Siemens (Pakistan) Engineering Company Limited is a subsidiary of Siemens Aktiengesellschaft (SAG), which is incorporated in Germany. It is incorporated in Pakistan as a public limited company and its shares are quoted on all the stock exchanges of Pakistan.
The company is principally engaged in the manufacture, installation and sale of electronic and electrical capital goods and also executes projects under contracts. The company holds majority shareholding in Carrier Telephone Industries (Private) Limited.
Its major business divisions involve communications, power transmission and distribution, industrial solutions and power generation, automation and drives, medical transportation and appliances and finance and business administrations. Drive for continual improvement supported by focused managements' commitment has ensured that Siemens remains the market leader in nearly all of its business divisions.
Siemens has penetrated well in the UAE market of transmission and distribution, despite intense competition. Its major orders include high voltage grid stations to be constructed in Dubai, orders for transformers and switchboards, SAP software implementation for Pakistan Telecommunication Company Limited, some major orders from mobile operators, New Murree Bulk Water Supply Project and KESC operation and management contract etc.
Siemens business processes improvement activities are constantly undertaken by its top program. This is in addition to its continual activities for improvement and redefinition of all its processes through the Quality Management System and Siemens specific quality initiatives.
RECENT RESULTS
During the six-month period, that ended on March 31, 2010 the profits before tax of the company increased significantly to Rs 821 million as compared to profit of Rs 534 million in the corresponding period of the last year. The reason behind this increase in profit was the higher margins mainly in the UAE operations of the company and the reduction in the exchange loss as compared to the same period last year. Profits after tax also increased by 42% as compared to the corresponding period last year to reach levels of Rs 526 million.
The net sales and services of the company have declined to Rs 14,276 million during the period ended March 31, 2010 as compared to Rs 19,028 million during the same period last year. The decline in sales was due to less order taking during the year ended September 30, 2009. Major contributions to sales includes project for 132/11 KV Substation of a customer in UAE which was received in the first quarter, turnkey services for the engineering, procurement and construction of modification to substations in Afghanistan, supply of reverse osmosis plants for a customer in Pakistan and supply of power and distribution transformers to power distribution companies in Pakistan.
On the balance sheet side, the balance sheet size of the company has increased slightly. The total assets of the company have increased to Rs 25,316 million in 2Q10 as compared to the levels of Rs 24,258 million during the FY09. The inventories of the company have decreased to Rs 3,892 million during the 6 month period ended March 31, 2010 as compared to the levels of Rs 4,367 million of FY09. Decline has been seen in goods in transit which have declined from Rs 892 million during FY09 to Rs 607 million during the quarter 2Q10. Also, the finished goods have declined to Rs 1,042 million in 2Q10, as compared to Rs 1,198 million in FY09. The trade receivables of the company have increased during the period ended 2Q10 to Rs 15,608 million as compared to Rs 13,538 million in FY09. On the liabilities side the current liabilities of the company have increased to levels of Rs 18,373 million in 2Q10 from Rs 17,347 million in FY09. The increase has been seen in short term running finances. They have increased from levels of Rs 1,675 million in FY 09 to levels of Rs 3,147 million in 2Q10.
THE MARKET
The year 2009 proved very challenging for the Company due to the global financial crisis particularly in the United Arab Emirates (UAE) and the prevailing weak economic situation in the country. These factors contributed to decreased order intake and profitability for the company. Moreover, the cautious tendency of investors and reduced government spending also had an impact on the business operations.
The business environment is influenced by conditions in the domestic, UAE and global economies, political uncertainties, law and order situations. FY09 was the worst year in recent history on the national front with unprecedented high inflation and massive depreciation of local currency coupled with fast depleting foreign exchange reserves, political instability and worsening security situation. The overall situation has started stabilizing in the country very late during the current fiscal year. The economic indicators together with the reform programme under supervision of IMF, promises better business opportunities in the years to come.
COMPANY PERFORMANCE
The total turnover includes business of Rs 21.5 billion (2008: Rs 12.4 billion) conducted in Dubai, UAE and in Afghanistan in the area of construction of high voltage substations, registering growth of 74% over last year. This increase was attributable to execution of orders received in the previous year.
The energy sector outperformed all others in the area of turnover and profitability. The sector showed turnover of Rs 28,306 million and earnings before tax of Rs 1,906 million. With the overall gap between the demand and supply situation of energy in Pakistan and the Government's commitment to overcome the shortage in the near future, the Energy Sector offers remarkable opportunities which never existed before.
The healthcare segment was able to achieve a significant growth in order intake and turnover with volume of Rs 1,017 million and Rs 984 million, respectively. However, the segment could not achieve the targets set for profitability. The industry segment was able to secure new orders of Rs 6,755 million during the year. The segment achieved a turnover during the year of Rs 6,860 million up by 24% as compared to the previous year.
The major turnover is coming from underground electrification of Defense Housing Authority, mechanical, electrical and instrumentation services for ABB SPA, supply of MV/LV switchgears, transformers and SCADA system for Atlas Power plant and supply of diesel generating sets to Water and Sanitation Agency. The segment profit declined by 35% and stood at Rs 335.580 million. The profitability of the segment was affected mainly due to default in payment by some customers.
FINANCIAL PERFORMANCE
LIQUIDITY RATIOSThe liquidity situation has improved over the last year. The current ratio increased to 1.19 from last year's 1.15. The increase was due to a YoY decrease in current assets of 3.63% compared to a larger decrease of 6.70% YoY in current liabilities. The main factor of the fall in current liabilities was the 17.75% YoY decrease in trade and other payables. The decrease in current assets was due to an almost halving of the cash and bank balances (-58.82% YoY) coupled with a 49.32% YoY decrease in the other receivables. The quick ratio also reflected these changes with an increase from 0.90 (FY08) to 0.93 (FY09).
ASSET MANAGEMENT RATIOSInventory turnover has regained normalcy after two tumultuous years. The ratio was maintained around 41 in FY05 and 06. It spiked to 52.05 (FY07) before reaching a high of 61.45 in FY08. The ratio returned to 43.49 for FY09. The decrease in the turnover was due to 4.82% YoY decrease in inventories and a 34.48% YoY increase in net sales.
The day sales outstanding (DSO) spiked in FY08 touching 149.02 from 109.04 of FY07. In this year (FY09) the DSO decreased closing at 135.27 days. This shows that recovery of trade debts has improved for the company. The spike of FY08 was caused by a sharper increase in trade receivables (67.73% YoY) compared to the increase in net sales of 22.73% YoY. The DSO fell this year due to greater growth in net sales (of 34.48% YoY) compared to that of trade receivables (22.07% YoY).
The total assets turnover shows the revenue generated by each rupee of assets. The ratio stood around 1.65 during FY05 and FY06. It had since fallen, touching 1.25 in FY07, ending at 1.08 for FY08. The ratio has currently (FY09) increased to 1.49, which is a sign of better performance. The decrease in the ratio in FY08 was due to a higher growth rate of assets as compared to that of sales (22.73% YoY). The increase in assets was due to a 46.01% YoY increase in current assets. The subsequent fall in the ratio occurred amid an increase in net sales (34.48% YoY) due to a decrease in the amount of assets (-2.09% YoY). The main factors behind the fall in assets was the huge declines in the cash and bank balances (-58.82% YoY) and other receivables (-49.32% YoY). Thus the total assets turnover has increased in FY09 and ended at 1.49.
The sales-to-equity ratio shows the amount of revenue generated for each rupee of investment in the company. The ratio was 5.34 for FY05. It spiked in FY06 to 7.25 and then fell to 4.09 in FY07. The ratio picked up in FY08 to 4.27 and was 5.23 to FY09. Since FY07, total equity and net sales have increased continuously. In FY08, the total equity increased by 17.51% YoY while net sales increased by 22.73% YoY. In FY09, net sales again outpaced total equity. Net sales grew by 34.48% YoY, while equity increased by around 9.91% YoY.
DEBT MANAGEMENT RATIOThe debt to assets ratio was 0.69 in FY05. The ratio increased to 0.77 in FY06, and then fell to 0.70 in FY07. The ratio for FY08 was 0.75 which fell to 0.72 for FY09. The increase in FY08 was due to a larger increase in debt (51.17% YoY) compared to the increase in assets of 40.92% YoY. The subsequent fall in the ratio of FY09 was due to larger contraction in total liabilities (-6.17% YoY) as compared to the decrease in assets (-2.09%).
The debt to equity ratio shows the amount of debt for each rupee of investment in the company. The ratio stood at 2.21 in FY05, which spiked in FY06 touching 3.42 and then returning to 2.29 for FY07. FY08 saw the ratio increase to 2.94, after which it fell again ending FY09 at 2.51. The increase of FY08 was because of a larger increase in liabilities (51.71% YoY) as compared to the increase in equity (of 17.51% YoY).
The increase in debt was due to huge increases in trade and other payables (97.98% YoY) and provisions (78.31% YoY) while the increase in equity was led by a 37.78% YoY increase in reserves. In FY09, the ratio decreased due to a fall in liabilities (-6.17% YoY) amid a 9.91% YoY increase in equity. The increase in equity was again led by an almost doubling of the reserves (87.23% YoY increase) while the fall in debt was due to a 17.75% YoY decrease in trade and other receivables. Thus currently, for every rupee of investment 2.51 rupees has been borrowed.
The long term debt to equity ratio has more or less followed a pattern similar to that of the debt to equity ratio. In FY05 the ratio was 1.85, which by FY06 increased to 2.83. The ratio then decreased, touching 2.12 in FY07 and 1.69 in FY08. It spiked in FY09, reaching a five year high at 2.86. The low ratio for FY08 was due to a decreasing long term debt (-6.68% YoY) amid an increasing equity (17.51% YoY). The sudden spike of FY09 was due to a huge increase in non-current liabilities (86.50% YoY). This increase has been an effect of a more than doubling of retention money payables (a 101.95% YoY increase).
The times interest earned (TIE) ratio had decreased from FY05 to FY07, from 14.10 to 6.38 respectively. It increased to 10.60 in FY08, and then to 11.74 for FY09. The increase in FY08 was due to an increase of 33.05% YoY in the earnings before interest and tax (EBIT) coupled with a decrease of 19.92% YoY in financial expenses. The following increase in TIE for FY09 was also due to the same reason. The decrease in EBIT (-20.32% YoY) was lower than the decrease in financial expenses (of 28.01% YoY).
PROFITABILITY RATIOSThe gross profit margin for the company has remained in the 11% to 15% range. For FY07 the gross margin stood at 14.27%, which increased to 14.93% for FY08. The margin decreased to 11.02 (five-year low) in FY09. The increase of FY08 was due to a larger increase in gross profit (28.44% YoY) as compared to the increase in net sales (22.73% YoY), which was a consequence of a 21.78% YoY increase in the cost of sales. The fall in the margin for the subsequent year was due to the large increase in the cost of sales (40.66% YoY) with moderate growth in the net sales (34.48%).
The net profit margin for the company has remained within the 2.5% to 6.5% range. The margin was 2.88% in FY07 which increased to 6.46% in FY08. In FY09 the margin decreased to 3.78%. The spike of FY08 was due to a huge increase in net profit (175.01% YoY) amid a moderate (22.73% YoY) increase in net sales. In FY09, the margin decreased to 3.78% due to fall in net profit (-21.38% YoY) coupled with an increase of 34.48% increase in net sales. The decrease in the net margin suggests an increasing ratio of expenses against revenues.
The return on assets (ROA) ratio gives the amount of return each rupee of assets has generated in the company. The ROA was 9.87% in FY05, which decreased to 6.10% in FY06. It further decreased to 3.59% in FY07 touching 3.59%. The ROA increased in FY08 to 7.01% and then decreased to 5.63% in FY09. The upward movement for FY08 was due to the abnormal growth in net profit (175.01% YoY) as compared to the increase in total assets (40.92% YoY). FY09 witnessed the ROA fall to 5.63% due to a larger decrease in the net profit (-21.38% YoY) opposed to a 2.09% YoY decrease in assets.
The return on equity (ROE) ratio gives the return or profit generated by each rupee of investment. The ROE has decreased substantially from the FY05 figure of 31.65% to the current (FY09) figure of 11.02%. In FY08 the ROE increased from 3.59% (FY07) to 7.01%. This increase was again due to abnormal growth in net profit (175.01% YoY) as opposed to the growth in equity (17.51% YoY). For the FY09, the ROE was computed at 11.02%. This further increase was due to a continuous increase in equity (9.91% YoY) amid a decreasing net profit (-21.38% YoY).
MARKET VALUEThe earnings per share (EPS) ratio give the amount of profit for each share. The EPS stood at 100.24 in FY05. It decreased to 94.65 in FY06, and then spiked to 300.87 in FY07 (a seven year high). In FY08, the EPS reduced to 203.60 and in FY09, it further decreased to 165.53. The spike of FY07 was due to the addition of the proceeds from the sale of discontinued operations being added to the net profit. The EPS for FY08 was 203.60. In FY09, the EPS fell to 165.53 due to a decrease in the net profit (-21.38% YoY). Therefore, in simple terms, the company earned 165.53 rupees for each share outstanding.
The market value of the company had continued on an upward trend till FY07, from whence the markets collapsed. Siemens still outperformed other companies and therefore its share price remained high. The company closed the FY09 at a share price of 1414.05 rupees per share.
The dividend per share or the dividend payout has been consistent. The company had increased its payout till FY06. From FY07, the company has paid a dividend of 90 rupees per ordinary share of par value 10 rupees. The dividend has been broken in two parts - an interim dividend of 30 rupees and an annual dividend of 60 rupees.
The price to earnings ratio (P/E ratio) has shown quite a variance. The ratio was 6.69 in FY05, which spiked to 10.35 in FY06. The ratio then fell to 5.61 (FY07) and has since been on the rise, touching 5.94 in FY08 and 8.55 in FY09. The sudden decrease of FY07 is due to the very high EPS for that year. The abnormally high EPS is explained by the fact that proceeds from the sale of discontinued operations had been added to the profits. Therefore as the EPS rose, the market value spiked. In FY08, the company's shares did not lose as much value as the decrease in EPS, and therefore the P/E ratio increased slightly. This year (FY09) the share price increased with a fall in the EPS, and this led to an increase in the P/E ratio. The high price is a testimony to the confidence that the market has on the company.
FUTURE ANALYSISThe coming year may not be as good for the company due to its inability to secure new orders in Dubai. The recent credit crunch has affected Dubai, leading to a collapse of the real estate sector, which in turn has affected infrastructure development activities in the Emirate. Thus, even though the company has a cost advantage, it was unable to secure new orders. This development may have an adverse affect on the company as its Dubai operations are an imperative part of its recent success.
Also affecting the company are the ground realities in Pakistan. The worsening law and order situation and a collapsing economy are only two of the problems. If the economy continues to suffer along with the worsening law and order situation and if disruptions continue or worsen, the company may experience an adverse effect that may affect revenues, results of operations, financial condition and ability to access capital.
Looking on the brighter side the economy is showing the signs of betterment, as the country follows the IMF programme. Political stability seems to be returning to the country, which is seen as a fore bearer to development. The company may witness an expansion in its energy sector as the country grapples with the electricity and gas shortages.
CONCLUSIONThese challenges would require serious efforts, political will by the government and private sector. The economic reforms portrayed by the government needs to be consistently followed and on the other hand the private sector needs to strengthen the government by investing in the country to generate business and employment opportunities. A cohesive approach between the government and the private sector would ultimately put the country back on the track of growth and prosperity, which would augment well for all concerned parties (the government, the private sector, and the people).
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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