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

The company is engaged in the manufacture, installation and sale of electronic and electrical capital goods and also executes the 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. The 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 Murree Bulk Water Supply Project and KESC operation and management contract etc.

Siemens business 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 recertification under ISO 9001:2000 standards in FY06 without any non-conformity.

Financial analysis (FY'03-FY'07):

In FY07 too, the company had made record sales and pre-tax profits in its history and over 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% as 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's after tax profit. 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, a negative profitability trend of FY06 reversed in FY07. The higher increase in profit and gross profits further diminished the effect of an increase in sales. Both the margins recovered greatly in FY07 on the 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 due to the declining net profit of the company in FY06 also recovered back in FY07 showing a sharp upturn in the trend. ROE hiked in 2007 due to a significantly higher net profit again a modest increase in equity. ROA in 2007 didn't rise sharply because the total assets of the company also increased considerably thereby slightly offsetting the sharp increase in net profit.

All the 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 slightly different trend than current ratios, being on a constant rise till 2005, while suffering a fall in 2006. The drop can be attributed to the 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 ratio 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 trend 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 an increase in net sales as well as 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 of Siemens 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 shows 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 the account of issuance of new shares).

As far as debt management is concerned, both D/A and D/E ratios shows Siemens has increased its reliance on debt financing rather than equity financing. The trend lines of D/E ratios in particular shows that the ratio has gone through a major hike over the years owing to the 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 most of the company is relying mostly on its long term debts for financing in particular 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 the ratio mainly due to higher equity base (on the account of issuance of new shares). Perhaps the company wants to reduce its debt obligations and move towards equity financing.

The TIE ratio for Siemens has nose-dived after 2004. This is attributed to the sharp increase in interest expense compared to a modest increase in EBIT. Looking at this, we can that 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 investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the 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 the number of shares remained constant 2003 onwards. However, it increased tremendously in FY07 rising to 300 due to higher profits from discontinued operations.

The earning per share excluding this extraordinary profit amounted to Rs 119.28 per share, which is an improvement from the 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 investors were willing to pay relatively little for a dollar of Siemens's book value however 2003 onwards, the company has turned into a financially strong setup. A major factor of the increase in this 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 the good return to shareholders as the primary objective of Siemens.

FUTURE OUTLOOK: The upward movement of Pakistan's economy continued in FY07. With all the indicators of economy showing a positive trend, expected infrastructure development and opportunities in the energy sector, both within and outside the country, may prove favourable for the company's future success.

Furthermore, budget for the fiscal year 2007-08 aims at simplification of tax system, boosting economic activities and promoting tax friendly culture through better relationship between the tax payers and the tax officials.

This is also positive for the company's business as higher government revenues will lead to more development and infrastructure projects, hence increasing the demand for its products and services. Orders in hand currently depict a healthy outlook.

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.

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 Carrier Telephone Industries (Pvt) Limited (CTI) into the Company was another significant event of FY07. It is expected that with the amalgamation of CTII, the profitability of the Company would improve due to synergies.

With global tools of top + and Fit4 More - Profit and Growth, there is no reason why the company cannot achieve and surpass its targets. However, due to intense competition, there is enormous pressure on its prices, which is not in line with rising prices of the inputs. The rising inflation and interest rates may have some adverse impact on the growth of market. Furthermore, with uncertainties involved in different segments of the business it is difficult to predict about the results of the company for the future.