Siemens: Raw wound

Siemens' margins have come under pressure owing to rising input costs

Siemens has once again reported a strong growth in revenues for its year ended September 2006, given the well documented upturn in the capex cycle, but its margins have come under pressure owing to rising input costs.

The company's consolidated operating profit grew 34.7 per cent y-o-y to Rs 641.7 crore in the last financial year, as compared to a 64.7 per cent growth in its total operating income to Rs 6058.6 crore.

However, the results for the year ended September 2006 are not strictly comparable with a year earlier, owing to the merger of several subsidies with itself in the previous financial year.

Nevertheless, the consolidated entity saw its operating profit margin decline 235 basis points y-o-y to 10.6 per cent in FY06. Pressure on margins resulted in the stock dipping 3.9 per cent to Rs 1279.25 on Thursday.

However, prior to Thursday, the stock has outperformed over the past three months""it has gained 29.5 per cent during this period as compared to a 19.2 per cent gain in the Sensex.

This drop in operating margin was owing to adjusted raw materials as a percentage of income rising 490 basis points y-o-y to 65.4 per cent in the last financial year. Siemens, like other players in the capital goods sector, has been grappling with rising non ferrous and steel costs.

Meanwhile, the company's key power division saw another buoyant performance in the last financial year, thanks to orders won like that of a 1100 mw order from the Torrent group. Segment profit of the power division surged 58.9 per cent y-o-y to Rs 122.78 crore in the last year.

Siemens India also announced that it would exit from Siemens Public Communication Networks (a 100 per cent subsidiary) as a fall-out of its parent's decision to form a 50:50 JV.

This subsidiary had revenues of Rs 319 crore in FY06. It will also sell the communication - enterprise networks division to its parent's 100 per cent subsidiary.

The company's growth is expected to be powered by its outstanding order book of Rs 7525.8 crore at the end of September 2006, a growth of 97 per cent y-o-y.

Also, the company has recently won several additional orders, such as recently in Qatar, jointly with its German parent.

However, with non-ferrous prices still high, the company's margins could continue to be under pressure, say analysts. Excluding the impact of the divestment, the stock gets a discounting of 24 times estimated September FY07 earnings, which appears high.

Aditya Birla Nuvo: Right turn

Aditya Birla Nuvo announced that it will raise Rs 777 crore by way of a rights issue. This issue is at a discount of 29 per cent to the Tuesday's price, which is attractive.

Taking the current price, the ex-rights price works out to Rs 1,081 (the average of 17 shares at current price and two shares at Rs 793). As long as the stock stays higher than this level after the rights issue, the investor will be in the money.

The funds will come in handy for ABNL to pursue growth across its businesses and reduce some of its debt. In FY07, it had raised Rs 590 crore of secured debt and an additional unsecured debt of Rs 479 crore, a part of it to finance investments in Idea Cellular, TransWorks and Birla Sun Life Insurance besides capital expenditure.

In the September 2006 quarter, ABNL posted a 95.5 per cent growth in sales and 169.4 per cent increase in its operating profit.

However, the numbers are not comparable as Indo Gulf Fertilisers and Birla Global Finance were merged with the company in September 2005. Also, it increased its stake in Idea Cellular by 15 per cent in June 2006. Nevertheless, its operating profit margin improved by 407 basis points y-o-y to 14.85 per cent.

Rayon and carbon black divisions benefited because of higher prices. The garments business did quite well"" it grew 16 per cent, despite the company transferring its contract manufacturing business to a subsidiary.

Its fertilisers division was affected by lower production due to floods in Gujarat. Profitability improved in garments and rayon yarn businesses. Insurance arm, Birla Sun Life, lost market share. The contribution of Idea Cellular to profit before interest and tax stands at 36 per cent after the increase in the stake.

Also, the segment profitability in telecom improved by 236 basis points y-o-y to 18.63 per cent. The stock trades at about 31 times and 25 times estimated FY07 and FY08 earnings.