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Siemens Ltd - Is growth coming back?

Siemens Ltd is an MNC Capital Goods company operating in India since 20th century. Its Promoters are Siemens AG based out of Germany and it has 75% holding in the company. It operates businesses in the following lines.

Digital Factory Division:

This division offers software products and automation technologies for industrial applications covering the entire life cycle, from product design and production to after-sales service for discrete manufacturing industries such as automotive, F&B. The Division’s “Digital Enterprise Suite” offers flexibility and efficiency to various discrete industries, general engineering segments and OEMs engaged in machine tools, printing, packaging and electrical panel manufacturing.

The company has launched “Mindsphere” open IoT cloud platform using which various machines / tools in the factory can be connected to the cloud and be operated from there. To understand this further, you can watch below videos:


The company also launched the ‘Ingenuity Tour’, a multi-city tour across India covering 120 cities over a period of two years. The Tour demonstrates the Division’s offerings for the manufacturing industry. On display are products, solutions and digitally-enabled services covering electrification, automation and digitalization.

Sales and Profits from Operations of this division are at 2265 crores and 196 crores respectively in FY18.

Process Industries and Drives:

This division offers a comprehensive portfolio for industrial application and solutions in the field of automation and drives for process industries such as cement and steel. This business is primarily driven by core sector industries.

Sales and Profits from operations of this division are at 1919 crores and 77 crores respectively in FY18.

Building Technologies:

This division provides solutions for safe, secure and energy-efficient infrastructure and buildings. It has solutions for applications such as fire safety, security, building automation, heating, ventilation, air conditioning and energy management. Major contributors to new orders continued to be commercial spaces, life sciences, data centers, IT / ITES and hospitality sectors.

Sales and Profits from operations of this division are at 490 crores and 44 crores respectively in FY18.

Power and Gas:

This division offers products and solutions for reliable, efficient and clean power generation from fossil fuels and for oil & gas applications. The customers include Utilities, IPPs and EPC companies as well as businesses in industries such as oil and gas, sugar and cement.

The Indian power sector is witnessing surplus power equipment manufacturing capacitieis, with thermal power plants still operating at low PLFs. The thermal-based power generation (large gas and steam turbine) continued to face challenges due to various factors such as subdued demand, lower industrial growth, inadequate availability of gas and measures to increase renewable energy.

Sales and Profits from operations of this division are at 1480 crores and 246 crores respectively in FY18.

Energy Management:

This division is a supplier of products, solutions and services for the transmission and distribution of electrical energy. Electrification portfolio ranges from low voltage products for domestic electrification, through products, systems and solutions for electrification of medium voltage distribution and ultra high-voltage transmission grids. Portfolio also covers automation and digitalization products and solutions for all elements of power value chain. Its customers are central and state utilities, private transmission and distribution system operators.

Some solutions here include SCADA. Watch below video to understand further:

Sales and Profits from operations of this division are at 5159 crores and 420 crores respectively in FY18.

Mobility Division:

This division supplies solutions for passenger and freight transportation, including rail vehicles, rail automation and rail electrification systems. This division is benefiting from expansion of Metro Rail market as well as govt initiatives to enhance capacity and improve rail safety which led to acquisition of various projects in both mainline and metro rail segments.

Sales and Profits from operations of this division are at 976 crores and 98 crores respectively in FY18.

Financials:

ROCE: About 20%
Working Capital cycle is not great => 1 month of inventories, 3.5 months of receivables and 3 months of payables.
Current Ratio of 1.9
For further numbers, you can look up screener: https://www.screener.in/company/SIEMENS/

Sales Breakup (millions) 2018 2017 2016
Power and Gas 15432 14387 14161
Energy Management 52905 44337 35243
Building Technologies 4913 4248 3695
Mobility 10516 12423 11241
Digital Factory 23261 19489 17869
Process Industries & Drives 19540 17826 16511
Healthcare 0 0 12754
Others 1386 1324 1129
Total Sales 127953 114034 112603
Power and Gas Growth % 0.07263501772 0.01595932491 -0.09595250255
Energy Management Growth % 0.193247175 0.258037057 0.1744143424
Building Technologies Growth % 0.1565442561 0.149661705 0.2424344317
Digital Factory Growth % 0.1935450767 0.09065980189 0.1327416799
Process Industries & Drives Growth % 0.09615168854 0.07964387378 0.1280317005

What’s happening recently?

  1. Divestment of businesses to parent company. Company has been selling out some of the Indian subsidiary divisions to the parent company / fellow subsidiaries. Some of them include the Healthcare business, mechanical drives business, wind power services business, metal technologies business. This has been going on since last few years. Most of these seem to be small non-growing businesses. It seems Mobility business is also going to be divested as per Director’s Report in AR FY18. This will remove another non-growing business from the listed entity. Meanwhile other growing businesses have become sizeable and after this mobility division divestment happens, we will have a company in which 70%+ of the business will grow at 15%-20% and remaining 30% growing at 5%-10% as pointed by growth rates of various divisions above.
  2. Mindsphere cloud connectivity. Unable to put a number on how big this can become. But looking at the applications possible, seems this can have implications on almost all the factories in the country. And their Ingenuity Tour can help improve their penetration into SME manufacturing too.

Risks / Concerns / Questions:

  1. What’s the reason for the current divestment?
    Unable to understand why promoters are divesting non-growing businesses to self and letting the growing businesses be part of listed entity. This would carry risk of profitable divisions getting divested in the future.
  2. The expenses part of the financial statements include ‘Project bought out and other direct costs’. This forms about 20% of revenues. Not sure what this means at all and how to monitor this.
  3. How does one estimate market size / penetration / long-term potential of these kind of businesses and put a number to them?
  4. Related Party Transactions are high. 12% of Income is derived from related parties over the past few years.
  5. Couldn’t find any entry for Royalty in Other expenses notes. And R&D expenses are very minimal at 0.1% of sales. Where is the tech coming from for Siemens India? Wouldn’t believe that the parent would give away its tech to a listed subsidiary for free.

Discl: No holdings. Just started tracking.

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Seems the parent company is going through a re-org and hence the Indian subsidiary is following suit.

The Parent company initially planned to merge the Mobility business with Alstom but its request was denied by European Competition Commission and hence the demerger of Mobility business from Indian subsidiary is also put on hold now.

Meanwhile the company was planning to de-merge the gas & power business too from Siemens AG (parent). Something similar might be pursued for the Indian subsidiary too. So interested people might need to factor this into account.

I have categorized Mobility business as a non-growing business in my first post. But I actually think it has good potential to grow in the coming years due to announcement of Metro projects in various cities. It was not growing till FY18 but may grow well going forward. It has already delivered superb performance in Q2FY19. Waiting for ARFY19…

Resources:

Siemens AG (parent) Annual Report

Brokerage reports


Discl: No holdings

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