continuing operations
    Power 11,867 52.8% 5.9% 11,375 49.0% -7.6% -4.1% -13.5%
    Industrial Solutions & Services 2,713 12.1% 10.7% 3,053 13.2% 11.7% 12.5% 0.9%
    Automation & Drives 4,385 19.5% 8.3% 5,572 24.0% 8.5% 27.1% 0.2%
    Transport 796 3.5% 3.4% 1,662 7.2% -5.6% 108.9% -9.0%
    Healthcare & Other Services 1,586 7.1% 2.9% 1,355 5.8% 4.2% -14.6% 1.3%
    Real Estate 125 0.6% 68.1% 180 0.8% 45.0% 44.0% -23.1%
    Discontinued operations
    Building Technologies 252 1.1% 8.2% -        
    Information & Communication 469 2.1% 9.3% -        
    Automotive 282 1.3% 0.3% -        
    Total* 22,474 100.0% 7.0% 23,196 100.0% 0.0% 3.2% -7.0%

  • Siemens’ operating margins contracted to 0.1% in 2QFY08, from 7.6% in 2QFY07. This was on account of the one time provision for losses (of Rs 1,098 m), as explained above. Based on cost heads, raw material costs increased from 64% of sales in 2QFY07 to 72% in 2QFY08, thus impacting the profitability during the quarter. Based on segments, the power business (which formed 49% of Siemens’ standalone sales during 2QFY08) recorded a loss during the quarter. As for the company’s second largest business segment of automation and drives, PBIT margins were flat at around 8.5%.

  • Siemens’ net profits collapsed by almost 99% YoY during 2QFY08, for all reasons mentioned above – flat sales and substantial drop in operating margins. Bottomline was also impacted by decline in interest income (down 49% YoY). For the first half, net profits were lower by 4% YoY

    What to expect?
    At the current price of Rs 644, the stock is trading at a multiple of 13 times our estimated FY10 earnings, which we shall have to revise downwards considering the unexpected provisioning made by the company during 2QFY08. Siemens’ management has taken note of the cautious business environment in the industry and has cited the risks of rising commodity prices on profitability and delay in new investments in infrastructure projects. This vindicates our view that engineering companies face a great deal of execution issues and that investors need to take this into account before committing any investments in such companies. However, the provisioning of losses has taken us by surprise, as we had not factored anything of this sort in our estimates. Subsequently, we shall soon update our research report on the company incorporating any revision in estimates.

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