Siemens (Pakistan) Engineering Company Limited is a subsidiary of Siemens Aktiengesellschaft (SAG), Germany. It is incorporated in Pakistan as a public limited company and its shares are quoted on all the stock exchanges of Pakistan.

The company is principally engaged in manufacture, installation and sale of electronic and electrical capital goods and also executes projects under contracts. The company holds majority shareholding in Carrier Telephone Industries (Private) Limited.

Its major business divisions involve communications, power transmission and distribution, industrial solutions and power generation, automation and drives, medical transportation and appliances and finance and business administrations. Drive for continual improvement supported by focused managements' commitment has ensured that Siemens remains the market leader in nearly all of its business divisions.

Siemens has penetrated well in the UAE market of transmission and distribution, despite intense competition. Its major orders include high voltage grid stations to be constructed in Dubai, orders for transformers and switchboards, SAP software implementation for Pakistan Telecommunication Company Limited, some major orders from mobile operators, New Muree Bulk Water Supply Project and KESC operation and management contract etc.

Siemens business processes improvement activities are constantly undertaken by its top programme. This is in addition to its continual activities for improvement and redefinition of all its processes through the Quality Management System and Siemens specific quality initiatives. Adherence to stringent controls on quality has again made the company possible to achieve re-certification under ISO 9001:2000 standards in FY06 without any non-conformity.

In Q1 of FY06, the company acquired 52.51% shares of Carrier Telephone Industries (Private) Limited (CTI) held by PTCL and took over the management control on December 9, 2005. Amalgamation of CTI into the Siemens was another significant event of FY07.

During FY07, the COM Carrier business of Siemens Pakistan was transferred to Nokia Siemens Networks Pakistan (Pvt) Limited on April 1, 2007 and COM Enterprise Network business of the company was transferred to Siemens Enterprise Communications (Pvt) Limited on August 2, 2007 in line with the global carve-out plan provided by SAG. The company received an aggregate sale price of Rs 2,451 million and the whole transaction resulted in net after tax capital gain of Rs 1,498 million to the company. The company intends to invest the proceeds received to further increase shareholders' value.Recent results (H1'08)

The earnings for H1'08 are up by Rs 5.1 per share registering a growth of 6% vis-à-vis H1'07, with higher sales volume and other operating income being the major drivers. A break up analysis of sales, further reveals that sales from the continuing operations have increased by 50% compared to the corresponding period to just over Rs 11.8 billion mainly due to projects being undertaken in the energy sector. Overall, the sales showed a 7% increase compared to the same period last year, predominantly on account of discontinuation COM business segment. As a result gross income was lower by 27% compared to the same period last year.

Even though the other operating income increased manifolds, it could not translate into a higher operating profit mainly due to lower gross incomes. As a result, PBT decreased by 18% compared to the corresponding six months. However, PBT from continuing operations have increased by 42% to just over Rs 1 billion. A Rs 30 per share interim dividend has been declared by the Board of Directors considering the performance of the first six months of the financial year.

Financial analysis (FY03-FY07) In FY07 too, the company made record sales and pre tax profits in its history and achieved all its budgeted targets in FY07.

New orders of Rs 32,040 million were received which is an all time record. Major contributions include projects for building grid stations/substations for various customers locally as well as in Dubai, supply of power and distribution transformers to various power generation companies and SAP Enterprise Resource Planning (ERP) implementation for Pakistan Telecommunication Company Limited. Healthcare sector with their digital linear accelerators for cancer treatment, diesel generating sets particularly for the telecommunication sector and first ever order of SGT-400 gas turbine compressor trains in Pakistan for Kandhkot Compression Project also played a significant role.

Sales increased by 5.32% compared to the corresponding period to Rs 21.902 billion - again a record performance. The major increase contributed by power transmission and distribution and communication divisions (projects being undertaken in the energy sector). The total turnover includes business of Rs 5,611 million conducted outside Pakistan, especially in construction of substations, which grew by 20.46% over last year.

Profit before tax increased by 30.25% compared to the corresponding period of last year showing an all time high value of Rs 1.965 billion. The major contributors are higher sales volume, higher commission income, lower selling and marketing expenses as a percentage of sales and well-controlled general administration expenses.

After tax profit aggregated to Rs 2,481 million which is 2.4 times higher than the corresponding year. This disproportionate increase in profit is attributable to profit of Rs 1,498 million, net of income tax, on sale of discontinued COM business.

As a result, the negative profitability trend of FY06 reversed in FY07. Higher increase in profit and gross profits further diminished the effect of an increase in sales. Both the margins recovered greatly in FY07 on account of 11% increase in sales (much higher than COGS and other expenses), mainly due to the projects being undertaken in the energy sector.

Both ROA and ROE, which depicted a decline owing to declining net profit in FY06, also recovered in FY07 showing a sharp upturn in the trend. ROE hiked in 2007 due to higher net profit, again a modest increase in equity. ROA in 2007 didn't rise sharply because the total assets of the company increased considerably thereby slightly offsetting the sharp increase in net profit.

All liquidity ratios indicate that the company has expanded over the years. The current ratio has decreased from 1.5 in 2003 to 1.06 in 2006. But it again increased to 1.2 in FY07 showing that company's current assets are rising far more than its current liabilities, reflecting an improvement in company's ability to pay off its short-term obligations.

Quick ratio followed a different trend than current ratios, being on a constant rise till 2005, while suffering a fall in 2006. The drop can be attributed to 52% increase in inventory that year, which is considerably higher than that in previous years. However, it again improved in FY07 just like current ratio due to better net working capital management.

Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. For Siemens, this has been declining until 2005, after which it started rising. The decline is to be explained by the proportionate increase in net sales being higher than the modest increase (and decrease in FY05) in average inventory kept by the company.

However the ratios rose in 2006 again because the net sales increase (50%) was by a lower percentage than the inventory increases (53%). Same deteriorating trend continued in FY07. That's not a good sign because a decline in inventory turnover indicates that the company is keeping excess inventory and hence is facing a risk of obsolescence of inventory. But again it is too early to say as we can see from the tend line that 2007's ITO is still lower than 2003's ITO.

Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be high enough for the company to avoid risks of bad debts. The trend line indicates a decline in this ratio in 2004 due to both that an increase in net sales and a decline in trade debts. However in later years it again rose and became almost double in FY07, indicating that the company is increasing its credit sales and hence facing higher risk of default. The operating cycle hence showed an increase in FY05, FY06 and FY07 due to rise in ITO and DSO in the respective years.

TATO, a reflector of the company's assets' revenue generation capability, has shown a positive stable trend till FY06. Capital investments were made which include investment in Carrier Telephone Industry and for replacement and modernization of plant and machinery and vehicles. This reflects that the company has been efficiently predicting and responding to a corresponding increase in its net sales. However, it lowered slightly in FY07 due to higher assets base. The sales/equity ratio on the other hand show a sharp increase in subsequent years owing to very slight increases in equity base against record increases in net sales. It however, plummeted in FY07 due to higher equity base (on account of issuance of new shares).

As far as debt management is concerned, both D/A and D/E ratios show Siemens has increased its reliance on debt financing rather than equity financing. The trend lines of D/E ratio in particular shows that the ratio has gone through a major hike over the years owing to proportionate increase in liabilities being greater than the modest increase in the equity base.

The long term debt to equity ratio further gives an insight that the company is relying mostly on its long term debts for financing, particularly in its trade and other payables, short-term running finances and provision for taxation. This trend has changed a little bit in FY07 as one can see a decline in ratio mainly due to higher equity base (on account of issuance of new shares). Perhaps the company wants to reduce its debt obligations and move towards stock mode of financing.

The TIE ratio has nose-dived after 2004. This is due to the sharp increase in interest expense compared to a modest increase in EBIT. Looking at this, we can infer that Siemens interest paying ability is declining over the years owing to high finance costs ie the high interest rates are having adverse impact on its operations.

The (P/E) ratio shows how much the investors are willing to pay per rupee of reported profits depends on company's price per share and its earnings per share (EPS). Siemens's EPS has been on a constant rise from 2003 onwards with a slight decline in FY06 (from Rs 100 to Rs 95 per share). This decrease can be attributed only to lower net income in 2006, as number of shares remained constant in 2003 onwards.

However, it increased tremendously in FY07 rising to 300 due to higher profits from discontinued operations. The earning per share excluding extraordinary profit amounted to Rs 119.28 per share, which is an improvement from FY06 EPS. Consequently, the P/E ratio also followed an erratic trend driven by the increases in EPS and market price of its share.

Initially, the investors were willing to pay relatively little for a dollar of Siemens's book value however, in 2003 onwards the company has turned into a financially strong setup. A major factor of increase in the book value per share is the positive image the company projects through its marketing activities and focus on quality. Despite significant capital investments over the years, the overall cash position of the company improved which is evident by the positive trend of DPS. It has increased from Rs 26/share in FY03 to Rs 90/share in FY07, showing a good return to shareholders as the primary objective of Siemens.

FUTURE OUTLOOK Orders at hand for Siemens currently depict a healthy outlook with major contributions coming from projects for building grid stations for various customers in Dubai and supply of power and distribution of transformers to power generating companies. With adequate orders at hand and new orders of over Rs 30.9 billion during H1'08, the company is well poised to perform well.

In the budget 2008-09, Rs 66 billion have been allocated for power sector projects. The projects will cover all sub-sectors, power generation, transmission and distribution and alternate energy. Around 2,200 MW power is expected to be brought on stream by the early next year. This is also positive for company's business, as it will lead to more energy projects, hence increasing the demand for its products and services.

However, due to intense competition, there is enormous pressure on its prices, which is not in line with rising prices of inputs. The rising inflation and interest rates may have some adverse impact on the growth of market. Furthermore, the uncertainties in different segments of the business, it is difficult to predict about the results of the company for next fiscal year