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Siemens: Performance appraisal

Aug 25, 2003

Engineering majors have done well in the last financial year. Their orderbook sizes have increased significantly. Going forward economic prospects are looking good and the IIP is expected to grow by more than 6%. In this article we take a look at engineering major, Siemens India, its business profile and future prospects. Siemens India is a 51% subsidiary of German engineering behemoth Siemens AG. The company is operating in many areas like: power - manufacturing generation and T&D equipments, industrial solution service - providing process automation, manufacturing automation drives. In health care services the company manufactures diagnostic equipment, hearing equipments etc. and in transport it is into railway automation, trains and locomotives. The company has presence in communication and information technology segments too.

Let’s have a look at the topline drivers.

Segmental revenue
(Rs m) 9mFY04
revenues
Contribution to
topline
PBIT
margin
Information and communication 561 5.3% 7.0%
Automation & Drives 3,316 31.2% 4.8%
Industrial solutions & services 1,040 9.8% 8.2%
Power 2,527 23.8% 14.8%
Transport 958 9.0% 16.3%
Health care & other services 1,996 18.8% -0.7%
Real estate 240 2.3% 91.5%
Total 10,638 100.0% 9.6%

Power business has remained as primary growth driver in the past. The revenues for the 9-month period ended June 30, 2003 have declined by 12% largely owing to cancellation of some of the orders. Moreover power business being contract based, the revenues are accounted for only on the completion of projects. However, PBIT margins expanded significantly during the period (at 14.8%) mainly due to inclusion of forfeited amount of the cancelled orders. Going forward, power is expected to remain as one of the key contributors because the company has received good number of orders from this segment. Moreover, encouraged by the new electricity bill a lot of investment is expected to come in this sector, both private and public. So the company expecting more orders to flow in from power sector.

Automation segment contributed around 31% to topline but due to low margins, it failed to impress the bottomline. However, optimism flows in because it has doubled its margins as compared to 9mFY03. Going forward the margins of this segment will improve as company gains experience. Automation segment is going to retain its position as key contributor as the segment has perked up overall and user industries are opting for smart and intelligent devices to run the systems.

Healthcare segment has emerged as an important segment and contributed around 19% to topline in 9mFY04. The medical equipment business is expected to pep up revenues as the parent company proposes to make India a manufacturing hub for medical equipment primarily for exports to Asian countries. Though this move could enhance the topline figure, poor margins remain a cause of concern. Unless margins improve, it might be a drag on overall profitability.

The company is also planning to expand its presence in information and communication segment going forward. Recently it launched a program to expand its sale in Rajasthan. The revenues from this segment have grown but the pressure on the margins is there. The transportation business has shown significant growth. Going forward it is expected to continue its good showing led by consistent order flow. The margins in the transportation business are over 16% at the PBIT level.

In the past few months, the company’s stock price has gained around 33% reflecting the improvement in fundamentals. The orderbook of the company stood at Rs 8,347 m at the end of June 2003, which is 85% of 9mFY04 revenues. At the current price of Rs 395, the stock trades at the P/E multiple of 11.4x annualised 9mFY04 earnings.

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