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Sowmya Krishnan

THE fortunes of Siemens India, one of the prominent players in the electrical and electronic engineering segment, appear to be improving in sync with the general economy. The company has maintained steady growth during the recessionary period by improving cost-efficiency and introducing new products. The effects of restructuring have started bearing fruit in the form of lower operating costs and higher operating margins. Given the internal strength of the company, the slow pick up in the economy and the thrust on infrastructure and power projects, Siemens India appears to be on a growth path.

Earnings performance: Siemens India's performance for the year ended September 2002 was good. The income from sales and services rose 11.5 per cent during the year, while the average topline growth for the previous three years hovered around 6 per cent. The growth was primarily powered by automation, power transmission and distribution and healthcare segments.

Though the contribution from these segments was higher in terms of revenue, their effect on the bottomline was limited due to lower margins. For instance, the health-care segment, which presents good growth opportunities, constituted 18.6 per cent of the total sales, but contributed only 10 per cent towards profits. Operating margins for the segment were low at 3.6 per cent. On the other hand, the operating margins of the transport segment were quite high at 16.5 per cent. As a result, the segment's contribution towards profits was much higher at 15 per cent vis-à-vis its contribution to the topline at 6 per cent.

The company curtailed its costs to improve profitability. Staff costs reduced by 3.3 per cent while the rise in other expenses kept pace with the sales growth. The operating margin inched up marginally from 10.11 per cent to 10.34 per cent.

Being a low debt company, its payout in terms of interest is negligible. However, net interest income fell sharply by 41 per cent to Rs 11.86 crore over the previous year. This was to a large extent made up by the write-back of restructuring charges deducted during the earlier years. A write-back of Rs 10.89 crore against a charge of Rs 11.34 crore the previous year directly added to the bottomline. Post-restructuring, the profit before taxes (PBT) posted a 35 per cent growth. But if the effect of restructuring (which is not consistent) is nullified, the PBT growth drops sharply to 10.93 per cent. Thus, profit at the net level is skewed to a large extent due to the write back of restructuring charges.

Future prospects: In its traditional businesses of power and automation, Siemens might perform better, given the opportunities in the T&D segment. The thrust on infrastructure development might open up opportunities in transport systems and safety systems. Given the growth in the mobile connections, the demand for its mobile units might also perk up. It recently planned to foray into the fast growing business process outsourcing (BPO) business. The company's current order-book position stands at Rs 1154 crore, a 7 per cent increase over the previous year. Given these facts, Siemens' future prospects seem better.

Valuation: The stock has been re-rated in the previous year on the back of improved fundamentals and the increased interest shown by the parent company in the form of fresh investments of $500 million. The reduction in capital as a result of the buyback has further increased the per share earnings, improving the valuation of the stock.

Though the decision to buy back further equity was deferred at the board meeting, the company has sent signals that the stock might still be undervalued. At the current market price of Rs 273, the stock might be a good bet from a one-to-two-year horizon. An upside of up to 20 per cent can be expected in a one-year time-frame.

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