Siemens India, the Indian arm of German engineering major Siemens AG, is escalating business integration and sharpening focus on its core competence to lift its drooping business in India. The company has completed the amalgamation of Siemens Power Engineering Pvt Ltd, into a 100 per cent subsidiary of Siemens AG, and will soon acquire 100 per cent equity in Siemens Rail Automation Pvt Ltd. With this, Siemens India is betting big on the Indian infrastructure and urban development space in the country.
The company, which operates in various business segments including infrastructure, power, industrial automation and healthcare in India, has taken this move because, last year, the uncertain macro-economic environment has impacted its performance. ´While order growth was reasonable, revenues declined. The company´s profitability was impacted due to increased project costs, lower off-take of finished goods and project delays,´ said Chairman Deepak Parekh to the shareholders at the AGM.
According to him, the investment scenario was weighed down by numerous factors such as delays in statutory approvals, slow decision-making, land acquisition issues, volatility in commodity prices and exchange rates, higher capital costs and non-availability of raw material. ´Accentuating the low business and investor confidence, the Reserve Bank of India (RBI) has revised down the gross domestic product (GDP) growth forecast to 4.8 percent for the period April 2013 to March 2014,´ said Parekh.
However, the company has already initiated measures to optimise its cost position and productivity in the factories, and is optimistic about its future growth. ´The recent clearances given by the Project Monitoring Group (PMG) and the Cabinet Committee on Investment (CCI) for projects in the power and infrastructure space are some of the positive signs, but more needs to be urgently done,´ asserts Parekh.
Performance at par
Keeping the challenging economic conditions in perspective, all four sectors-energy, healthcare, industry and infrastructure and cities have performed at par with the market. For the financial year ended 30 September 2013, the company received new orders valued at Rs 10,957.3 crore, a 7 per cent increase over Rs 10,235.1 crore last year. However, sales were down by 12 per cent to Rs 11,145.2 crore, as compared to Rs 12,708.1 crore in the previous year.
The order backlog as of 30 September 2013 stood at Rs 12,926.4 crore, a decline of 5 per cent as compared with Rs 13,660.4 crore in the preceding year. Profits from operations stood at Rs 170.5 crore, down by 75 per cent as compared to Rs 690.3 crore in the previous year. During the same period, the company´s profit before tax (PBT) stood at Rs 218.6 crore, down by 58 per cent as compared with Rs 520.9 crore in the previous year. The profit after tax (PAT) for the year was 194 crore, down by 43 per cent as compared with Rs 343.2 crore in the previous year.
Siemens entered the new financial year with a marginal growth as the macro-economic conditions in the country are yet to improve. For the first quarter of FY2014 ended 31 December 2013, the company has registered new orders of Rs 2,005.8 crore as compared to Rs 2,002.8 crore in the same period last year, while sales stood at Rs 2,360.5 crore as compared to Rs 2,461.8 crore in the corresponding quarter last year. PAT was also stable at Rs 65.1 crore compared to Rs. 63.6 crore last year.
Sunil Mathur, Managing Director and Chief Executive Officer, said, ´While the results were impacted by the challenging macro-economic situation, they also reflect the benefits of various internal measures aimed at increasing the company´s competitiveness.´
Focusing on core competence
Siemens has initiated various initiatives to overcome the persisting challenging environment. It is implementing a five point programme to improve its operational efficiencies.
These initiatives should help Siemens to emerge leaner and more focused and benefit from recovery in the capex cycle. ´Our focus continues to be on stabilising our operations and strengthening our core competence. As an organisation, we are preparing for the next phase of growth,´ says Mathur.
In addition, the company has restructured its sales force and go-to-market approach by introducing Siemens One programme and City Account management. The company has also ramped up its services business through various initiatives for each segment. Siemens earned 54 per cent of revenue from projects in FY13 and has witnessed delays in off-take by customers due to various project related issues such as unavailability of land, fuel and financing, pressure on liquidity. This has forced the company to make provisions based on project cost updates. The company is also focusing on improving the project management processes to improve the cash flows.
Aiming big in Cities and Infrastructure
The company expects that its I and C segment, which currently contributes 20 per cent of the Indian revenues, will contribute a significantly higher proportion in the coming years. ´We are well prepared to provide the full spectrum of services required for cities and infrastructure development. This is expected to be a major differentiator in the coming years as we have seen an order book growth of more than 20 per cent yoy for the past two years´, said Tilak Raj Seth, Head-Infrastructure and Cities Sector, South Asia. The Infrastructure and Cities sector had a net order book of Rs 2,800 crore as on September 2013.
The new sector was formed two years ago by combining the mobility and building technology divisions from the industry sector and the power distribution and smart grid applications divisions from the energy sector. According to Seth, the focus area for growth will be urban transportation, safety and security solutions, energy efficiency, infrastructure automation and smart grid solutions, etc. One of the major projects for the I&C vertical during the last year was completion of a $40 million order for turnkey 6 km core rail systems of the Rapid Metro Rail Gurgaon project. Siemens was to equip Rapid Metro Rail Gurgaon with aluminium body trains, modern train control system, 750 V DC traction power supply along with a third-rail system for current collection.
The company has also won an order for Phase II of the Rapid Metro Rail Gurgaon project for an amount of $70 million. A consortium comprising Siemens Ltd and Siemens AG had bagged an order worth Rs 248 crore from Delhi Metro Rail Corporation Ltd (DMRC) for the electrification of Phase III of the Delhi Mass Rapid Transit System (MRTS). The division is also executing a Rs 700 crore order for the entire electrification work for Chennai metro.
The power segment continued to face issues related to land acquisition, environmental clearances and power tariffs. The company says that during FY2012-13, the market for power equipment was characterised by sharply reduced demand, over capacities and consequently lower prices. Despite these challenges, the energy sector was in a position to retain its overall market share.
During the financial year, the energy sector set up global engineering centres for compressors and oil and gas solutions businesses in Mumbai (Maharashtra) and Coimbatore (Tamil Nadu) respectively. The segment won an order worth Rs 66 crore from National Thermal Power Corporation (NTPC) to modernise its Korba Stage II plant. It also won an order worth Rs 104.4 crore from Bangladesh Steels Re-Rolling Mills Ltd (BSRM), the largest steel manufacturing company in Bangladesh, to build a gas insulated switchgear (GIS) substation. This is the first private sector-funded GIS substation project and the largest order size in the GIS segment in Bangladesh.
Among other milestones, the sector handed over the Unosugen combined cycle power plant in India to Torrent Power Ltd. The state-of-the-art and environmentally-friendly fossil fuel-fired power plant has an installed capacity of approximately 380 MW and an efficiency level of 57 per cent, one of the highest in India. The sector also successfully designed and developed, in collaboration with Siemens AG, a 1200kV double-break disconnector, the highest-rating disconnector in India, at its factory in Hyderabad (Andhra Pradesh).
Siemens officials believe that the investment climate in the power sector is expected to remain subdued for another 1-2 years and projects are expected to get delayed due to various prevailing factors such as lack of fuel supply, delayed statutory clearances, liquidity constraints and land acquisition issues. Nevertheless, the recent clearance of 28 stalled power and infrastructure projects involving an investment of Rs 50,000 crore is a positive sign. ´However further actions will be required to drive the investment in the sector. The energy sector has been gearing up to meet this challenging market situation by focusing on improving the cost position and strengthening the sector´s competitive edge,´ the company said in its annual report.
SMART Products, the key drivers
Siemens continues to focus on SMART range of products and maintains that these products are likely to be the key growth drivers for the company. The number of SMART products in the portfolio has increased to 32 in CY13 from 20 in CY11. However, the contribution of SMART products in the order flow has come down to 13 per cent in CY13 from 17 per cent in CY12 largely on account of poor market conditions in segments like metals and power equipment.
´The management reiterated its focus on SMART portfolio of products and considers them as the key growth drivers. While management does not see any meaningful green shoots as yet, it is focusing on cost reduction, strengthening core activities, focusing on go-to-market approach and optimising infrastructure,´ says Kunal Sheth, a senior research analyst with Research Division of Prabhudas Lilladher.
´Management expects the revenue from energy segment to pick up in future. In the I and C segment, railways, transportation and smart grids will drive growth. Healthcare segment has not been impacted by the downturn. Industry segment growth would be driven by various initiatives taken by the industry to improve productivity, which will drive the growth in industry automation,´ notes Bhavin Vithlani, Executive DirectorùPower & Cap Goods, Axis Capital.
- Exports potential intact; steady outlookAccording to Antique Stock Broking, Siemens India continues to be a key partner in Siemens AG's global growth strategy, particularly for the Middle East and Asian markets. It has benefited from ongoing infrastructure investments in the Middle East, particularly Qatar, over FY06-11. Though there has been slowdown in export orders in past 18 months, there are signs of improvement in awarding activity across several regions of MENA countries. However, despite sluggishness in export orders, the company continues to derive 17-18 per cent of revenue from exports, which is a key positive.
Five point programme
- Cost reduction (each sector has clear targets for cutting costs, optimising worldwide utilised capacity)
- Strengthening core activities (initiatives of focusing on SMART strategy)
- Strengthening go-to-market approach across all sectors (Siemens One programme, City Account Management)
- Optimising infrastructure (consolidating Siemens Group companies in India)
- Reducing complexities (streamlining internal processes and systems).