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Cost cuts, reworked deals boost Siemens’ margins

The company’s operating margins in the first half improved to 6.5 per cent against the last six-quarter average of 3.7 per cent.

, ET Bureau|
Updated: Apr 30, 2014, 11.53 AM IST
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Internal controls appear to be paying off for Siemens, the Indian arm of Europe’s largest engineering company, Siemens AG. Its focus on cost controls and better project management is reflected in its financials.

The company’s operating margins in the first half of FY14 improved to 6.5 per cent against the last six-quarter average of 3.7 per cent, though revenue growth slipped by 7 per cent.

Siemens India’s financial year ends in September. In the past few quarters, the firm posted divergent margins, from as low as 1 per cent in the third quarter of FY13 to as high as 13 per cent in the second quarter of FY12.

Analysts believe the main reason for such variance is its high exposure to currency risk.

The company imports most of its raw material. Besides internal controls to boost margins, the company is also re-negotiating with its customers on price.

Post the March earnings, the management stated there’s still significant amount of under-cutting to grab orders, and the difference between the lowest bidder and the next possible one ranges between 15 per cent and 20 per cent.

Adding to the woes of capital goods firms are the trade terms, which seem skewed in favour of the buyer, resulting in stretched payment schedules . The company says it will continue to focus on profitable revenue growth and ignore lossmaking orders.

The attempt by the firm to focus on profitable volumes has led to a slide in order inflow growth as it stays away from loss-making orders. The order inflow declined by 4 per cent to Rs 4,620 crore in the first half of FY14 against Rs 4,790 crore in the same period last year.

It continues to see a decline in order inflow from infrastructure and energy, which contributed 48 per cent to total revenue in the March quarter. The order backlog stands at Rs 12,900 crore at the end of March 2014.

Despite the stock appreciating by 41 per cent in the last six months, 73 per cent of analysts tracking it, have put a ‘sell’ call on it, influenced by its P/E ratio.

According to Bloomberg, earnings per share (EPS) for the next year is expected at Rs 16.23, which means the stock is currently trading at a P/E of 47.5 times of one-year forward earnings.

Given the headwinds of a demand environment and cut-throat competition, a 47 times of P/E for a stock like Siemens India appears to be quite expensive for investors. On earnings, net profit climbed 185 per cent to Rs 88.29 crore in the March quarter, while revenue declined by 8 per cent to Rs 2,706 crore on a y-o-y basis. The drop in revenue is mainly the result of clients deferring deliveries.

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