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Siemens: FY05 performance review

Dec 2, 2004

Performance summary
Engineering major, Siemens reported buoyant results during its year ended September 2004 (FY05), reporting nearly 23% topline growth. However, bottomline growth was a sedate 8.6%. The company's expenses rose at a faster clip, as compared to revenues, thereby putting a downward pressure on operating margins. On a consolidated basis (including Siemens Ltd. and Siemens Information Systems Ltd.), the company finished with nearly 28% topline and a none too enthusing 2% bottomline growth during FY05.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Gross operating income 4,539 5,761 26.9% 14,946 18,345 22.7%
Expenditure 4,057 5,128 26.4% 13,277 16,475 24.1%
Operating profit (EBDITA) 482 633 31.2% 1,669 1,870 12.0%
EBDITA margin (%) 10.6% 11.0%   11.2% 10.2%  
Other income 279 213 -23.5% 417 526 26.3%
Interest (net) -25 -38 55.3% -112 -132 17.1%
Depreciation 61 61 -0.1% 230 228 -0.7%
Profit before Tax 725 823 13.6% 1,968 2,299 16.8%
Tax 190 251 32.0% 574 785 36.8%
Profit after Tax/(Loss) 535 572 7.1% 1,394 1,514 8.6%
Net profit margin (%) 11.8% 9.9%   9.3% 8.3%  
No. of Shares (m) 33.1 33.1   33.1 33.1  
Diluted Earnings per share (Rs)* 64.5 69.1   42.1 45.7  
Price to earnings ratio (x)         27.4  
*(annualised)            

What is the company's business?
Siemens India is a 54.6% subsidiary of the Euro 84 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. Finally, in the transport segment, Siemens India is into railway automation, trains and locomotives. The company has presence in communication and information technology segments too.

What has driven performance for the FY05?
Sales:  As shown in the table given below, topline growth of 23% during the year was led by higher revenues from automation, industrial solution, transport and power divisions. Significant growth in the automation (33% of FY05 revenues) and industrial solution (12% of revenues) businesses was due to higher order backlogs in these divisions on account of the upturn in the investment cycle. With industries like metal (both ferrous and non-ferrous), chemicals and textiles adding capacity, the automation drives and industry segments across the engineering companies have done well.

Power division (almost 25% of FY05 revenues) grew on the back of orders from generation, transmission and distribution segment of power sector. As we know, India is a power deficient country and the government plans to add around 1,50,000 MW by 2017. Also, the investments driven by APDRP Act are likely to strengthen the orders for the division, thus ensuring growth going forward.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change % of FY05
revenues
Information & Communication 257 286 11.5% 818 879 7.5% 4.6%
PBIT margin 16.7% 13.0%   10.0% 12.3%    
Automation & Drives 1,323 1,860 40.5% 4,640 6,334 36.5% 33.0%
PBIT margin 6.4% 8.8%   5.3% 5.9%    
Industrial solution & services 523 562 7.5% 1,563 2,316 48.2% 12.0%
PBIT margin 11.3% 9.4%   9.2% 8.9%    
Power 936 1,856 98.4% 3,463 4,707 35.9% 24.5%
PBIT margin 11.7% 6.2%   14.0% 7.7%    
Transport 327 351 7.2% 1,285 1,534 19.4% 8.0%
PBIT margin 12.8% 13.9%   15.4% 12.6%    
Health care services 1,091 933 -14.5% 3,086 2,771 -10.2% 14.4%
PBIT margin 2.8% 10.6%   0.5% 5.4%    
Building technologies 0 110 - 0 308 - 1.6%
PBIT margin - 3.6%   - 4.0%    
Real Estate 105 102 -2.5% 345 373 8.2% 1.9%
PBIT margin 63.8% 60.9%   83.1% 63.5%      
Total segmental revenues 4,561 6,060 32.9% 15,199 19,223 26.5% 100.0%
Total PBIT margin 9.5% 9.6%   9.6% 8.6%      
Less: Intersegment revenues 193 424 120.2% 954 1,323 38.7%   
Net operating income 4,369 5,636 29.0% 14,245 17,900 25.7%  

Transportation, the other growth driver for the company had received around Rs 2.3 bn orders from Indian Railways for modernisation of its facilities. However, the health care business of the company has reported over 10% decline in the revenues. The company is carrying out a restructuring exercise in this division. Building Technologies now forms 1.6% of the company's revenues, as compared to zero last fiscal.

The order inflow during the FY05 stood at Rs 30.1 bn as compared to Rs 16.8 bn last year (up 80% YoY). Even after adjusting the effects of three large orders won by the company in the areas of Transportation and Power amounting to Rs 9.9 bn, orders rose by a healthy 21% YoY. Siemens unexecuted orders at the end of FY05 stood at over Rs 21 bn, which is around 1.2 times FY05 standalone revenues.

Consolidated picture
(Rs m) FY04 FY05 Change
Gross operating income 17,926 22,930 27.9%
Expenditure 15,562 20,033 28.7%
Operating profit (EBDITA) 2,364 2,897 22.5%
EBDITA margin (%) 13.2% 12.6%  
Other income 83 18 -78.4%
Share of profit in associate companies 1 16 1279.6%
Interest (net) -142 -176 -
Depreciation 353 476 35.0%
Profit before Tax 2,237 2,630 17.6%
Minority interest -123 0 -
Tax 456 936 105.3%
Profit after Tax/(Loss) 1,658 1,694 2.2%
Net profit margin (%) 9.2% 7.4%  
No. of Shares (m) 33.1 33.1  
Diluted Earnings per share (Rs)* 50.0 51.1  
Price to earnings ratio (x) 24.5  
*(annualised)      

Operating margins:  The key contributor to the 1% fall in operating margins was the company's power division. The division's margins almost halved, as compared to last year. Transport, real estate and industrial solutions businesses too, saw some pressure on margins. However, improved profitability in the information/communication, automation and healthcare divisions helped the company avoid a significant fall in margins.

Net profit:  Though net profit growth in absolute terms was just 9% during FY05, this is not a correct comparison. After adjusting for a one-time gains of Rs 336 m due to order cancellation and sale of property (that accrued in FY04), the growth stood at a strong 51% YoY. Going forward, we believe though the return on the company’s investments may fall, good dividends from its 100% subsidiary, SISL (Siemens Information Services Ltd) are likely to compensate for that.

What to expect?
At the current price level of Rs 1,252, the stock trades at P/E ratio of 25 times consolidated FY05 earnings. On market cap to sales basis, the stock trades at 1.8 times consolidated FY05 revenues. The company has declared a total dividend of Rs 9 per share during the year. Though the growth prospects for the company’s divisions are bright, at this juncture, investors need to take a long term view on the company. Over the short term, the risk reward for investors may prove to be unfavourable.


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