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Siemens: Good results. Now what? - Views on News from Equitymaster
 
 
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  • Nov 23, 2000

    Siemens: Good results. Now what?

    Siemens India is a 51% subsidiary of German engineering behemoth Siemens AG. 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, ancillary equipment). The balance is split between power projects, industrial projects and switchgears.

    Siemens 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. 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 reducing its debt levels.

    So Siemens hived off its telecom and infotech (IT) businesses into a separate subsidiary. It also sold surplus land and came up with a rights issue. The funds raised were used to retire debt, which reduced its interest burden. Apart from this, Siemens introduced a voluntary retirement scheme to cut its operational costs.

    By FY00, the company had made a remarkable recovery. Siemens reported a net profit of Rs 351 million during the year. It had posted a net loss of Rs 560 million in the previous year. FY01 was even better. Siemens recorded a huge 139% jump in profits. But the growth in turnover was a marginal 3%. It is this stagnant nature of its turnover that has worried investors’ and analysts’ alike.

    (Rs m) FY00 FY01 Change
    Sales 10,506 10,833 3.1%
    Other Income 715 896 25.3%
    Expenditure 10,235 10,574 3.3%
    Operating Profit (EBDIT) 271 259 -4.4%
    Operating Profit Margin (%) 2.6% 2.4%  
    Interest 278 49 -82.4%
    Depreciation 358 315 -12.0%
    Profit before Tax 349 791 126.5%
    Other Adjustments 32 155  
    Tax 30 106 256.3%
    Profit after Tax/(Loss) 351 840 139.2%
    Net profit margin (%) 3.3% 6.3%  
    No. of Shares (eoy) 35.5 35.5  
    Earnings per share* 9.9 23.7  
    *(annualised)      
    Current P/e ratio   12.6  

    Till now, extraordinary income in the form of asset sales has helped it shed flab, reduce debts and cut costs. But sluggish demand has meant a declining turnover, which later could hamper profitability sans extraordinary income. Since Siemens is past it’s restructuring, the question that pops up is that now what else Siemens can do? The jump in its profitability, is it here to stay? It is the uncertain answer to this question that is likely to hit the company’s valuations.

    At the current price of Rs 299, the stock trades at 12.6 times its FY01 earnings. This is low compared to the historical valuations (P/e) of 25-30 times its earnings. However, given Siemens resilience and its technological prowess, it is one of the best placed to take advantage of the huge potential demand in power transmission and distribution segment in India.

     

     

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