Siemens hit by cost overruns

Siemens hit by cost overruns
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First Published: Thu, Nov 27 2008. 12 56 AM IST

Updated: Thu, Nov 27 2008. 12 56 AM IST
The results of Siemens Ltd’s for the year ended September were quite a disappointment.
Sales from continuing operations rose by 11.9% to Rs9,706 crore, while profit of these businesses fell by 9.6% to Rs599 crore. This represents a 150 basis points drop in the net profit margin of the continuing operations of the consolidated entity. While subsidiary companies were responsible for the drop in profit, even the parent company witnessed pressure on margins last year.
Continuing operations of subsidiary firms grew by 7% to Rs1,372 crore in terms of revenue, but their profit fell by as much as 93% to Rs6.2 crore. Siemens’ stand-alone revenues grew by 12.7% to Rs8,335 crore, while profit grew by just 2.5% to Rs592.8 crore.
The decline in earnings has come as a rude shock to the markets, which at its peak in January had assigned a price-earnings valuation multiple of as high as 50 times trailing earnings. Hardly anyone had envisaged a scenario where the company’s earnings would decline on a year-on-year basis.
The company had this to say in a statement: “The impact on profitability was due to the provisions booked to cover the costs overrun on certain large projects.”
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Ever since the market crash, the markets had woken up to the risk on execution and cost overrun in particular for engineering and capital goods firms. Still, the fact that it has impacted the performance to this extent has come as a negative surprise.
The company’s power segment, which houses most of these large projects, showed little sign of the strain till the end of the June quarter.
In the first three quarters of the company’s fiscal year, profit of the segment was more or less flat, and in line with the growth in revenues of the division. But after the hit taken in the fourth quarter on account of the cost overruns, the segment reported a 21% fall in profit for the entire year.
According to one analyst, last year’s results demonstrate the company’s lack of pricing power.
Also, last year’s wins of large projects hasn’t been repeated to the same extent this year, leading to a 14% drop in new order booking.
According to the company, new order flow has risen by 27%, adjusted for the impact of mega order flows. The unexecuted order value of Rs9,834 crore amounts to at least a year’s sales for the company, but with the rate at which economic growth has decelerated in the past few months, growth would be under pressure. Further, the company has entered into fixed price contracts for materials at higher levels and it will be a while before it will benefit from the fall in commodity prices. Because of these concerns, the Siemens stock has corrected by about 78% from its peak and now trades at about 15 times trailing earnings (adjusted for exceptional income).
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Graphics by Paras Jain / Mint
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First Published: Thu, Nov 27 2008. 12 56 AM IST