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Siemens: Provisioning mars profits - Views on News from Equitymaster

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Siemens: Provisioning mars profits

Aug 14, 2012

Siemens has announced the third quarter results of financial year 2012 (3QFY12). The company has reported 1.7% YoY growth in sales. However, net profits have declined 76.5% YoY. Here is our analysis of the results.

Performance summary
  • Sales increase by 1.7% YoY in 3QFY12 (September ending fiscal).
  • Operating margins decline to 3.4% in 3QFY12 from 9.0% in 3QFY11 on account of rise in overall expenditure as a percentage of sales.
  • Bottom line declined by 76.5% YoY due to poor performance at the operating level, fall in other income and rise in interest and depreciation expenses.
  • It may be noted that during the quarter, due to significant cost variations in certain projects the company took a provisioning hit of Rs 240 m (relating to previous year) which impacted the profitability adversely.
  • The order inflow for the current quarter stood at Rs 27 bn.

Standalone financial performance
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 27,481 27,935 1.7% 83,458 88,851 6.5%
Other operating income 344 498 45.0% 1,436 1,230 -14.3%
Expenditure 25,317 27,467 8.5% 74,406 82,917 11.4%
Operating profit (EBDITA) 2,508 966 -61.5% 10,487 7,165 -31.7%
Operating profit margin (%) 9.0% 3.4%   12.4% 8.0%  
Finance costs 22 53 142.1% 82 177 115.5%
Other income 203 129 -36.6% 749 521 -30.4%
Depreciation 401 506 26.3% 1,112 1,407 26.5%
Profit before tax 2,288 536 -76.6% 10,041 6,102 -39.2%
Tax 741 172 -76.8% 3,368 1,990 -40.9%
Profit after tax/(loss) 1,548 364 -76.5% 6,673 4,111 -38.4%
Net profit margin (%) 5.6% 1.3%   7.9% 4.6%  
No. of shares         340.3  
Basic & Diluted earnings per share (Rs)         12.1  
P/E ratio (x)*         38.3  
* On a trailing 12-months basis

What has driven performance in 3QFY12?
  • Siemens reported 1.7% YoY growth in sales during 3QFY12. Sales from the infrastructure and cities segment increased 15% YoY while that from the healthcare segment increased 11% YoY. However, revenues from the energy segment declined 1% YoY and those from the industry segment were relatively flat having registered a growth of 4% YoY.

    Segment-wise performance (Standalone)
      3QFY11 3QFY12    
    (Rs m) Sales % of total PBIT margins Sales % of total PBIT margins Sales growth Margin change
    Continuing operations                
    Infrastructure & Cities 5,861 20% 5.0% 6,743 22% -4.1% 15% -9.1%
    Energy 12,194 42% 9.5% 12,057 40% 2.1% -1% -7.4%
    Industry 8,604 29% 6.4% 8,929 29% 3.9% 4% -2.5%
    Healthcare 2,509 9% 1.3% 2,783 9% 2.1% 11% 0.8%
    Total* 29,168 100.0% 7.0% 30,512 100.0% 1.3% 4.6% -5.7%
    * Excluding inter-segment adjustments

  • Siemens' operating margins declined to 3.4% in 3QFY12 from 9.0% in 3QFY11. This was mainly due to increase in all expenditure heads as a percentage of sales. The raw material expenses (including stock adjustments) increased from 75.8% in 3QFY11 to 78.8% in 3QFY12 (as a percentage of sales). The employee expenses and other expenses too increased from 8.4% and 7.9% in 3QFY11 to 10% and 9.5% respectively in 3QFY12.

  • Siemens' net profits declined 76.5% YoY during 3QFY12. Muted performance at operating level, fall in other income and rise in depreciation expenses took a toll on profits. However, the fall should be seen in the context of provisioning adjustments the company makes on quarterly basis when lapses appear certain.

What to expect?
At the current price of Rs 662, the stock is trading at a multiple of 38.3 times its trailing twelve month earnings. It may be noted that significant development/changes in certain projects led the company to revisit its expected revenue and profit estimates for the future. This exercise impacted the profit before tax negatively by Rs 240 m during the quarter.

It may be noted that recently the company had acquired land for setting up wind energy business. The company had spent Rs 316.3 m on land and Rs 906 m on construction of the building. But considering the prevailing conditions in the wind energy business, the future plans have been put on hold and management is looking out for an alternative use of the acquired assets.

As far as the revenue growth is concerned, it was impacted by postponement in the capex cycle of corporates. As a result, the volumes in the long cycle project business have declined. While Siemens can emerge as a good play once there is a recovery in industrial capex, considering the expensive valuations and margin concerns, we continue to maintain our sell view on the stock.

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