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Siemens: Power leads the pack - Views on News from Equitymaster
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Siemens: Power leads the pack
Jul 23, 2007

Performance summary
  • Standalone sales grow 84% YoY in 9mFY07 (September ending fiscal), led by growth in power (146% YoY) and industrial solutions (101% YoY).

  • Operating margins contract by 2% in 9mFY07, largely due to higher raw material costs (as percentage of sales).

  • Net profit growth at 29% YoY during the nine month period.

  • Receives orders worth Rs 17.5 bn in 3QFY07, up 45% YoY.

Standalone financial performance: A snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Sales 10,523 17,823 69.4% 30,184 55,383 83.5%
Expenditure 9,673 16,992 75.7% 27,604 51,766 87.5%
Operating profit (EBDITA) 850 831 -2.2% 2,580 3,617 40.2%
Operating profit margin (%) 8.1% 4.7%   8.5% 6.5%  
Other income 84 497   920 1,058 15.0%
Depreciation 90 121 34.3% 320 332 3.8%
Profit before tax 844 1,207 42.9% 3,180 4,343 36.6%
Tax 279 389 39.2% 946 1,464 54.8%
Profit after tax/(loss) 565 818 44.7% 2,234 2,879 28.9%
Net profit margin (%) 5.4% 4.6%   7.4% 5.2%  
No. of shares         168.6  
Diluted earnings per share (Rs)*         25.2  
P/E ratio (x)*         52.6  
* On a trailing 12 months basis

What is the company’s business?
Siemens India is a 55.2% subsidiary of the US$ 113 bn German engineering behemoth Siemens AG, one of the largest engineering companies in the world. Siemens India operates in many areas like power (manufacturing generation and T&D equipments) and industrial solutions service (providing process automation, manufacturing automation drives). In health care services, the company manufactures diagnostic equipments and hearing equipments. In the transport segment, Siemens India is into railway automation, trains and locomotives. The company has presence in communication and information technology segments as well. During the period between FY01 and FY06, the company has grown its revenues and net profits at compounded rates of 35% and 38% respectively.

What has driven performance in 9mFY07?
Power provides the punch: The strong 84% YoY growth in Siemens’ standalone sales has been largely due to robust performance of the company’s power division, which has recorded sales growth of 146% YoY during 9mFY07. Even the industrial solutions and services business performed stupendously, recording a doubling of sales during the same period. Siemens has significantly benefited from the improvement in the country’s power scenario where increased investments have been pumped into setting up generation, transmission and distribution capacities. Robust performance from the industrial solutions business, on the other hand, has been a factor of strong investment-led growth by Indian companies and government agencies.

Segment-wise performance (Standalone)
(Rs m) Sales % of total Sales % of total Change
Power 12,841 40.5% 31,577 54.0% 145.9%
Industrial Solutions & Services 3,349 10.6% 6,720 11.5% 100.7%
Building Technologies 483 1.5% 730 1.2% 51.3%
Automation & Drives 8,332 26.2% 11,254 19.2% 35.1%
Transport 1,800 5.7% 2,170 3.7% 20.5%
Information & Communication 1,067 3.4% 1,286 2.2% 20.5%
Healthcare & Other Services 2,654 8.4% 3,552 6.1% 33.8%
Real Estate 289 0.9% 334 0.6% 15.6%
Automotive 927 2.9% 866 1.5% -6.6%
Total* 31,742 100.0% 58,489 100.0% 84.3%
* Excluding inter-segment adjustments

During the third quarter, Siemens received orders worth Rs 18 bn, which was 45% higher than the orders received during 3QFY06. For 9mFY07, the company received orders worth Rs 88 bn, with major contributors being the power, industrial solutions and automation & drives segments. At the end of June 2007, the company’s order backlog stood at Rs 108 bn, or 2.3 times its standalone sales in the whole of FY06.

Higher input costs dent margins: Siemens recorded a 2% contraction in its operating margins for 9mFY07. This was largely a result of higher input costs. As a percentage of sales, these costs increased from 79% in 9mFY06 to 85% in 9mFY07. The pressure on this account was, however, pared by way of lower (as percentage of sales) staff and other costs. Based on segments, the company recorded margin contraction across all its key business segments except building technologies and healthcare (see adjoining chart).

Margin contraction, increased taxes taper bottomline growth: Siemens’ robust performance on the topline front could not be carried down to the bottomline during 9mFY07. This was on account of contraction in operating margins as also higher tax expenses. As a matter of fact, the company’s effective tax rate increased from 30% in 9mFY06 to 34% in 9mFY07. The company’s nine month performance is almost in line with our full year estimates.

What to expect?
At the current price of Rs 1,322, the stock is trading at a multiple of 19.6 times our estimated FY10 standalone earnings for the company. Large orders in the power business have been among the chief growth drivers for the company in the first nine months of FY07 (September ending fiscal). While we remain positive on the topline prospects of the company, given the large backlog that it currently holds, our concerns stem from the pressure that it is facing on the profitability front. We maintain our positive view on the stock from a long-term perspective.

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