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 three 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 & Drives, Medical Transportation & Appliances and Finance and Business Administrations. Drive for continual improvement supported by focused management's 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. Another reason for operating UAE market was to lower the workload from Siemens Pakistan. 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.
Macroeconomic overview
This year, the national economy experienced further deterioration in comparison to the last year. The stress on macroeconomic stability mainly emanated from unsustainable balance of payment position and the falling value of rupee, escalating food and non-food inflation, and structural problems like power shortages resulting in perceptible slowdown in economic activity. The domestic and regional socio-political upheavals and rapidly changing global economic environment added to multifaceted problems. The wide spread devastation of flood would lead to missing this year's GDP target of 4.5% and the government's already depleted coffers may be further strained by the crisis. Initial estimates state that the fiscal deficit may rise to as much as 8% of the GDP. The floods have destroyed crops worth around $1 billion including much of the country's main exports like rice, cotton and sugarcane. Nature's fury may also add to Pakistan's inflationary woes. Consumer prices eased a bit in July, rising 12.34% year-on-year compared to 12.69% in June, but the worst may be yet to come. The government has cut down massively in development funds and capital expenditure and we expect that it would have impact on the company's business in the years to come.
Recent results (1Q11)
Siemens faced a 45% decline in its sales to Rs 4,388 million due to reduced orders from the Dubai market in wake of the financial crisis encompassing the world. Locally too, the situation is marred by uncertain political and economic variables. Accordingly the cost of goods sold declined by 48%. GP margin however improved from 12.2% to 16.8%. Administrative and selling expenses were maintained at decent levels, showing a slight increase, while the financial charges showed a decline of Rs 14 million. PAT is Rs 203 million as compared to Rs 368 million in the same period last year. EPS was Rs 24.66 in comparison to an EPS of Rs 44.74 in the same period last year.
Company performance
Being part of the local industry and like other companies, Siemens Pakistan was also hit hard by the international crisis, domestic economic crisis, political uncertainties, law and order situation etc. During the year, the company continued progress on a number of fronts, all designed with the goal of strengthening Siemens and building shareholder value. Despite all these odds and difficulties, the performance of the Company remained within the limits set for the year.
New orders of Rs 21 billion have been received during the year and in view of the circumstances mentioned earlier, this appears to be a significant achievement. The major contributor to this achievement comprises of order for New Benazir Bhutto International Airport Islamabad and various orders from public utility companies in the field of energy sector.
Industry performance
In the area of turnover and profitability, the energy segment outperformed all other segments, with turnover of Rs 19,227 million and before tax profit of Rs 1,381 million. This achievement is mainly attributable to high voltage substations business in Dubai, UAE and supply of power and distribution transformers to various public utility companies. In the area of order intake the segment received orders worth 13.896 billion.
The industry segment was able to secure new orders of Rs 6,836 million during the year. The segment also achieved a turnover of Rs 6,444 million. The segment profit increased by 11% and stood at Rs 372 million.
The Healthcare segment is small in size as compared to other segments. The segment was able to achieve a sales volume of Rs 577 million during the year.
Financial performance
The liquidity situation has improved over the last year. The current ratio increased to 1.21 from last year's 1.19. The increase was due to a YoY increase in current assets of 1.80% compared to a smaller increase of 0.3% YoY in current liabilities. The main factor for improvement in liquidity ratio was a 24% decrease in trade payables. Despite a 14.5% decrease in inventory, the increase in current assets was due to increase in trade receivables. Though the increase was lower (7.89% in FY 10) as compared to the previous years which resulted in a substantially lower increase in current assets.
Asset management ratios
Inventory 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. However it again increased to 51.22 days. The increase in turnover is due to a 14.5% decease in inventory and a 27.4% decrease in net sales. Thus it was difficult to convert inventory into sales as opposed to last year when the ratio was much lower than this year.
The day sales outstanding (DSO) spiked in FY08 touching 149.02 from 109.04 of FY07. In FY09 the DSO decreased closing at 135.27 days and this year (FY10) it reached 201.13 days. This worsening of ratio signifies that trade receivables have increased; however the increase in trade receivables is very low as compared to previous years. Having a closer look, this ratio has worsened because of a steady decrease in Net sales (27.39%).
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. Unfortunately this year again the ratio worsened (reaching 1.07) which is the lowest in proceeding five years. This is again due to reduction in net sales which has adversely affected all ratios involving sales and has ultimately affected the bottom line profitability of the company. Since there was a slight increase (1.17%) in assets but the increase is insignificant to affect the ratio.
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. Like all other sales related ratios, we observe a decrease in sales/equity ratio, which deceased to 3.66. This again reflects the jagged decrease in sales. However the ratio has not only worsened because of decrease in sales but a rise in equity is a major contributor. Total equity increased by 3.72% on a YoY basis contributing to a decrease of 1.67* in the ratio.
Debt management ratio
The debt to assets 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. This year the ratio remained more or less stable (0.71). This is because the assets and debt increased by approximately same proportion resulting in a stable debt to assets ratio.
The debt to equity ratio shows the amount of debt for each rupee of investment in the company. The ratio stood at 3.42 in FY06, 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 ratio decreased slightly this year reaching 2.42.
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. This year the increase in liabilities was almost negligible whereas equity showed a substantial increase of 3.72% which is largely attributed to a 3.77% increase in reserves of the company. The ratio could have been better provided the sales were up to expectation, which would have resulted in a better profitability of the company.
The long term debt to equity ratio has more or less followed a pattern similar to that of the debt to equity ratio. In FY06, the ratio was 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. This year however, the ratio improved reaching 2.39. 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). This improvement can be attributed to a decrease in retention money payables (17%) and a decrease of 13.23% in non-current liabilities, which reflects some positive signals for the investors. This also shows that in the long run, company's debt-equity position is likely to improve.
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). This year, TIE decreased substantially reaching 9.16 times. This is largely due to a 5% decrease in operating profit at the same time, financial charges of the company rose by 28%. This is due to a drastic increase in borrowing for short term running finance. An increase of 156.6% was observed on a YoY basis as opposed to 84.5% last year. Also the increase in interest rates by the Government of Pakistan contributed to this increase in financial charges.
Profitability ratios
The 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 margin increased to 15% this year. A 30% decrease in cost of sales contributed to the growth of this ratio, which was more than the decrease in net sales.
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%. This year the margin remained 3.81%, which is approximately the same as last year. 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. In line with the reduction in sales volume, the profit before tax also recorded a decline in absolute terms and stood at Rs 1.578 billion, showing a decline of 26% as compared to the corresponding period of previous year. Simultaneously, the profit after tax also recorded a decrease of 27%. In addition to the reduction in sales volume, the main contributor of erosion of profitability is the unfavorable exchange rate movement and provision made against doubtful debts.
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. This year ROA further decreased to 4.63% which is though not the lowest in five years but a very disappointing ratio. The assets base of the company increased by 1.17% whereas the net profit experienced a 27% decrease ultimately contributing to the worsening of this ratio.
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 (FY10) figure of 13.94% which is the lowest in the last five years. This further decrease was due to a continuous increase in equity (9.91% YoY) amid a decreasing net profit (-21.38% YoY).
Market value
The 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). This year the decreasing trend continued and EPS after taxation was Rs 121.19 (2009: Rs 165.53). As there is no movement in the number of shares, the only contributor to this decline in EPS is the low profitability.
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 market value of the shares as of September 30, 2010 was Rs 1160 whereas the average price remained around Rs 1050. The company has observed a substantial decrease in its price on a YoY basis.
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. Despite declining profitability, the company managed to pay dividends to its equity holders. In addition to the interim dividend of Rs 30 per equity share the company also paid a final dividend of Rs 60 making total dividend for the year ended September 30, 2010 of Rs 90 per equity share (2009: Rs 90 per share ie 900%).
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. The P/E multiple increased this year and was reported to 10.21 which is a reflection of a decreasing EPS and share price.
Future outlook
The future business outlook for the company is very much dependent on the positive development in the economic and political situation of the country. Energy scarcity and increasing cost of doing business are also the major concerns. A substantial decline of local and foreign direct investment mainly due to the deteriorating law and order situation and shortage of electricity and higher inflation have raised cost of doing business significantly. These are the main impediments for growth of industrial infrastructure and not much improvement in this situation is foreseen in the near future for the Industry Sector. Potential also exists and investment from both private and public sector is expected, particularly after the floods, in the healthcare sector.
The company is committed to a strong financial profile, which gives us the financial flexibility to achieve growth and portfolio optimization goals. The strong cash flow from existing portfolio along with low levels of financial gearing enabled the company to continue with stated strategy of investing in our business throughout the cycle.
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.
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FINANCIAL RATIOS
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FY'05 FY '06 FY'07 FY'08 FY'09 FY'10
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PROFITABILITY RATIOS
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Profit Margin 5.93% 3.71% 1123% 6.25% 3.78% 3.81%
Gross profit margin 13.44% 12.09% 14.27% 14.93% 11.02% 14.76%
Return on Assets 9.87% 6.10% 14.11% 6.78% 5.63% 4.07%
Return on Equity 31.65% 26.94% 46.37% 26.70% 19.75% 13 94%
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LIQUIDITY RATIOS
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Quick Ratio 0.97 0.81 0.93 0.90 0.93 0.99
Current Ratio 1.25 1.06 1.20 1.15 1.19 1.21
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ASSET MANAGEMENT RATIOS
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Inventory Turnover (Days) 41.11 41.54 52.05 61.45 43.49 51.22
Day Sales Outstanding (Days) 71.21 92.67 109.04 149.02 135.27 201.13
Operating cycle (Days) 112.32 134.20 161.10 210.48 178.77 252.35
Total Asset Turnover 1.66 1.64 1.25 1.08 1.49 1.07
Sales/Equity 5.34 7.25 4.09 4.27 5.23 3.66
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.69 0.77 0.70 0.75 0.72 0.71
Debt to Equity Ratio 2.21 3.42 2.29 2.94 2.51 2.42
Long Term Debt to Equity (%) 1.85 2.83 2.12 1.69 2.86 2.39
Times Interest Earned 14.10 7.03 6.38 10.60 12.39 9.16
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MARKET RATIOS
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Earning per share 100.24 94.65 300.87 203.60 165.54 121.19
Price/Earnings Ratio 6.69 10.35 5.61 5.94 6.34 10.21
Dividend per share 54.00 66.00 90.00 90.00 90 90
Book value per share 316.75 351.39 648.89 762.49 838.03 869.22
No of Shares issued (in thousands) 7,770 7,770 8,247 8,247 8,247 8,247
Market Value per share (average year) 671 980 1,689 1,210 1,050 1,237
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