Siemens

Siemens India may have taken the stock market by surprise, with revenues back on the growth track and profit margins showing a visible improvement for the quarter ended March 2009 (the company’s second quarter) compared to a year ago numbers.

The stock has climbed by 44 per cent after the declaration of its quarterly results on April 30. The Siemens stock has also returned 150 per cent since the market lows in March 2009.

Investors can use this opportunity to take some profits from their holdings in the stock of Siemens as not everything may be rosy for this diversified engineering company as yet.

At the current market price of Rs 498, the stock trades at 17.5 times its trailing per share earnings. The valuations appear to be at a premium given the muted growth prospects in the medium term.

A stagnant order-book, effects of selling some of the more profitable units to the parent and the struggle to free itself from issues such as high project costs and sub-contract issues suggest that the company may still be on a consolidation phase.

Investors with risk appetite can consider retaining their trimmed holding with a two-three-year perspective.

Robust order flows expected for its power division and a slow revival in capital expenditure spending by industries may result in improved earnings prospects for the company.

Siemens India is a 55 per cent subsidiary of Siemens AG. Energy and industrial sectors are the key revenue generators for the company while healthcare and real estate are the other relatively smaller divisions

The industry segment, consisting of automation, switchgears, signalling systems, and building technologies witnessed tepid growth for the quarter ended March 2009.

This was the result of a slower revival in capex spending; nevertheless, the energy segment — driven by revenue from power transmission and distribution and oil and gas (in that order) — has been the key contributor to revenue growth in the latest ended quarter, after a weak quarter in December.
Aided by write-backs

For the quarter ended March, the company’s revenue grew 10.5 per cent to Rs 2,368 crore. Net profits for the period stood at Rs 225 crore.

The figures on a year-on-year basis are not fully comparable, as Siemens had provided for some losses in the year ago financials, on the back of an estimated increase in input costs. In the just ended quarter, a part of such provisions were written back, leading to a surge in operating profits for the quarter.

Operating profit margins have, therefore, moved from abysmally low levels to a more reminiscent 14 per cent norm. With commodity prices much lower than a year ago, the company may be able to keep its input costs at bay sustaining the above margins.

The supernormal net profit growth, for the quarter is not a sustainable number for the above reasons.
Order intake troubles

While revenue growth imparts some positive signals, the order intake of Siemens has not been all that healthy. The company did not participate in a number of project bids that they might otherwise have qualified, due to concerns over profitability of the projects and customer payments.

While Siemens has had trouble with costs overshoots in the past, the recent slowdown may have only accentuated their cautious view.

Like many other companies dependent on the power sector, the January-March or the second quarter (Siemens has a financial year ending in September) has, historically, been the best one for order flows for Siemens, with government companies typically placing orders to meet target at the close of the financial year.

The order inflow was down 6 per cent to Rs 1,850 crore for the latest ended quarter compared with December.

On a year-on-year basis, the order accretion was down 20 per cent, providing an indication of the extent of slowdown.

Siemens’ dependence on export for a good part of its revenues (40 per cent) may have also been another reason for the slowdown in order intake, as industries across globe curtailed spending.

The slowdown in order intake, not really a short-term phenomenon, has resulted in a stagnant order-book position for 10 quarters now.

The current order book of Rs 9,700 crore does not compare too well with the Rs 9,570 crore of orders a year ago. For investors, a pick-up in order intake and execution of existing projects on a quarterly basis may be the key aspect to look out for, over the next three-four quarters to gauge any signs of a complete recovery for the company.
Segment performance

While Siemens’ transmission business by far demonstrated superior profit margins, it perhaps came on the back of write-backs discussed earlier. The margins in the industrial division contracted; little surprise what with weaker industrial growth.

Siemens has been selling a number of units that it considered non-core over the last couple of years. While such moves may not always be profitable, we believe that Siemens’ core business holds sufficient potential, even stripped of the other businesses.

Power transmission and distribution space, for instance, offers opportunities aplenty given Power Grid Corporation’s capex plan of about Rs 24,000 crore over the next couple of years.

Note that Siemens’ product range in this space is wider than ABB’s. The company’s recent order wins suggest that this segment may see improved order flows.

The company’s mobility division — offering electrical solutions to the Railways — is another small, yet fast growing sector that holds potential.

With a domestic manufacturing base and superior technology, this segment is well-placed to win orders for railway projects.

Its success so far in the Mumbai Railway Vikas Corporation’s Phase I of the suburban railway project is likely to lend sufficient qualification not only for the next phase, but also for similar projects.

The challenge lies in Siemens tapping the above opportunities and getting its project cost estimations right, thus preventing any erosion to profitability.

via BL