Siemens: Tempered outlook

The Siemens story is priced in

Siemens India has had an exceptionally good year and this is well reflected in its share price, which hit an time high on Thursday after the company announced its annual results.

At first glance, the 16.8 per cent growth in profit before exceptionals and taxes doesn't look too impressive, especially since sales rose by almost 26 per cent.

But results for the year ended September 2003 included a considerably higher amount of non-recurring income. Adjusting for this, the growth in profit before exceptionals and taxes is 39 per cent.

Operating profit grew 35.3 per cent, thanks to a 75 basis points improvement in operating margin. The company has done well to curtail the impact of higher raw material cost (up 90 basis points).

While the key 'power' division witnessed a huge drop in profit margin, Siemens made up through much higher margins in the 'information and communication' and 'healthcare and other services' divisions.

Importantly, the company ended the year with an order backlog of Rs 2133.4 crore, which is 138 per cent higher than last year's levels. Even on a sequential basis, the growth in the order backlog is impressive at 10.7 per cent. New orders worth Rs 777 crore were booked last quarter.

Clearly, Siemens' prospects look bright, but at 25 times trailing earnings the Siemens growth story is well priced in. In fact, considering that BHEL trades at less than 15 times estimated FY05 earnings, Siemens seems overpriced.

Tractor sales: It's raining credit

With their purses full from the bountiful harvest last year and banks doling out cheap credit, farmers are buying more tractors than ever. Between April and October, sales of tractors were up 27 per cent over the corresponding period last year at 1.28 lakh units.

It must be mentioned that sales in H104 were weak, at just 70,000 units coming after a drought and so the increase must be viewed on the lower base.

However, the second half of FY04 was strong (1,05000 units) and so the growth in H205 on the higher base should be in the region of 15 per cent.

That means growth for FY05 should settle at between 20 per cent and 25 per cent over FY04. Sales in October are higher by 26 per cent ostensibly in anticipation of a good rabi crop. The late and fairly heavy rains in September have ensured that the water level doesn't drop too low, so that there is sufficient moisture.

Farmers have also been lured by cheaper credit from banks now available at rates of 10-11 per cent compared with 13-14 per cent a couple of years ago. To some extent that has been nullified by higher tractor prices.

Manufactuers have been compelled to hike prices to take care of rising steel prices. The other factor driving tractor sales is the fact that increasingly tractors are used for purposes other than farming. On an average across states, nearly 50 per cent of tractors are bought for other uses.

Interestingly, exports for the first half of FY05 are up 51 per cent at 9,922 units, thanks partly to the outsourcing done by foreign players such as John Deere. If the projected 220mn foodgrains output happens, it would keep demand buoyant next year too.

The Bovespa and the Sensex

Why should the Brazilian stock index""-the Bovespa""-be so closely correlated to the Sensex? The composition of Brazil's index is very different from the Sensex, with commodity companies looming large in their index and the absence of our large IT services sector.

Yet, as can be seen from the chart, the indices closely track each other. What can two very different economies located at opposite ends of the globe have in common?

Especially since the Brazilian economy is set to grow at 4.5 per cent this year, after a contraction of 0.2 per cent last year, growth rates mush lower than India's.

The common factors are the size of their economies and markets. But the real explanation lies in the explosion of global liquidity, which has driven stocks across the world.

This liquidity has led to a rise in asset prices globally, and emerging markets across the board have participated. Increasingly, funds flows are linked, not so much to the prospects of a particular economy, but to its valuation.

And with global and international equity funds taking in $14.5 billion of net inflows so far this year, (according to EmergingPortfolio.com) which is more than three times last year's $4 billion net investor contributions, the money is likely to spill over to all emerging markets.

With contributions from Mobis Philipose and Shobhana Subramanian