Graphics: Yogesh Kumar / Mint

Earnings before interest and tax, however, rose by 32% to Rs945.4 crore, which gives the impression that the company has managed to improve margins despite tough market conditions. But note that the preceding year’s results included some one-time write-offs, which resulted in a low base. This is largely reflected in the first half of the preceding fiscal ended September 2008. So, although sales fell by 1.5% in the first half period ended March, Ebit (earnings before interest and tax) jumped by 245% to Rs482.6 crore.

In the second half period ended September, sales rose by 3.6%, but Ebit margins dropped by about 300 basis points and Ebit fell by 20% to Rs462.8 crore. This is a better reflection of the ground realities companies such as Siemens are facing. According to an analyst, engineering companies are facing a lack of pricing power for the second year in succession, and the outlook for the near future isn’t bright either, because of an excess capacity situation. In the fourth quarter, matters got worse with margins falling by over 400 basis points.

One basis point is one-hundredth of a percentage point.

On the positive side, things are getting better on the order inflows front. In the first half period, order inflows had dropped by 10% on a year-on-year basis. In the second half period, they rose by 11%. But pricing pressure continues, especially in the energy segment.

According to an analyst who did not want to be quoted, earnings are likely to be flat in the coming year because of pressure on margins. For all these reasons, the Siemens stock has underperformed the BSE Capital Goods index since early last year (see chart). Still, considering that the stock enjoys a valuation of about 30 times trailing earnings (adjusted for exceptionals), there’s room for further underperformance.

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