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TURNAROUND The Company That Came In From The Cold Despite sales staying virtually stagnant, Siemens manages to register a 139% spurt in net profits. Here's how. By Brian Carvalho
Your knee-jerk answer would be: ''Oh, they must have sold assets, and propped up their other income.'' You're right, Jurgen Schubert, the 53-year-old managing director of Siemens, did some of that. But as Wolfgang A. Kroll, executive director and chief financial officer at this diversified company, will tell you, divestments contributed just Rs 4.7 crore, or a little over half a per cent to Siemens' net profit of Rs 84 crore. ''There's much more to it,'' winks Kroll. Kroll would love to give you details about how Siemens' financial ratios have fared over the past three years. But let's try making sense of Siemens' perfor- mance without recourse to number-play. Let's listen to Schubert, instead, who gives a hint of an answer. ''We had to focus on our internal processes to boost the bottomline,'' he says. Stagnant Businesses
Indeed, the markets for Siemens' bread- and-butter businesses-power generation, transmission and distribution (T&D), and industrial products-which account for 70 per cent of its turnover and almost 80 per cent of operating profits are mired in a slowdown. There's little action on the power generation front, thanks to delays in the financial closures of power projects. This is reflected in the division's orderbook, which shrunk by 33 per cent (a 14 per cent decline in sales). At the T&D division, although there was a growth in new orders, margins were wafer-thin, courtesy cut-throat price wars in the sector. What also didn't help the Siemens cause were the high-cost structures at the T&D division's manufacturing units. Meantime, the other mainstay of Siemens, the industrial products division, is witnessing the full fury of the industrial slowdown. A 46 per cent contributor to turnover (50 per cent to operating profits), sales slipped by 14 per cent, and orders by 23 per cent. What's worse, Schubert doesn't expect any change soon. ''I won't use the word recession, but I don't expect any change in the economic climate for some time,'' he says. Schubert could have decided to wait till the much-awaited infrastructure boom materialises. But his minority shareholders wouldn't allow him to. So the managing director had to look for another option: focus on cutting costs, divest businesses that don't yield returns, acquire businesses that complement existing ones, and introduce new products, systems, services, and solutions. The objective? Keep the bottomline moving north by pruning costs, and hope that the new business areas gradually add to the topline. Turnaround Elements
That the first objective has been met-and it's taken three years of restructuring to reach there-is manifest in the net profit for 2000. Borrowings have come down phenomenally, from Rs 359 crore in 1996-97, to Rs 48 crore now, largely via the proceeds of a rights issue made last year. That's done wonders for the interest burden, which has declined 82 per cent over the previous year, to just Rs 4.9 crore. And, in 2000-2001, Siemens is on its way to becoming a zero-debt company. But, as Kroll will agree, slashing debt was just one prong of the turnaround strategy. Prudent treasury management had a part too. Last year, Siemens was sitting on funds of close to Rs 250 crore, and deployment of these in high-growth investment avenues was, in part, responsible for the 29 per cent return on capital employed. Siemens' annual results includes 'Exceptional items', a sum of Rs 15.4 crore that has gone directly into the bottom-line. Kroll isn't willing to give a break-up of this, preferring to attribute it to the ''results of the restructuring of the business''. To be fair, though, there are other operational factors that have influenced Siemens' revival. Over the past three years, the workforce has been pruned by 25 per cent. And by cutting its vendor-base and via strategic sourcing, Siemens has been able to slash its raw material costs. Then, there were the divestments. Siemens Telecom, for instance, in which the company sold its 51 per cent stake to the Bharti group (the other partner), was losing money. But whilst it has sold most of the business (the analogue part), Siemens has preferred to hold on to mobile phones, an area in which its German parent is gunning for No. 3 position. Another poor performer, the automotive systems division, has been hived off and is now a subsidiary of Siemens AG. Where Siemens hasn't been able to make much headway strangely is in its infotech subsidiary, Siemens Information Systems Ltd (SISL). The biggest challenge for Siemens today is to prop up its topline. Via acquis- itions and forays into new areas, Schubert is trying exactly that. Recently, he acquired a 26 per cent stake in VXL Landis & Gyr, in which Siemens AG holds the rest. VXL Landis makes electric meters needed in the power distribution business. By retaining the mobile phone business, Siemens is also trying to leverage the strengths of its parent. Last year, Siemens sold just 35,000 phones, but this year it has fixed a rather ambitious target of 1.5 lakh pieces. Then, Siemens has also entered new areas of traffic management systems and process automation. Despite all the efforts to increase revenues in the short-term, Siemens' growth will eventually depend on a turnaround in the fortunes of industry. Till that happens, CFO Kroll will have his hands full sustaining Siemens' bottomline growth in the quarters ahead. |
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Analysing
Siemens India's results for the year ended September, 2000, could prove a
number-cruncher's delight. Here's a company whose net sales have stayed
virtually stagnant for three years: Rs 996 crore in 1998, Rs 1,051 crore
in 1999, and Rs 1,083 in the 12 months that concluded on September 30,
2000. How then did it manage to increase it net profits by a whopping 139
per cent this year?