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Siemens: Bright prospect ahead?

Oct 1, 2004

With the capacity addition plans of power, steel, non-ferrous metals, chemicals, textile and food industries and higher infrastructure spending planned by government, the macro investment cycle looks encouraging. In such a scenario, demand for the industrial equipments is likely to rise. Having recognised this, the markets have shown significant buying interest in the engineering stocks in past few months. Engineering major, Siemens gained around 17% on the bourses in last one month and has largely outperformed its peers like ABB (down 2%), BHEL (up 3%) and Thermax (down 2%). Let us take a look at the profile of the company.Siemens India is a 54.6% subsidiary of German engineering behemoth Siemens AG. Siemens AG in the one of largest engineering companies across the globe with a presence in around 190 countries, it employs more than 4 lakh people. The Indian subsidiary is operating in many areas like: Power, Industrial segment, Health care services, Transport, Information & communication and Real estate. The graph below shows the company’s performance over last five years.

As a known fact, India is largely a power deficient country. The per capita consumption of power in India is abysmally low and is less than 500 MU as compared to world average of more than 2,000 MU. The government has decided to raise the per capita consumption to 1,000 MU by 2012 and has made a blue print to add an additional 1,50,000 MW of capacity by 2017. On the distribution side, the alarmingly high T&D losses (transmission and distribution), there is a strong need to revamp the T&D infrastructure. An outlay of Rs 200 bn has been provided as central plan assistance under APDRP to State Governments for implementing the up gradation and modernization of sub transmission and distribution schemes under investment component. Since Siemens is present in both generation and T&D equipments, the company is likely to witness higher orders from the power sector going forward.

India has emerged as the second-largest market after China for mobile-phone handsets. The total mobile users in India grew to around 36 m that forms around 3% of the total population, which is much lower as compared to around 20% in China. The mobile users are expected to grow to 70 m in the next 2 years. Siemens has also introduced a range of mobile handsets in order to have a pie of cake. Globally, Siemens has been able to increase its market share over last 4 years from 6% to 9.1%. While in India their base is very low, we believe the company will be able to increase its market share to around 5% from current 1.5% in medium term.

Healthcare division of the company is the third largest when it comes to sales, and is infact the last when it comes to contribution to the company’s bottomline. The PBIT margins from this segment stood at 0.5% during FY04. However, the management is carrying out restructuring in the division and is confident of taking PBIT margins to 5% in next two years.

The outstanding orderbook value of the company as on June 30th 2004, stood at Rs 29 bn, which works out to be around 1.7 times FY04 revenues. The new order inflow in the first nine months of the year stood at Rs 22 bn, as compared to Rs 11 bn for the same period last year.

At the current price level of Rs 1150, the stock trades at a P/E ratio of 30.4x its annualised 9mFY05 earnings (excluding Siemens Information Service Ltd. numbers, a 100% subsidiary of Siemens India). On market cap to sales basis, the stock trades at 2.3 times annualised 9mFY05 standalone sales of the company. Though the growth prospects for the company’s divisions are bright, before taking any investment decisions, it must be considered that valuations are on the higher side and to that extent, the returns from the stock would only accrue over the long-term. Thus the investment horizon in this stock needs to be long-term to get adequate returns.

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