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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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Annual Report 2019 was out yesterday. Posting my notes here.

  1. The company was awarded an order to upgrade India’s oldest HVDC link from PGCIL.
  2. The company launched the Digital Experience and Application Center (DEX), a full-fledged testing, simulation and training center for the machine tool industry.
  3. The company’s Vadodara factory achieved a key milestone during the year when it rolled out the 1000th steam turbine. It also built the 9000 HP propulsion system to boost Indian Railways’ electrification and haulage capabilities which was entirely designed, built and manufactured in India.
  4. The company also got an order to upgrade and modernize Hindustan Zinc Ltd’s Power Asset Fleet with state-of-the-art technology.
  5. It installed a state-of-the-art Remote Diagnostic Services (RDS) for GAIL (India) Ltd covering 29 gas turbines across multiple locations in India. Real-time data analysis from these gas turbines helps the customer increase availability, reduced forced outages and enable proactive, predictive maintenance.
  6. Digital solutions for a global automotive OEM contributed to reduction of costs and enhancing productivity. With India’s automotive industry competing in the global market, such companies need to transition to industry 4.0 to reduce production costs, minimize defects, boost efficiency and shorten time to market for new products.
  7. During FY19, the company also launched a new MindSphere Application Center, a state-of-the-art digitalized tech center, supported by Siemens’ MindSphere, an open, cloud-based IoT operating system that lets customers connect machines and physical infra to the digital world and its thermodynamic digital twin.
  8. The MindSphere Application Center launched in Gurgaon, is the first in the world, specifically aimed at digital solutions for coal and steam-based power plants.
  9. While there are challenges in any business environment, India’s overall macro fundamentals continue to remain stable.
  10. Board meeting in Feb18 agreed to sell Mobility segment and Mechanical Drives business to Siemens AG, Germany. After due deliberations during Board meeting in Aug19, decided to not pursue the aforesaid matters for the time being.
  11. During FY19, Digital Industries Business witnessed order pick-up in digitalization initiatives across automotive, food & beverage, and machine building sectors which are driving growth. Water and pharmaceutical sectors also contributed to growth during the financial year.
  12. In its second year, the Ingenuity Tour covered 66 cities across 16 states of India. In total, the tour is scheduled to travel more than 30000 kms. The tour has an array of latest products covering electrification, automation and digitalization from the fields of industry, software, automation, power distribution, drive technology, digital & cloud services, industrial training as well as customized financing solutions.
  13. The Gas and Power Business continued to operate in challenging market conditions. Ordering was driven by small steam turbine businesses across cement, chemicals and sugar verticals. The contribution of renewables as an energy source continued to increase during the year and conventional energy producers have started becoming more flexible in their operations while continuing at base load. Thermal power plants continued to operate at low plant load factors.
  14. Gas and Power business won an order from Hindustan Zinc Ltd to modernize and commission 80 MW steam turbines and provide on-site project services on a turnkey basis. It won another order from GAIL (India) Ltd to isntall state-of-the-art Remote Diagnostic Services covering gas turbines installed at GAIL’s pipelines and plant.
  15. The Smart Infrastructure Business is engaged from the macro to the micro level, from physical products, components and systems to connected, cloud-based digital offerings and services. From intelligent grid control and electrification to smart storage solutions, from building automation and control systems to switches, valves and sensors.
  16. During the financial year, the Company saw growing demand for “smart” infrastructure in verticals and markets that included data centers, airports, metros, utilities and smart campuses.
  17. The Intelligent Integrated platform - AVATAR, setup at its office in Navi Mumbai provides customers with a deeper understanding of the digital “Smart Campus”, which can contribute to the increasing demand from private investors, to improve the utilization of existing assets.
  18. In 2018, Indian Railways decided to drive 100% electrification across its rail network. This caused disruption in the Mobility Rolling Stock Components business for diesel electric locomotives as the manufacture of diesel electric locomotives reduced to zero. Indian Railways has since changed over to electric locomotives and is adding high horsepower locomotives to its fleet, including 9000 HP locomotives.
  19. Indian Railways is driving its infrastructure development with enhanced rate of electrification and adapting modern signaling technology like European Train Control System Level 2 (ETCS L2), the tendering process for which has begun.
  20. Mobility continued expansion of its Metro footprint by adding electrification and signalling packages of Chennai Metro extension contract during the financial year. Siemens was the preferred bidder and has executed projects in the phase 1 of 45 kms for the project. Similarly, Mobility was also declared the preferred bidder in the package for the Delhi Airport Metrolink Express extension project.
  21. The demand for solutions provided by POC is growing inspite of continued challenges in a muted capex environment. Demand is driven by energy-saving requirements in existing industrial fan or pump applications.
  22. Among the highlights of POC during the financial year, it commissioned variable frequency drives for one of the world’s largest lift irrigation projects in Telangana State. The Company also won an order to deliver an integrated electrification and automation solution for a large cement grinding project in Sri Lanka.

Please note sales in below table are external revenues i.e. inter-segment revenue is not subtracted.

Sales Breakup 2019 2018
Digital Industries 26298 22967
Gas and Power 50415 48089
Smart Infrastructure 35704 35718
Mobility 12026 10516
Portfolio Companies 12038 9327
Total Sales 136481 126617

Digital Industries, Mobility and Portfolio Companies are going through strong growth.
Gas and Power, Smart Infrastructure which are the heart of Siemens are still experiencing slow growth as these are heavily dependent on capex in the country.

Discl: Entered Siemens through tracking position in last 30 days.

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Find enlcosed my observation about past conduct of Siemens Management. While there has complete change in board and hence things may have been change for good. However, AG management approch is not very conducive for minority shareholders.

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SIEMENS INDIA HAS 24% EQUITY CHANGE HANDS IN PRE-MARKET TRADE
Any idea what’s the reason…