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Siemens: Extraordinary income fillip

May 12, 2003

Engineering major, Siemens declared its first half FY04 results recently. The company reported a healthy 13% growth in operating income and finished the first half with a 54% net profit growth. On first glance, the performance does look very encouraging, but let's take a deeper look to find out more.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Net Sales3,5093,89711.1%6,1126,88212.6%
Other operating income50101101.3%11814925.7%
Total operating income3,5593,99812.3%6,2307,03112.9%
Other Income7943-46.1%125114-9.1%
Expenditure3,1853,57012.1%5,6766,39212.6%
Operating Profit (EBDIT)37442914.7%55463815.3%
Operating Profit Margin (%)10.5%10.7%8.9%9.1%
Interest income (net)202629.1%55573.1%
Depreciation7861-21.1%142116-18.2%
Profit before Tax39543610.3%59269317.0%
Extraordinary income088-69344398.6%
Tax14416414.2%20533362.4%
Profit after Tax/(Loss)25236043.0%45670454.3%
Net profit margin (%)7.1%9.0%7.3%10.0%
No. of Shares (eoy) (m)33.133.133.133.1
Diluted Earnings per share*30.443.427.542.5
*(annualised)
Current P/e ratio7.67.8

While there is no denying the fact that the company's revenue growth is encouraging against the backdrop of difficult economic environment, its strong bottomline performance is largely a result of one time higher non-recurring incomes. The company's release however, had largely categorised these incomes under the other operating income and other income heads.

Segment revenue snapshot...
(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Information & communication15118623.2%27435730.4%
Automation & drives1,0181,32029.6%1,8682,27822.0%
Industrial solutions & services33141725.7%62770512.5%
Power1,216948-22.1%1,8921,813-4.1%
Transport20137988.9%41567261.9%
Healthcare and other services75191822.2%1,2171,44618.8%
Real estate9080-10.4%174159-8.3%
Total3,7584,24813.0%6,4667,43114.9%
Less: Intersegment revenues25035140.5%35454954.8%
Net sales3,5093,89711.1%6,1126,88212.6%

During the six months ended March 2003, Siemens extraordinary income comprised of Rs 250 m as forfeiture of advance received (for a power project), Rs 50 m as profit on sale of its Joka factory, Rs 14 m as compensation received for vacation of property and Rs 24 m as profit on sale of investment in Siemens Metering Ltd. Thus extraordinary income in the first half totals a huge Rs 344 m (almost 49% of 1HFY04 profits). Rs 69 m extraordinary income in 1HFY03 reflects profit on sale of investment.

If we exclude the extraordinary income effect, then Siemens finished 1HFY04 with about 17% growth in profit before tax, which is still healthy. All its business segments, except for power and real estate clocked encouraging growth rates. Automation and drives, which accounts for nearly 30% of its revenues, registered a strong 22% revenue growth in 1HFY04. The segment margins also improved encouragingly to over 5% (from just over 1% earlier).

Though the power segment, which is the second largest revenue contributor (24% of sales), reported a 4% dip in 1HFY04 revenues, operating margins improved to 6.5% (excluding forfeiture of advances). Healthcare and other services, which is the third largest business segment for Siemens (almost 20% of sales), grew revenues by 19% YoY. However, margins for the segment suffered and dipped nearly 133 basis points.

The big picture...
(%)Sales mixRevenue growth PBIT margin (%)Margin growth YoY
(basis points)
Information & communication4.8%30.4%6.8%-405.9
Automation & drives30.7%22.0%5.8%446.1
Industrial solutions & services9.5%12.5%9.2%2.6
Power24.4%-4.1%20.7%1698.7
Transport9.0%61.9%15.9%-39.5
Healthcare and other services19.5%18.8%0.3%-133.5
Real estate2.1%-8.3%87.6%-457.8
* All figures and ratios pertain to 1HFY04 numbers

Siemens order inflow registered a rise of 30% YoY to Rs 7.9 bn during the six months period ended March 2003. The unexecuted orderbook stood at Rs 7.4 bn at the end of March 2003, which is 0.6x of the company's FY03 sales. The company's transport business registered a healthy 61% growth in revenues and now contributes 9% to the company's sales.

At the current price of Rs 331 the stock trades at 7.8x annualised 1HFY04 earnings. However, excluding extraordinary income, the P/E valuation shoots to 15.2x annualised 1HFY04 earnings. The company's topline growth is encouraging and seeing the strength in the orderbook, we believe that growth is likely to continue going forward. Also, with the passing of the electricity bill the company is likely to see strength in its power business orderbook in the long term.

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