Siemens (Pakistan) Engineering

Siemens (Pakistan) Engineering (PSX: SIEM) was incorporated in Pakistan as a public limited company in 1953. The principal activity of the company is the implementation of projects under contracts and also manufacturing, installation and sale of electronic and electrical capital goods. SIEM’s business portfolio includes smart infrastructure, digital industries, smart grid and smart buildings, power generation and distribution as well as automation and digitization, to name a few.

Pattern of Shareholding

As of September 30, 2022, SIEM has a total of 8.247 million shares outstanding which are held by 1494 shareholders. Siemens AG, Germany is the major shareholder of SIEM with a stake of 74.65 percent in the company followed by NIT and ICP holding 12.59 percent of SIEM’s shares. About 4.88 percent of the company’s shares are held by general public. Adamjee Insurance Company Limited accounts for 1.80 percent of SIEM’s shares while banking companies hold 1.53 percent shares. The remaining shares of SIEM are held by other categories of shareholders.

Historical Performance (2019-23)

SIEM’s topline and bottomline which had been on the skids in 2019 and 2020 boasted a turnaround in 2021 whereby the company recovered from the net loss posted in the previous year. In the subsequent years, the topline continued to expand, however, the bottomline slid in 2023. The margins which had been declining until 2020 also strengthened in 2021 to turn their highest ever levels in 2022 only to fall back in 2023. The detailed performance review of the period under consideration is given below.

In 2019, SIEM’s topline dropped by 14.59 percent year-on-year on the back of unfavorable macroeconomic conditions in Pakistan and also because some major projects in Afghanistan were completed in 2018. Cost of sales slid by 12.64 percent year-on-year in 2019, however, high per unit cost due to inflation and Pak Rupee depreciation and also because of high fixed overhead cost due to low capacity utilization, pushed down gross profit by 24.21 percent year-on-year in 2019. GP margin also slumped from 16.9 percent in 2018 to 15 percent in 2019. Distribution expense inched down by 2.17 percent year-on-year in 2019 mainly on account of higher commission income earned during the year and reversal of allowance on deposits and other receivables. Administrative expense grew by 20.20 percent year-on-year in 2019 on the back of higher payroll expense despite drop in the number of employees from 665 in 2018 to 602 in 2019. Other income nosedived by 80.76 percent year-on-year in 2019 because of lesser liabilities written back during the year and lesser insurance claims. Other expense also shrank by 46 percent year-on-year in 2019 which was the result of lower provisioning for WWF and WPPF. Despite a check on expenses, operating profit fell by 37.13 percent year-on-year in 2019 with OP margin sliding down to 8.6 percent from 11.7 percent in 2018. Net finance expense magnified by 444.26 percent year-on-year in 2019 due to higher discount rate. This culminated into 38.8 percent year-on-year decline in net profit which clocked in at Rs.709.47 million in 2019 with NP margin of 4.3 percent versus 5.9 percent in 2018. EPS also dwindled from Rs.140.56 in 2018 to Rs.86.03 in 2019.

2020 brought about further 23.20 percent decline in SIEM’s topline. This was on account of COVID-19 which halted economic activities for three months and slowed down the growth momentum for the rest of the year. Cost of sales shriveled by 15.92 percent year-on-year in 2020, yet couldn’t prevent the gross profit from slipping by 64.42 percent year-on-year in 2020. GP margin plunged to 6.95 percent in 2020 – the lowest among all the years under consideration. Distribution expense tapered off by 7 percent year-on-year in 2020 on account of reversal of loss allowance on trade receivables and also because of the discounting of long-term loans and trade receivables. Administrative expense didn’t give any respite in 2020 and grew by 7.23 percent year-on-year in 2020 due to higher payroll expense on account of inflation. This was despite the fact that the number of employees was further reduced to 539 in 2020. Other income didn’t offer any support either and trimmed down by 46.49 percent year-on-year in 2020 due to lower gain on sale of property, plant and equipment and also because of no insurance claims recorded during the year. SIEM didn’t incur any other expense during the year as the company didn’t book any provisioning for WWF and WPPF in 2020. The company incurred operating loss of Rs. 55.44 million in 2020. While the company availed SBP Refinance scheme for the payment of salaries and wages and also obtained lease liabilities which built up its long-term liabilities, short-term borrowings majorly reduced during 2020. This coupled with lower discount rate in the second half of 2020 (year ending September), resulted in 26.40 percent year-on-year decline in net finance expense. SIEM posted net loss of Rs.496.015 in 2020 with loss per share of Rs.60.14.

SIEM’s fate seems to have turned around in 2021 as its topline posted 12 percent year-on-year rise after two successive years of decline. The sales growth was mainly backed by energy transmission business which received new orders worth Rs.15 billion in 2021 versus Rs.5.6 billion in the previous year. Targeted measures of cost optimization resulted in 172.29 percent year-on-year rise in gross profit in 2021 with GP margin jumping up to 16.9 percent, the level last seen in 2018. Distribution expense grew by 20.83 percent year-on-year in 2021 as a result of low commission income as well as high payroll expense incurred during the year. Administrative expense also posted year-on-year rise of 9.6 percent in 2021. SIEM also booked allowance worth Rs.149.95 million for ECL in 2021 as against the reversal of Rs.13.99 million in the previous year. However, it was nullified by the gain of Rs. 247.85 million on disposal of leasehold land and building during the year. SIEM also made other income of Rs.65.08 million during the year which was 441.70 percent higher than that recorded in 2020. This mainly comprised of liabilities no longer payable written back during the year. Unlike last year when the company incurred losses and didn’t book any provisioning for WWF and WPPF, the company booked provisioning of Rs.85.3 million in 2021. SIEM recorded operating profit of Rs.1360.13 million in 2021 with OP margin of 9.48 percent. The lucky streak continued as the company earned net finance income of Rs.29.92 in 2021, as against the rest of the years under consideration where it incurred net finance expense. This was on account of a massive decline in borrowings coupled with low discount rate post COVID-19. SIEM posted net profit of Rs.850.01 million in 2021 with NP margin of 5.92 percent. EPS clocked in at Rs. 103.07 in 2021.

Despite geopolitical and macroeconomic impediments in 2022, SIEM’s topline posted a staggering 30.37 percent year-on-year improvement. The major wins of 2022 were energy transmission contract with K-Electric to build the KANUPP as well as gaining SAP license, implementation and maintenance contract for NTDC. SIEM also recorded gain of Rs.2000.72 million on derivatives due to sharp depreciation of Pak Rupee during the year. Cost of sales grew by 32.76 percent year-on-year mainly on account of Pak Rupee depreciation, fuel and power price hikes as well as inflationary pressure. However, robust revenue and gain on derivatives translated into 101.14 percent rise in gross profit with GP margin climbing up to 26 percent – the highest ever achieved by the company. A major hit to SIEM’s profitability in 2022 came from expected credit losses aggregating Rs.874.11 million recorded during the year due to geopolitical impediments in the energy transmission business which made SIEM’s credit recoveries questionable. Distribution expense escalated by 8.52 percent year-on-year in 2021 which was primarily on account of a spike in payroll expense, receivables written off during the year, advertising and promotion as well as travelling charges. Administrative expense also registered 8.48 percent hike in 2022 on the back of payroll expense as the number of employees grew from 536 in 2021 to 576 in 2022. Other income shrank by 50.46 percent in 2022 as lesser amount of liabilities was written back in 2022 when compared to the previous year. 125.49 percent higher other expense incurred in 2022 was due to higher provisioning for WWF and WPPF. Operating profit boasted 91.4 percent year-on-year growth with OP margin rising to 13.92 percent in 2022. SIEM incurred net finance expense of Rs.22.97 million in 2022 which was the result of higher discount rate. Bottomline grew by 103 percent year-on-year in 2022 to clock in at Rs.1725.98 million with NP margin of 9.23 percent and EPS of Rs.209.29.

In 2023, SIEM’s net sales grew by a splendid 56.9 percent year-on-year. This was mainly on account of energy transmission business. Contract with NTDC for the construction of grid station at Allama Iqbal Industrial city/ M-3 Faislabad was the major achievement for SIEM within the energy business. Gain on derivatives also improved by 54.63 percent in 2023. Cost of sales grew by 70.93 percent year-on-year in 2023 due to rising commodity prices, Pak Rupee depreciation and soaring inflation. Gross profit inched up by 10.44 percent in 2023, however, GP margin drastically fell to 18.35 percent. 23.45 percent escalation in distribution expense in 2023 was the result of higher payroll expense and a surge in IT, data communication and networking charges. Furthermore, the company made no scrap sales and a petite commission income during the year. Administrative expense escalated by 19.94 percent in 2023 due to higher payroll expense incurred during the year despite the fact that SIEM trimmed its workforce from 576 employees in 2022 to 498 employees in 2023. Allowance for ECL mounted by 47.57 percent in 2023. Other income also contracted by 56.42 percent in 2023 due to lesser liabilities written back during the year. Lesser profit related provisioning during the year translated into 80.59 percent lower other expense incurred during the year. All these factors translated into 1.87 percent lower operating profit in 2023 with OP margin sinking to 8.7 percent. SIEM’s net finance expense magnified by 1142.14 percent in 2023 as the company obtained short-term borrowings worth Rs.4048.937 million during the year. This greatly took its toll on the bottomline of the company which slid by 17.92 percent year-on-year to clock in at Rs.1416.676 million in 2023 with EPS of Rs.117.72 and NP margin of 4.83 percent.

Recent Performance (Six Months Ended March 31, 2024)

SIEM’s net sales grew by 96.69 percent year-on-year during the six month period under consideration. This was on account of robust order backlog, vigorous product portfolio and ease of import restrictions. However, this couldn’t cascade down the income statement as unrealized loss incurred on measurement of foreign currency derivatives and high cost of sales suppressed gross profit by 68.97 percent year-on-year during 1HFY24. GP margin drastically fell from 48.1 percent in 1HFY23 to 7.6 percent in 1HFY24. Distribution expense mounted by 37.69 percent in 1HFY24 supposedly due to higher payroll expense, IT & networking charges incurred during the year. The company had streamlined its workforce during the past year. Assuming the same continued during the ongoing year, 56.36 percent lower administrative expense incurred during 1HFY24 is quite justifiable. Allowance for ECL surged by 62.14 percent during 1HFY24, further suppressing the financial performance during the period. Other expense escalated by 70.8 percent during 1HFY24 supposedly on account of higher profit related provisioning. SIEM incurred operating loss of Rs.212.91 million in 1HFY24 versus operating profit of 3405.03 million during the same period last year. The execution of large-scale energy projects during the period required greater short-term borrowings, resulting in 386.83 percent higher finance cost incurred by SIEM during the period. As a consequence, the company incurred net loss of Rs.1567.63 million during 1HFY24 versus net profit of Rs.2534.91 million registered during the same period last year. Loss per share stood at Rs.190.08 during 1HFY24 versus EPS of Rs.307.37 during 1HFY23.

Future Outlook

Gloomy economic and political landscape warranties no significant progress in new orders for SIEM. Hence, the company plans to strengthen its clientele by meeting current and future needs of its existing customers. SIEM should also expedite recovery of its receivables to curtail allowance for ECL which is denting its financial performance. The company should also modify its financing mix to squeeze its finance cost which is another off-putting factor suppressing SIEM’s bottomline.