Siemens: Capex boom

Rising input costs, however, tempered operating profit

Siemens has once again leveraged the current boom in the capex sector in the March 2007 quarter, but it has had to also grapple with rising costs of inputs like metals.

As a result, the company's operating profit grew 38.1 per cent y-o-y to Rs 167.7 crore in the last quarter compared with 88.4 per cent growth in its total operational income to Rs 2135 crore. Its operating profit margin also fell 285 basis points y-o-y to 7.85 per cent in the March 2007 quarter.

The pressure on margins was owing to adjusted raw material costs (including project related work-in-progress) as a percentage of total operating income rising 650 basis points y-o-y to 80.3 per cent in the last quarter.

The results were declared after the close of Monday trade, but the stock had already declined 0.5 per cent by the close to Rs 1062.7.

Also, investors appear to be cautious with this stock over the past three months - Siemens has declined 7.2 per cent during the period compared with 0.8 per cent decline in the Sensex.

In the quarter ended December 2006 too, operating profit margin declined 165 basis points y-o-y to 7.54 per cent. Meanwhile in the March 2007 quarter, Siemens' growth was powered by its key power division, with segment revenues expanding an impressive 150 per cent y-o-y to Rs 1186.6 crore.

Key orders bagged by Siemens in this division in the last quarter include that of 235 million euros jointly with BHEL from the Power Grid Corporation of India.

The company is attempting to strengthen its building technologies division with the acquisition of 77 per cent stake in the Rs 161-crore iMetrex Technologies for an undisclosed sum.

Also, Siemens is planning to carve out its building technologies division and merge it with iMetrex, in order to ensure optimum utilisation of resources. For the six months ended March 2007, the building technologies division contributed 1.3 per cent of Siemens net sales.

Siemens closed the quarter with an order backlog of Rs 10,884 crore, up 43 per cent y-o-y. The stock trades at 26.7 times estimated September 2007 earnings given the growth potential in the capex sector.

Ceat: True value

In a bid to unlock value, RPG group company Ceat Ltd will be hiving off its investment business into a separate company, which too will be listed.

Ceat trades at a market cap of Rs 630 crore, while the market value of its investment in group companies (such as KEC International, Zensar and CESC) is around Rs 445 crore.
Ceat's tyre business is trading at a market cap of less than a tenth of its sales and about 1.43 times operating profit if the market value of its investments is removed. Competitor MRF Tyres' market cap is about a third of its sales and 4.9 times operating profit.

However, there is a question mark on the extent of value unlocking once the two businesses are separated. Holding companies (or investment companies that own group company shares) typically trade at a discount to their investment portfolios, as the market believes that these investments will never be sold.

Thus, the upside for shareholders of such companies comes from higher dividend outflows as there are hardly any capital gains to be made.

For example, Nalwa Sons, a Jindal group investment company trades at about 80 per cent discount to its investment portfolio. Even companies such as SRF Polymers and Vindhya Telelinks, trade at a discount to their investment portfolios, despite having an underlying business.

For the year ended FY07, Ceat's net sales went up 22 per cent, while operating profit was up 86.6 per cent. As a result, operating profit margin grew by over 200 basis points to about 6 per cent.

The company attributes the improved performance to increased sales of higher value products and effective cost management. Raw material to sales stayed at the same level of about 70 per cent, which is impressive considering that rubber costs have been 15 per cent higher on a y-o-y basis in FY07. Ceat management said it was because the company had hedged its rubber purchases.

Going forward, tyre demand is likely to be strong from both OEMs and the replacement market. Ceat Tyres will also sell 7 acres of land at its plant in Bhandup, Mumbai. Like other tyre makers, Ceat too will be introducing new products and set up a greenfield radial tyre plant.

While MRF trades at around 12 times trailing earnings, at about 16 times FY07 earnings, the near-term upside appear priced in for Ceat.