The Hindu Business Line : Siemens: Buy

INVESTORS with a medium-to-long-term horizon can consider exposure to the Siemens India stock on price declines. Shareholders can continue to retain their holdings. Business Line had given a buy recommendation at Rs 1,085; the stock has more than doubled since.

At the current price, the share trades at 35 times its expected FY-05 earnings. Strong order-book, synergy in operations after consolidation of its businesses in India, and reforms in the power sector are expected to add impetus to the company's growth trajectory.

A provider of industry and infrastructure solutions, Siemens India generates revenues from diverse industries such as power, communications, healthcare, transportation and information technology.

Financial performance

Siemens recorded a 34 per cent rise in topline and 11 per cent increase in bottomline for the third quarter-ended June 2005, lower when compared to the previous two quarters.

The operating margin (OPM) also fell by 200 basis points from that of the first six months ended March 2005. This can be attributed to increase in `other' costs.

The positive factor is that Siemens has been able to contain its raw material costs at a time when other players such as BHEL have been concerned about steel and allied inputs causing a dent in the margins.

The decline in margins for the June quarter is not a looming threat.

Order pile-up

Siemens' robust order-book this year can be expected to bolster its margins by the end of the fiscal.

The order-book position, as of June 2005, stood at Rs 3,446.3 crore, about twice its FY-04 sales. Its recent bagging of the Rs 175-crore Bangalore International Airport order indicates that the company has been able to successfully position itself as an EPC (Engineering, Procurement and Construction) contractor.

Such contracts would enable the company project itself as a complete solutions provider and also give it attractive returns.

Power play

Siemens has benefited from the upsurge in the power equipment business thanks to the Government's vision of "Power for All by 2012" and also general rise in demand for power from the industrial sector. Revenues from the power sector rose 103 per cent for the quarter-ended June 2005 and constituted 34 per cent of the total sales for that period.

The Government's "Power for All" mission requires raising the country's power generating capacity from the current 1,14,000 MW to at least 2,00,000 MW by 2012.

The Planning Commission has estimated the investment opportunity in the power sector at Rs 8,90,000 crore over the period 2002-2012. The unsustainable loses of the State electricity boards has compelled the government to look for private players with capability to develop large capacities. The Electricity Act, 2003 and the Accelerated Power Development Reforms Programme (APDRP) are likely to bring about commercial viability in the power sector. With the private sector allowed into the transmission segment, huge opportunities will open for large private players in the field.

With its vast experience in the power sector, Siemens is well-placed to take advantage of this positive environment. The following indicates that it has already made a move towards the same:

The power transmission and distribution division of Siemens will provide India's first 765kV sub-station as part of a Rs 148-crore order bagged from PowerGrid Corporation, the central transmission utility;

Siemens is setting up a new transformer factory near Mumbai with an investment of Rs 150 crore. With this facility that will go onstream by end-2006, the company will offer complete energy solutions spanning power generation, transmission and distribution.

Imminent gains from business consolidation

Siemens has been capitalising on its cash-rich position to bring profitable group businesses under its banner too. Siemens Information Systems that became a 100 percent subsidiary of Siemens in 2003 saw a 59 per cent growth in its revenue during the fiscal year ended 2004.

With the acquisition of Demag Dellaval Industrial Turbomachinery, Netherlands, the company hopes to strengthen its industrial power business.

The company has also approved the merger of Siemens VDO Automotive with itself. Siemens VDO manufactures automotive accessories and spare parts and is a original equipment supplier for leading automobile companies in the country. The merger will provide traction to Siemens in the fast-growing automotive segment. The consolidations once in place may usher in synergies and add momentum to the company's earnings growth.

Backed by other segments

Another factor in Siemens' favour is the diversified revenue stream. Even while power has emerged as the major contributor to revenue and earnings, it has been strongly backed by other segments. Through the breakthrough achieved in traction systems, the company's transportation segment caters to railway infrastructure projects.

Increased service network of the segment can be expected to provide competitive advantage to the company although margins are likely to be under pressure. The company's industrial solutions division, which contributes only 8 per cent of the revenues, saw a 103 per cent increase in profits before interest and taxes.

With several industries in the country on expansion mode, this division too has the potential to add to Siemens' profit growth. The backing of other segments and the merger of group businesses offer scope for less volatile earnings growth over a longer period.

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