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Siemens: Margins spike on lower input cost
Jul 23, 2008

Performance summary
  • Sales grow by a marginal 2% YoY in 3QFY08, 6% YoY in 9mFY08 (September ending fiscal). Sales impacted by discontinuation of three businesses (Read more), so not really comparable with corresponding quarter of the previous year.

  • Operating margins almost triple to 14.1% in 3QFY08. Expansion largely on account of lower raw material and other costs (both as percentage of sales).

  • Net profits grow by 107% YoY in 3QFY08, 28% YoY in 9mFY08.



Standalone financial performance
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 17,823 18,097 1.5% 55,383 58,665 5.9%
Expenditure 16,992 15,550 -8.5% 51,766 54,592 5.5%
Operating profit (EBDITA) 831 2,546 206.5% 3,617 4,074 12.6%
Operating profit margin (%) 4.7% 14.1%   6.5% 6.9%  
Other income 115 124 8.2% 445 327 -26.6%
Interest expense/(income) (123) (111) -9.8% (353) (295) -16.6%
Depreciation 121 161 33.8% 332 461 38.8%
Profit before tax 947 2,620 176.5% 4,084 4,234 3.7%
Extraordinary income/(expense) 259 -   259 1,246  
Tax 389 926 138.1% 1,464 1,799 22.9%
Profit after tax/(loss) 818 1,694 107.2% 2,879 3,681 27.9%
Net profit margin (%) 4.6% 9.4%   5.2% 6.3%  
No. of shares       168.6 337.2  
Diluted earnings per share (Rs)*         20.1  
P/E ratio (x)*         26.4  
* On a trailing 12-months basis

What has driven performance in 3QFY08?
  • Siemens reported a flat sale performance during 3QFY08, with sales growing by just around 2% YoY. However, the results are not really comparable on account of the discontinuation of three businesses – building technologies, information & communication and automotive – during the latter part of the previous fiscal. On a like to like basis, sales growth stands at 7% YoY for 3QFY08 (11% YoY for 9mFY08). This growth was largely on the back of strong performance of the company’s automation & drives and transport business, where sales grew by 28% YoY and 90% YoY respectively. Sales of the power segment (44% of total standalone sales) however declined by 15% YoY during the quarter. The management has not given any explanation for the same though we assume that this has been on account of completion of some of the old contracts that the company was working on in this space.

    Siemens’ order book grew by 18% YoY during 3QFY08. However, for the nine-month period, order bookings were down 28% YoY, as the corresponding quarter of previous year included one mega order (of size Rs 38 bn). At the end of June 2008, Siemens’ unexecuted order book stood at Rs 98 bn, almost 1.3 times the company’s last year’s total sales.

    Segment-wise performance (Standalone)
      3QFY07 3QFY08    
    (Rs m) Sales % of total PBIT margins Sales % of total PBIT margins Sales growth Margin change
    Continuing operations                
    Power 9,823 51.8% 0.5% 8,386 43.6% 16.7% -14.6% 16.2%
    Industrial Solutions & Services 2,369 12.5% 10.1% 2,960 15.4% 16.9% 24.9% 6.8%
    Automation & Drives 3,706 19.5% 7.0% 4,752 24.7% 8.1% 28.2% 1.1%
    Transport 790 4.2% 8.8% 1,501 7.8% 4.9% 90.1% -4.0%
    Healthcare & Other Services 1,199 6.3% 4.5% 1,504 7.8% 3.3% 25.4% -1.3%
    Real Estate 96 0.5% 74.9% 136 0.7% 61.9% 41.2% -12.9%
    Discontinued operations                
    Building Technologies 230 1.2% 7.9% -        
    Information & Communication 465 2.5% 7.9% -        
    Automotive 296 1.6% -2.1% -        
    Total* 18,975 100.0% 4.2% 19,239 100.0% 13.0% 1.4% 8.8%
    * Excluding inter-segment adjustments

  • Siemens’ operating margins almost tripled to 14.1% during 3QFY08 (4.7% in 3QFY07). For the nine-month period, margins are up from 6.5% to 6.9%. The improvement in margins has been mainly come about on the back of surge in profitability of the power business. Here, PBIT margins spiked from a meagre 0.5% in 3QFY07 to 16.7% in 3QFY08. Based on cost heads, raw material costs declined from 89.5% of sales in 3QFY07 to 81.9% in 3QFY08. Staff costs however increased from 5.5% to 6.6%.

  • Siemens’ net profits surged by 107% YoY during 3QFY08 (28% YoY in 3QFY07). This was largely on the back of a strong rise in operating margins (as discussed above) and decline in effective tax rate (from 41% in 3QFY07 to 35% in 3QFY08).

What to expect?
At the current price of Rs 530, the stock is trading at a multiple of 15.3 times our estimated FY10 earnings. Siemens’ performance during 3QFY08 brings some respite after the company had reported a dismal second quarter. The management however maintains its caution regarding the business environment in the industry and has cited the risks of rising commodity prices on profitability and delay in new investments in infrastructure projects. These issues notwithstanding, the company has done well to improve profitability of its businesses during the latest completed quarter. Given the strong visibility and continued parent support, we maintain out positive view on the stock from a 2 to 3 years perspective.

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