Siemens: Sound engineering

Strong top line and lower input costs have boosted Siemens' margins

Driven by a 144 per cent increase in revenues of its power division, Siemens has posted an excellent Q1FY06 with consolidated sales rising 67.7 per cent y-o-y to Rs 860 crore.

Besides, earnings before interest, tax and depreciation (EBIDTA) has increased by a spectacular 76 per cent y-o-y to 79 crore. The stock closed 4 per cent higher at Rs 4,468 crore on Friday.

While the company had faced some margin pressures in the September quarter, this time round, there was an expansion of 50 basis points in the EBITDA margin which climbed to 9.19 per cent.

This was primarily because the company has managed to control costs: the ratio of raw materials to sales dropped 100 basis points to 71.7 per cent in the December quarter.

The PBIT margin of the power division improved by about 30 basis points. The profitability of the automation and drives segment also rose by about 40 basis points, with revenues growing 22.3 per cent y-o-y. The industrial solutions and services division also saw strong revenue growth at 38 per cent.

At the current price of Rs 4,468, the stock trades at a multiple of 32 times estimated FY06 (September) earnings.

The splitting of the Rs 10 paid-up share into a Rs 2 paid-up should infuse more liquidity into the stock. The company's orderbook is exceptionally strong ""the intake in Q1FY06 was Rs 4,162 crore.

Given the management's acquisition initiative, the current uptrend in the capex cycle and also the weakening in input costs, the stock is likely to remain expensive.

Colgate: Smiles again

It was a dazzling December quarter at Colgate-Palmolive, with an operating profit growth of 77.76 per cent. Operating profit margin improved by 1077 basis points to 23.27 per cent in Q3 FY06, compared with just 15.51 per cent in the September 2005 quarter and 13.2 per cent in June 2005 quarter.

Colgate's performance in Q3 is far higher than expectations, and not surprisingly, the stock gained 20 per cent since the results.

Net sales increased by 21.16 per cent y-o-y and the 14 per cent volume growth indicates that the company has benefited from better realisations.

The company has benefited from its new facilities at Baddi in Himachal Pradesh, which became fully operational in August 2005. At the operational level, raw material consumption increased by 55.39 per cent as a result of lesser outsourcing, which reduced by 22.16 per cent, thanks to new facilities.

Advertising expenses went up by 36.08 per cent, but total expenditure grew only 9.54 per cent, which has resulted in operating profit growth.

Depreciation has increased by 193 per cent, but it did not dent the net profit growth of 46.22 per cent as tax benefits in Baddi resulted in an tax outgo reducing by 9.56 per cent y-o-y. The stock trades at about 25 times its FY07 EPS.

Cipla : Export surge

Cipla, like other generic players which are using the partnership model, has been able to withstand the difficult operating environment in the US generics market.

As a result, operating profit expanded 31.9 per cent y-o-y to Rs 158.93 crore in the December quarter. While Dr Reddy's uses the same model to bring down R&D costs, Cipla has leveraged this strategy to market its products overseas.

While Cipla has to share profits with its foreign partners, markets, it saves the company marketing and allied costs. A key highlight of Cipla's last quarter has been a 94.2 per cent y-o-y growth in its API exports to Rs 150.26 crore.

Owing to stronger demand from segments such as anti-retrovirals, anti-malarials. However, exports of API typically yield lower margins than exports of formulations, point out analysts.

Meanwhile, formulation exports expanded 13.6 per cent y-o-y in the last quarter and it helped exports constitute virtually half of total sales in the December quarter compared with 46 per cent in the corresponding period of the previous year.

Cipla's domestic sales grew 18 per cent y-o-y. A larger proportion of formulation sales in its total sales, results in the company's operating profit margin remaining more or less flat on a y-o-y basis at 20.35 per cent in the last quarter.

Going forward, analysts expect an improvement in the company's exports of CFC-free inhalers, which should help the formulations exports business grow faster. The stock trades at about 28 times estimated FY06 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur