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Siemens: Business canít get more complex - Views on News from Equitymaster

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Siemens: Business canít get more complex
Jul 23, 2009

Performance summary
  • Sales grow by just around 6% YoY in 3QFY09 (September ending fiscal), remain flat during the nine month period.
  • Operating margins contract to 13% in 3QFY09, from 14.1% in 3QFY08. This is on account of higher costs incurred for purchase of traded goods, higher employee costs and other costs (as percentage of sales).
  • Net profits grow by 99% YoY during the quarter, boosted by extraordinary income consisting of profit from the sale of investments in Siemens Information Systems Ltd. and Siemens Information Processing Services Ltd. of Rs 2.1 bn. Excluding this gain, profits have fallen by 25% YoY during the quarter.


Standalone financial performance
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 18,097 19,096 5.5% 58,665 59,067 0.7%
Expenditure 15,550 16,606 6.8% 54,592 51,643 -5.4%
Operating profit (EBDITA) 2,546 2,490 -2.2% 4,074 7,424 82.2%
Operating profit margin (%) 14.1% 13.0%   6.9% 12.6%  
Other income 124 159 27.9% 327 2,679 720.0%
Interest expense/(income) (111) (118) 7.1% (295) (377) 28.0%
Depreciation 161 199 23.6% 461 565 22.5%
Profit before tax 2,620 2,568 -2.0% 4,234 9,916 134.2%
Extraordinary income/(expense) - 2,106   1,246 2,106 69.1%
Tax 926 1,304 40.9% 1,799 3,091 71.8%
Profit after tax/(loss) 1,694 3,370 98.9% 3,681 8,931 142.6%
Net profit margin (%) 9.4% 17.6%   6.3% 15.1%  
No. of shares       337.2 337.2  
Diluted earnings per share (Rs)*         33.2  
P/E ratio (x)*         14.2  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • Siemens reported an around 6% YoY growth in sales for 3QFY09, while for 9mFY09 the company saw a 0.7% increase in sales. The sales for 3QFY08 include about Rs 232 m from discontinued operations, without which the same increased by about just about 1% YoY. Segment wise, Siemensí mobility, oil and gas, power transmission and power distribution businesses that together contributed to 57% of sales gave some of the better performances during the quarter.

    Segment-wise performance (Standalone)
      3QFY08 3QFY09    
    (Rs m) Sales % of total PBIT margins Sales % of total PBIT margins Sales growth Margin change
    Industry Automation 2,290 11.9% 7.6% 2,144 10.3% 4.9% -6.4% -2.7%
    Drive Technology 2,224 11.6% 8.3% 2,360 11.3% 6.9% 6.1% -1.4%
    Building Technologies 238 1.2% 10.8% 205 1.0% 6.3% -14.0% -4.5%
    Industry Solutions 2,838 14.8% 17.6% 2,331 11.2% 7.3% -17.9% -10.3%
    Mobility 1,582 8.2% 4.5% 2,742 13.1% 3.7% 73.3% -0.8%
    Fossil Power Generation 153 0.8% 143.1% 750 3.6% 12.4% NA NA
    Oil and Gas 1,151 6.0% 10.9% 1,294 6.2% 18.3% 12.4% 7.4%
    Power Transmission 5,321 27.7% 14.4% 5,879 28.1% 22.1% 10.5% 7.6%
    Power Distribution 1,801 9.4% 16.2% 1,901 9.1% 1.5% 5.5% -14.7%
    Healthcare 1,504 7.8% 3.3% 1,137 5.4% -412.7% -24.4% NA
    Real Estate 136 0.7% 62.0% 151 0.7% 115.7% 11.0% 53.7%
    Total* 19,239 100.0% 0.0% 20,892 100.0% 16.3% 8.6% 16.3%
    * Excluding inter-segment adjustments

  • Siemensí operating margins contracted to 13% from 14.1% in 3QFY08 on account of significantly higher costs incurred for purchase of traded goods, higher employee costs and significantly higher other costs (as percentage of sales). Except for the oil & gas and power transmission businesses that saw an expansion in EBIT margins, all other segments saw a contraction in the same during the quarter.

  • Siemensí net profits saw a rise of 99% YoY during 3QFY09 boosted by extraordinary income consisting of profit from the sale of investments in Siemens Information Systems Ltd. and Siemens Information Processing Services Ltd. of Rs 2.1 bn. Excluding this gain, profits have fallen by 25% YoY during the quarter. This, despite the fact that completion of certain large projects resulted in significant savings in costs previously estimated by the company and consequential recognition of additional revenue and profits.

What to expect?
At the current price of Rs 471, the stock is trading at a multiple of 23.7 times our estimated FY11 earnings. While the companyís 9mFY09 sales performance has been in line with our estimates, its bottomline performance for the period has been way ahead due to the extraordinary gains as mentioned in the report above. We shall accordingly update our forward estimates for the company. Siemens has, over the past few years, spread itself too much across different industries. While this might seem good when one talks of diversification, the fact is that such a spread has brought in high levels of volatility to the overall business. Then, the company has also indulged in occasional selling off of its most profitable subsidiaries to the parent company that has raised doubts about its corporate governance practices. Overall, we maintain our cautious view on the stock.

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