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, 2024, SIEM has a total of 8.247 million shares outstanding which are held by 1602 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 6.30 percent of the company’s shares are held by the general public. Adamjee Insurance Company Limited accounts for 1.80 percent of SIEM’s shares while Modarabas & Mutual Funds hold 1.32 percent shares. The remaining shares of SIEM are held by other categories of shareholders.

Historical Performance (2019-24)

SIEM’s topline and bottomline which had been on the skids in 2019 and 2020 boasted a turnaround in 2021 whereby the company not only posted topline growth but also recovered from the net loss posted in the previous year. In the subsequent years, the topline continued to expand. Despite strengthening net sales, the bottom line slid in 2023 and ended up in the negative zone in 2024. The margins which had been declining until 2020 picked up in 2021 and 2022 only to fall back in 2023 and 2024. SIEM’s margins posted their optimum level in 2022 and their weakest level in 2024 (see the graph of profitability ratios). 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 to clock in at Rs.16,672.92 million. This came 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 also because of the reversal of allowance on deposits and other receivables. Administrative expenses grew by 20.20 percent year-on-year in 2019 on the back of higher payroll expenses despite the 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 fewer liabilities written back during the year and fewer insurance claims. Other expenses also shrank by 46.22 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 the OP margin of 11.7 percent recorded in 2018. Net finance expense magnified by 444.26 percent year-on-year in 2019 due to a higher discount rate. This culminated in a 38.8 percent year-on-year decline in net profit which clocked in at Rs.709.47 million in 2019 with an NP margin of 4.26 percent versus an NP margin of 5.94 percent recorded in 2018. EPS also dwindled from Rs.140.56 in 2018 to Rs.86.03 in 2019.

2020 brought about a further 23.20 percent decline in SIEM’s topline which was recorded at Rs.12,805.38 million. This was on account of COVID-19 which completely 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. Distribution expense tapered off by 7 percent year-on-year in 2020 on account of the reversal of loss allowance on trade receivables and also because of the discounting of long-term loans and trade receivables. Administrative expenses grew by 7.23 percent year-on-year in 2020 due to higher payroll expenses on account of inflation. This was despite the fact that the number of employees was reduced to 539 in 2020. Other income didn’t offer any support either and went down by 46.49 percent year-on-year in 2020 due to lower gains on the sale of property, plant, and equipment and also because of no insurance claims recorded during the year. SIEM didn’t incur any other expenses during the year as the company didn’t book any provisioning for WWF and WPPF in 2020. The company incurred an 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 the lower discount rate in the second half of 2020 (year ending September), resulted in a 26.40 percent year-on-year decline in net finance expense. SIEM posted a net loss of Rs.496.015 in 2020 with a loss per share of Rs.60.14.

SIEM’s fate turned around in 2021 as its topline posted a 12 percent year-on-year rise to clock in at Rs.14,348.95 million. In 2021, topline growth came after two successive years of decline. The sales growth was mainly backed by the energy transmission business which received new orders worth Rs.15 billion in 2021 versus new orders of Rs.5.6 billion in the previous year. Targeted measures of cost optimization resulted in a 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 expenses grew by 20.83 percent year-on-year in 2021 as a result of low commission income as well as high payroll expenses incurred during the year. Administrative expenses also posted a year-on-year rise of 9.6 percent in 2021. SIEM also booked an allowance worth Rs.149.95 million for ECL in 2021 as against a reversal of Rs.13.99 million recorded in the previous year. However, it was nullified by the gain of Rs. 247.85 million on the disposal of leasehold land and buildings 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 an operating profit of Rs.1360.13 million in 2021 with an OP margin of 9.48 percent. The lucky streak continued as the company recognized a 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 a low discount rate post-COVID-19. SIEM posted a net profit of Rs.850.01 million in 2021 with an 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 to clock in at Rs.18,707.06 million. The major wins of 2022 were the energy transmission contract with K-Electric to build the KANUPP as well as gaining the SAP license, implementation, and maintenance contract for NTDC. SIEM also recorded a gain of Rs.2000.72 million on derivatives due to the sharp depreciation of the 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 a 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 traveling charges. The administrative expense also registered an 8.48 percent hike in 2022 on the back of payroll expenses as the number of employees grew from 536 in 2021 to 576 in 2022. Other income shrank by 50.46 percent in 2022 as a lesser amount of liabilities was written back in 2022 when compared to the previous year. 125.49 percent higher other expenses incurred in 2022 was due to higher provisioning done 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 a net finance expense of Rs.22.97 million in 2022 which was the result of the higher discount rate. The bottom line grew by 103 percent year-on-year in 2022 to clock in at Rs.1725.98 million with an NP margin of 9.23 percent and EPS of Rs.209.28.

In 2023, SIEM’s net sales grew by a splendid 56.9 percent year-on-year to clock in at Rs.29,351.73 million. This was mainly on account of the energy transmission business. Contract with NTDC for the construction of a grid station at Allama Iqbal Industrial City/ M-3 Faisalabad 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 expenses and a surge in IT, data communication,n and networking charges. Furthermore, the company made no scrap sales and a petite commission income during the year. Administrative expenses escalated by 19.94 percent in 2023 due to higher payroll expenses 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 fewer liabilities written back during the year. Lesser profit-related provisioning during the year translated into 80.59 percent lower other expenses 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. Increased borrowings coupled with a higher discount rate greatly took its toll on the bottom line 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.

In 2024, SIEM’s net sales grew by 19.81 percent to clock in at Rs.35,166.30 million. This was mainly on account of demand from the industrial business segments i.e. smart infrastructure and digital industries. New orders of Rs. 26,079 million were recorded in 2024. However, this couldn’t cascade down as unrealized loss incurred on measurement of foreign currency derivatives (due to appreciation of Pak Rupee against foreign currencies) and high cost of sales suppressed gross profit by 58.76 percent year-on-year in 2024. GP margin drastically fell to its lowest level of 6.32 percent in 2024. Distribution expenses mounted by 35.48 percent in 2024 due to higher payroll expenses, business support service charges as well as IT, communication, and networking charges incurred during the year. The company streamlined its workforce to 487 employees in 2024 from 498 employees in 2023, resulting in a 33 percent diminution in administrative expenses in 2024. Allowance for ECL contracted by 75.50 percent in 2024. Other expenses dropped by 93.34 percent in 2024 as the company reversed the provision booked for WWF. Other income improved by 116.36 percent in 2024. Operating profit tapered off by 93.88 percent in 2024 with OP margin thinning down to 0.44 percent. The execution of large-scale energy projects during the year required greater borrowings which coupled with an elevated discount rate resulted in a 590.59 percent higher net finance cost incurred by SIEM in 2024. As a consequence, the company incurred a net loss of Rs.2048.087 million in 2024. This translated into a loss per share of Rs.248.34 in 2024.

Recent Performance (Three months ended December 31, 2024)

During the first three months of the new fiscal year (ending September 2025), SIEM recorded a 39.76 percent erosion in its net sales which clocked in at Rs.1593.18 million. This was due to the high-base effect as the company had a higher accumulated order backlog during the same period last year due to import restrictions. Cost of sales plunged by 57.29 percent in 1QFY25, resulting in a 69.35 percent improvement in gross profit. GP margin clocked in at a tremendous 38.92 percent in 1QFY25 versus GP margin of 13.85 percent recorded during the same period last year. This was due to a better sales mix. Distribution expense grew by 25.28 percent in 1QFY25 due to higher salaries of the sales force. Administrative expenses mounted by 130.99 percent in 1QFY25 apparently due to higher payroll expense. During the period under consideration, SIEM booked a reversal of Rs.31.42 million on ECL versus a provision of Rs.19.58 million booked in 1QFY24. Other income dipped by 97.72 percent in 1QFY25 probably due to lower income from financial assets on account of monetary easing. Other expenses plummeted by 16 percent in 1QFY25 due to lower provisioning done for WWF and WPPF. SIEM recorded a 173 percent improvement in its operating profit in 1QFY25 with OP margin clocking in at 24.81 percent versus OP margin of 5.48 percent recorded in 1QFY24. The company recorded a finance income of Rs.11.06 million in 1QFY25, up 281.61 percent year-on-year. This was due to a considerable decline in external borrowings during the period. Net profit dipped by 3.86 percent to clock in at Rs.318.30 million in 1QFY25. This translated into EPS of Rs.38.6 in 1QFY25 versus EPS of Rs.40.14 recorded in 1QFY24. NP margin picked up from 12.52 percent in 1QFY24 to 19.98 percent in 1QFY25.

Future Outlook

The company has recently announced the sale and transfer of its energy business to a separate non-affiliated entity of Siemens Energy Group. After this transaction, SIEM’s business portfolio comprised of Smart Infrastructure and Digital Industries. Hence, the company will put diligent efforts to grab more orders from these segments. Improvement in macroeconomic indicators provides the impetus for a better business environment and demand recovery for SIEM.