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Siemens: Provisioning mars profits
May 2, 2013

Siemens has announced the second quarter results of financial year 2013 (September ending fiscal). The company has reported 27.1% YoY decline in sales while net profits have declined 89.9% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Sales decline by 27.1% YoY in 2QFY13.
  • The company reported operating margins of 2.5% in 2QFY13 compared to 13.6% in 2QFY12 on account of revision in estimated revenues, cost and project related provisions. Net charge due to these provisions stood at Rs 907 m for the quarter.
  • Poor performance at the operating level flowed to the bottom line with net profits declining 89.9% YoY.
  • The company registered an order inflow of Rs 28.1 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.
  • The debt/ equity ratio stood at 0.08x at the end of the quarter.

Standalone financial performance
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Sales 39,882 29,077 -27.1% 64,591   53,696 -16.9%
Other operating income  290 478 65.1% 585   822 40.5%
Expenditure 34,727  28,802 -17.1% 58,599   52,208 -10.9%
Operating profit (EBDITA)   5,445 753 -86.2%  6,577  2,309 -64.9%
Operating profit margin (%) 13.6% 2.5%   10.1% 4.2%  
Finance costs 76 84 9.4% 106  170 60.5%
Other income  89  125 39.9% 324   194 -40.3%
Depreciation 487  610 25.3% 932   1,198 28.6%
Exceptional item  551 0 -100.0% 551 -   -100.0%
Profit before tax 4,419  184 -95.8%   5,312   1,135 -78.6%
Tax 1,444 (115)     1,736   199 -88.5%
Profit after tax/(loss)   2,975  299 -89.9%  3,577   936 -73.8%
Net profit margin (%) 7.4% 1.0%   5.5% 1.7%  
No. of shares           356  
Basic & Diluted earnings per share (Rs)         2.6  
P/E ratio (x)*          247  
*On trailing 12-month basis

What has driven performance in 2QFY13?
  • Siemens reported a 27.1% YoY decline in sales during 2QFY13. Except for healthcare segment which registered a modest decline of 1% YoY, sales from all the other three segments registered a massive fall. Sales from the infrastructure and cities segment declined 5% YoY while that from the industry segment declined 14% YoY despite amalgamation of Winergy. However, revenues from the energy segment declined 46% YoY. It may be noted that the results of energy segment should be viewed in the context of prior period adjustments which relate to updates on estimated revenues, cost and other project related provisions.
  • Segment-wise performance (Standalone)
      2QFY12 2QFY13  
    (Rs m) Sales % of total PBIT margins Sales % of total PBIT margins Sales growth Margin change
    Continuing operations
    Infrastructure & Cities     9,034 21% 8.0%    8,577 27% 3.3% -5% -4.7%
    Energy  18,850 45% 20.5% 10,257 33% -1.6% -46% -22.0%
    Industry   11,352 27% 4.7%   9,763 31% -1.8% -14% -6.5%
    Healthcare                 2,906 7% -4.1%                2,887 9% 0.4% -1% 4.5%
    Total* 42,142 100.0% 11.9% 31,484 100.0% -0.1% -25.3% -12.0%

  • The operating profits of the company declined 86.2% YoY. Operating margins stood at 2.5% for the quarter as compared to 13.6% in 2QFY12. The primary reason for fall in operating profits is a net charge of Rs 907 m taken with respect to project related provisions. However, even after adjusting for this charge operating profits stood at Rs 1.7 bn, a fall of 69.5% YoY. Decline in revenues by 27.1% YoY made absorption of fixed cost difficult thereby further impacting the operating margins.
  • The net profits of the company declined 89.9% YoY. Poor performance at the operating level led to a fall in profits. The company received a tax credit during the quarter or else the fall would have been even higher. The net margins stood at 1% for the quarter as compared to 7.4% in 2QFY12.

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 quarter performance was a complete disaster. While topline growth was muted due to delays from the customer end, profits came under pressure as costs escalated because of the delays. Volatility in commodity and exchange rates further impacted profits. The total capital employed also increased as compared to the last quarter signifying that the working capital concerns still prevail. We feel that unless the project execution pace picks up both topline and margins would remain under pressure. And considering an uncertain environment where delays are inevitable from the client end we do not see the situation improving soon in the near future.

Since our Sell recommendation in August 2012, the stock is down by 19% odd. 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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