Siemens India – a 51 percent subsidiary of German engineering behemoth Siemens AG, is on a high these days. The company was in the red only a few years back (1997 and 1998). High interest burden and lack of focus were major contributors to the decline in its fortunes.
Take a look at its product portfolio. In India, Siemens manufactures automation systems, components, medical equipment, motors and drivers, power generating equipment and switchgears. It derives 40-45 percent of revenues from standard products (automation, ancilliary equipment). The balance is split between power projects, industrial projects and switchgears. Thus about 70 percent of revenues are vulnerable to economic fluctuations.
To improve its performance, the company put a restructuring plan in place, which aimed at identifying and concentrating on the company’s core competence and also looking at ways to reduce its debt levels.
By financial year 1999, the company had made a remarkable recovery. Siemens reported a net profit of Rs 351 million in its financial year ended September 30, 1999. It had posted a net loss of Rs 560 million in the previous financial year. However, the company’s turnover was more or less stagnant.
In the first three quarters of financial year 2000, Siemens has almost achieved zero debt status. Its savings due to efficient working capital management have been considerable. Raw material costs as a percentage of sales shrunk to 18.5 percent from 22.6 percent in the corresponding period over previous year. This was a result of reduction in the number of vendors and strategic sourcing of materials.
Where to from here...
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Though Siemens has yet to declare its financial year 2000 results, we estimate the company to record a significant 70 percent jump in net profits to Rs 596 million over the previous year.
The change in its fortunes was achieved mainly by hiving off its telecom and infotech (IT) businesses into a separate subsidiary. Siemens also sold surplus land. The funds raised were used to retire debt, which reduced its interest burden. Added to this, the company focused on cutting its operational costs. Thus, a voluntary retirement scheme was put in place to for its workers. During this period, the company also came up with a rights issue to tide over the difficult situation.
The performance of the company over the last couple of years is very heartwarming but it becomes clear that a major contributor to the company’s burgeoning bottomline has been extraordinary income in the form of asset sales. A demand gap has also meant a stagnant topline. In fact, Siemens turnover is likely to see a 12 percent decline to Rs 9.6 billion in financial year 2000.
But given Siemens resilience and its technological prowess, the company is one of the best placed to take advantage of the huge potential demand in transmission and distribution. India has to generate an incremental 10,000 MW of electricity every year for the next 10 years to plug the power demand-supply gap. More importantly it has to bring transmission and distribution (T&D) at par with power generation. India’s T&D to generation ratio stands at a dismal 0.3:1, as compared to the international benchmark of 1:1.
Also, the company is not resting on its past laurels and instead is looking at new ways to improve efficiency and profitability. Siemens recently acquired a 26 percent stake in VXL Landis & Gyr as part of its ongoing process of focusing on its core products. The company’s parent Siemens AG already holds the majority 74 percent stake in VXL. The acquisition will help Siemens India increase its range of complementary products by including electric meters manufactured by VXL. Expanding the product range helps the company realise additional value out of an order.
On the other hand, the company is divesting its 26 percent stake in Siemens Nixdorf Information System. Nixdorf markets and services a range of notebooks, desktops and servers. The company’s profile doesn’t really match with Siemens other businesses, hence the move to divest.
The company is also reviewing its investment options in consultations with its German parent Siemens AG. The underlying motive for review is to minimise risks and identify higher growth areas. The company’s current order book stands at a healthy Rs 2.4 billion (up 30 percent over last year).
All in all, the restructuring efforts have paid off. Siemens has shed flab, cut costs and is giving a new focus to its businesses. All this is fine, but where does the company go from here? With much of the company’s turnover still dependent on demand from the slow moving, government policy dependent, power sector, the company’s prospects do not appear to be improving significantly over the next few years.