Wednesday, March 19, 2014

Siemens Ltd. – high technology capital goods marred by slow Indian economy

BSE: 500550|NSE: SIEMENS|ISIN: INE003A01024

The parent company has been around since 1847 - a 100 years more than the independent republic of India's history.

This particular listed subsidiary is involved in the energy, industry, healthcare and infrastructure sectors. The entire sales cycle depends on the capital investment in the economy. Returns on equity used to be high From FY2005 till FY2011 after which the ROE has taken a sharp dip - since economic growth in India slowed down.

1. How good is the moat?

Grade B moat.
  • Brand - The brand is rock solid and has been around for years. Globally is well respected and known.
  • Product competitiveness - Few companies are competing in some of the areas and many in others. Overall needs to compete with several large companies for the market from all over the globe - Europe, US, & Asia. Siemens holds a lot of technology which might be of use in some areas - but in the Indian market buyers might step down to slightly older technology that is off patent for lower prices.
  • Sales and distribution - Relative to the competition no real competitive advantage in this area.
  • Employees - cordial relations with unions. HR processes are robust and well developed.
  • Net imports stand at 3000 Crores+ or over 26% of revenues - fall in INR values will hit profitability severely. Some of its competition in the Infrastructure space have setup local plants
  • Performance during recessions - This may be a big issue. A great management team & a great company when up against a bad business market is always going to end up losing the battle to the bad business market.

2. Risks
  • Largest risk is low capital expenditure in the economy will have adverse impacts of the cash flow
  • FX risk has already hit margins. Indian rupee is likely to decline against the dollar by the inflation rate difference between India and the US every year (FX interest rate parity)
3. Financials
  • CFO has lagged net profit by over 50%. Reasons a manifold - provisions reductions, etc.
  • Inventories - Have more or less fluctuated between 8% and 15% of sales
  • ROCE - Has gone down from over 30% to 4%
  • Dividend % of earnings - over 100% in the latest year. The company has tried to keep up the dividends through declining profits
4. Soft factors
  • Shareholding
    • Promoter group owns 75%. Has gone up from 55% or so in Sep 2010. This is the driver for the stock holding its value within 5% of the Sep 2010 prices. It is weird why this is happening given the decline in earnings.
  • Director shareholding - Negligible. Not a great sign.
  • Indices - BSE 200 Index, BSE Capital Goods Sector Index, BSE National Index, BSE Power Index, CNX 200 Index, CNX Infrastructure Index, CNX MNC Index, NSE CNX 100 and S&P CNX Nifty Index
5. Pricing
  • Market cap is around 24300 Crores with earnings of only 194 Crores. Dec 2013 is nothing very different. The company therefore is trading at 125 times or so earnings. Probably a bit too high at this point - not a value investment.
  • Price to book is around 6 times. For a company in this engineering sector this metric might not be very relevant
  • Only point going for the pricing maybe that the parent increased its stack back in 2010-2011.

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