Siemens: Dull performance

Performance summary

• Standalone sales grow 7% YoY in FY08 (September ending fiscal), mainly led by growth in automation & drives and transport businesses.
• Operating margins contract by 0.5% YoY in FY08, hurt by higher cost of traded goods (as percentage of sales). On a consolidated basis, margins decline by 1.2% YoY during the fiscal.
• Standalone bottomline declines by 0.5% YoY during Fy08 mainly due to a contraction in operating margins and increase in depreciation costs. Consolidated bottomline dips by 14% YoY.
• The Board recommends a final dividend of Rs 3 per share (dividend yield of 1.4%).

Financial performance snapshot

	Standalone						Consolidated
(Rs m)	4QFY07	4QFY08	Change	FY07	FY08	Change	FY07	FY08	Change
Sales	21,885	24,216	10.7%	77,268	82,955	7.4%	93,786	96,798	3.2%
Expenditure	18,479	21,199	14.7%	70,245	75,787	7.9%	84,338	88,193	4.6%
Operating profit (EBDITA)	3,405	3,017	-11.4%	7,023	7,169	2.1%	9,448	8,605	-8.9%
Operating profit margin (%)	15.6%	12.5%		9.1%	8.6%		10.1%	8.9%
Other income	540	441	-18.4%	985	689	-30.1%	484	597	23.2%
Interest expense/(income)	(90)	(157)	74.4%	(443)	(451)	1.9%	(542)	(602)	11.1%
Depreciation	160	176	10.2%	492	637	29.5%	1,403	1,617	15.2%
Profit before tax	3,875	3,438	-11.3%	7,959	7,672	-3.6%	9,071	8,187	-9.7%
Extraordinary income/(expense)	524	-		783	1,246	59.0%	798	1,235	54.7%
Tax	1,313	1,186	-9.7%	2,777	2,984	7.5%	3,007	3,483	15.8%
Share of profit in associates	NA	NA		NA	NA		78	75	-4.4%
Minority interest	NA	NA		NA	NA		11	19	63.9%
Profit after tax/(loss)	3,086	2,252	-27.0%	5,965	5,933	-0.5%	6,929	5,995	-13.5%
Net profit margin (%)	14.1%	9.3%		7.7%	7.2%		7.4%	6.2%
No. of shares								337.2
Diluted earnings per share (Rs)								17.8
P/E ratio (x)								12.3

NA-Not applicable

What has driven performance in FY08?

• For the full year, Siemens’ power segment saw a dip in sales of 1.5% YoY was to that extent responsible for a dull sales performance for the company (given that it makes up almost half the company’s standalone sales). Siemens’ other two large divisions - Automation & Drives and Industrial Solutions & Services – were comparatively better performers as sales in these grew by 27% YoY and 26% YoY respectively during the fiscal. Around 32% of the company’s standalone sales for the fiscal came from exports.
  Segment-wise performance (Standalone)

  	FY07			FY08
  (Rs m)	Sales	% of total	PBIT margins	Sales	% of total	PBIT margins	Sales growth	Margin change
  Power	43,008	54.9%	9.0%	42,378	47.7%	7.2%	-1.5%	-1.8%
  Industrial Solutions & Services	9,529	12.2%	10.0%	12,029	13.5%	12.8%	26.2%	2.8%
  Automation & Drives	16,555	21.1%	6.9%	21,048	23.7%	8.5%	27.1%	1.6%
  Transport	3,467	4.4%	6.5%	6,709	7.5%	-3.0%	93.5%	-9.6%
  Healthcare & Other Services	5,247	6.7%	2.2%	6,053	6.8%	5.5%	15.4%	3.3%
  Real Estate	496	0.6%	65.6%	645	0.7%	95.3%	30.1%	29.6%
  Total*	78,303	100.0%	8.5%	88,863	100.0%	8.0%	13.5%	-0.5%

  * Excluding inter-segment adjustments

  The Automotive, Information & Communication and Building Technologies business segments of the company have been sold off. Out of that the Building Technologies and Automotive segments have been sold during FY08, and thus the figures for FY08 are not strictly comparable with the figures of FY07.

  Net Sales for FY08 consists of Rs 232 m from the discontinued operations, while the profit after tax for the year consists of: Rs 5.4 m from discontinued operations. Also the exceptional income for FY08 consists of profit on sale of Automotive Building Technologies segment.

• Lower staff and lower raw material costs were beneficial to the operating margins but their effect was negated due to higher costs of traded goods as also higher costs of work in progress of projects. This led to a 0.5% contraction in operating margins, from 9.1% in FY07 to 8.6% in FY08 (for the standalone entity). That, along with higher depreciation costs, was responsible for a 0.5% YoY and 13.5% YoY fall in the company’s standalone and consolidated profits respectively during the fiscal.

What to expect?

At the current price of Rs 218 the stock is trading at a multiple of 12.3 times its FY08 consolidated earnings. Given that the company has underperformed our full year estimates, we shall have to revise the same downwards. The company’s standalone order inflows during the year stood at Rs 87 bn, down 14% compared to last fiscal’s inflows. The order backlog stood at Rs 98 bn as at 30th September 2008, an increase of 5% over that of last year’s backlog. The management expects demand for infrastructure development to continue and sees the current scenario as the Indian economy going through a correction phase.