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Siemens: Power packs a punch - Views on News from Equitymaster
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Siemens: Power packs a punch
Nov 23, 2007

Performance summary
  • Standalone sales grow 71% YoY in FY07 (September ending fiscal), mainly led by growth in power business.
  • Operating margins expand by 1.8% in FY07, aided by lower staff and other costs (as percentage of sales).

  • Bottomline surges 66% YoY aided by expansion in operating margins.

  • Consolidated topline and bottomline grow by 56% YoY and 77% YoY respectively. Actual performance higher than our estimates by 2% and 10% respectively.

  • Board recommends final dividend of Rs 4.8 per share (dividend yield of 0.2%) as also a bonus issue in the ratio of 1:1 (1 bonus share for every 1 share held on the record date yet to be fixed).

Financial performance snapshot
  Standalone Consolidated
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change FY06 FY07 Change
Sales 14,920 21,885 46.7% 45,103 77,268 71.3% 60,323 93,786 55.5%
Expenditure 13,752 18,479 34.4% 41,356 70,245 69.9% 54,169 84,338 55.7%
Operating profit (EBDITA) 1,168 3,405 191.6% 3,748 7,023 87.4% 6,153 9,448 53.5%
Operating profit margin (%) 7.8% 15.6%   8.3% 9.1%   10.2% 10.1%  
Other income 714 540 -24.3% 1,383 985 -28.7% 461 484 5.1%
Interest expense/(income) (116) (90) -22.7% (367) (443) 20.8% (389) (542) 39.4%
Depreciation 122 160 31.2% 442 492 11.3% 1,260 1,403 11.4%
Profit before tax 1,875 3,875 106.6% 5,055 7,959 57.5% 5,743 9,071 57.9%
Extraordinary income/(expense) - 524   - 783   92 799  
Tax 508 1,313 158.6% 1,454 2,777 91.0% 1,955 3,007 53.8%
Share of profit in associates - -   - -   40 78 92.9%
Minority interest - -   - -   4 11 210.3%
Profit after tax/(loss) 1,367 3,086 125.7% 3,601 5,965 65.7% 3,917 6,929 76.9%
Net profit margin (%) 9.2% 14.1%   8.0% 7.7%   6.5% 7.4%  
No. of shares               168.6  
Diluted earnings per share (Rs)               41.1  
P/E ratio (x)               48.1  

What is the company’s business?
Siemens India is a 55.2% subsidiary of the US$ 110 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 the information technology segment as well.

What has driven performance in FY07?
Power packs a punch: Siemens’ power segment continued its strong run during the fourth quarter as well, thereby completing a robust fiscal in terms of performance. For FY07, the segment, which contributed to 53% of the company’s standalone sales, grew by 117% YoY. 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.

Siemens’ other two large divisions - Automation & Drives and Industrial Solutions & Services – also recorded strong traction as sales in these grew by 36% YoY and 79% YoY respectively during the fiscal. These two businesses have benefited from strong investments being made by Indian companies and government agencies in industrial capacity expansion.

Segment-wise performance (Standalone)
  FY06 FY07    
(Rs m) Sales % of total PBIT margins Sales % of total PBIT margins Sales growth Margin change
Power 19,782 41.4% 6.2% 43,008 52.5% 9.0% 117.4% 2.8%
Industrial Solutions & Services 5,321 11.1% 11.0% 9,529 11.6% 10.0% 79.1% -1.0%
Building Technologies 756 1.6% 5.4% 1,020 1.2% 9.1% 34.9% 3.7%
Automation & Drives 12,210 25.6% 8.6% 16,555 20.2% 6.9% 35.6% -1.7%
Transport 2,483 5.2% 8.3% 3,467 4.2% 6.5% 39.7% -1.8%
Information & Communication 1,418 3.0% 10.3% 1,470 1.8% 7.9% 3.6% -2.4%
Healthcare & Other Services 4,138 8.7% 2.4% 5,247 6.4% 2.2% 26.8% -0.3%
Real Estate 421 0.9% 58.8% 496 0.6% 65.6% 17.6% 6.8%
Automotive 1,240 2.6% 1.4% 1,203 1.5% 5.5% -3.0% 4.1%
Total* 47,769 100.0% 7.6% 81,996 100.0% 8.4% 71.6% 0.9%
* Excluding inter-segment adjustments

During the whole of FY07, Siemens received orders worth Rs 101 bn, which was 23% higher than the orders received during FY06. At the end of September 2007, the company’s order backlog stood at Rs 94 bn, or almost equal to the company’s FY07 consolidated sales.

Siemens recorded a 0.8% expansion in its operating margins for FY07. This was largely on the back of lower staff and other costs (as percentage of sales). The decline in other costs was on account of foreign exchange gains that were recorded for the company’s power business (and reduced from other costs). The margin expansion was, however, pared due to a substantial rise in raw material costs, which increased from 77% of sales in FY06 to 82% in FY07. Based on segments, while the forex gains helped margin expansion in the power business, building technologies and real estate segments also witnessed improvement in profitability (see adjoining chart).

Margin expansion, strong topline growth aids net: Siemens recorded a 66% YoY growth in standalone bottomline during FY07. This was on the back of a strong performance on the topline front as also the expansion in operating margins. The net profits were, however, aided by extraordinary income of Rs 783 m as gains from sale of the Information & Communications segment and that on sale of investment in Siemens Public Communication Networks Pvt. Ltd., an erstwhile subsidiary of the company. As a matter of fact, the latter decision was taken consequent to the announcement by the company's global parent Siemens AG, Germany, for the merger of the networks business group of Nokia and Siemens' Carrier related operations for fixed and mobile networks worldwide.

Performance summary
What to expect? At the current price of Rs 1,975, the stock is trading at a multiple of 29.2 times our estimated FY09 consolidated earnings. Large orders in the power business have been among the chief growth drivers for the company in FY07, which we expect to be the case over the next two years as well. We had recommended the stock in July 2007 with a 2-year target that has already been breached. Considering the completion of FY07, we shall soon update our research report on the company, incorporating our FY10 estimates therein.

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