Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the long term bank facilities of Siemens Limited (Siemens).

 

CRISIL Ratings takes note of the approval by the Board of Directors of Siemens Limited to the proposal to demerge its Energy Business into a separate legal entity – Siemens Energy India Limited (SEIL, currently a wholly owned subsidiary of Siemens Limited), which will be subsequently listed, upon the receipt of requisite approvals.

 

The rationale for the demerger are: it will lead to the creation of two strong and independent listed entities; both entities will have sharper business focus on their core activities, portfolios and capital allocation; stronger market focus as they will be able to execute their own strategy, with a tailored go-to-market and operational approach to leverage the full potential of the Indian market; and unlock shareholder value. The proposed demerger of the Energy Business is expected to be completed by calendar year (CY) 2025.

 

Siemens Limited will continue to be a leading technology-focused company in Industry, Infrastructure and Mobility while SEIL will focus on being the most valued energy technology company supporting its customers in transitioning to a more sustainable world. Siemens Energy India Limited will provide solutions across the entire energy value chain – from power and heat generation, transmission to storage through a portfolio that includes conventional and renewable energy technology such as gas and steam turbines, hybrid power plants operated with hydrogen as well as power generators and transformers.

 

The Energy Business is the second largest business segment for Siemens Limited forming ~31% of consolidated revenues at Rs 6,080 crore and ~31% of the consolidated EBITDA for the fiscal ending September 2023. Order book for the Energy Business as of March 31, 2024, stood at Rs ~9,740 crore.

 

The remaining Businesses including Smart Infrastructure (SI), Digital Industries (DI) and Mobility would continue to be housed under Siemens. These Businesses contributed Rs 13,712 crore in fiscal 2023 and Rs 7515 crore for the six-months period ending March 31, 2024 (H1 fiscal 2024). CRISIL Ratings adjusted EBITDA contribution of these three segments was Rs ~1,692 crore in fiscal 2023. Orderbook for the remaining businesses as of March 31, 2024, stood at INR ~37,240 crore (predominantly led by its Rs ~26,000 crore order from Indian Railways – part of its Mobility Business).

 

Despite the demerger (of the Energy business), the business and financial risk profile of Siemens is expected to remain robust on the back of a growing orderbook across its SI, DI & Mobility segments.

 

Post the completion of the demerger, Siemens AG, (parent of Siemens, rated ‘AA-/Stable/A-1+’ by S&P Global, February 2024) will hold a controlling stake of 69% in SEIL, as SEIL will mirror the shareholding of Siemens Limited. SEIL’s credit facilities with banks will have support from Siemens AG in the form of Letter of Support (LOS) till Siemens AG holds a controlling stake in SEIL, which is in line with the one issued by Siemens AG for its other subsidiaries globally.

 

The rating continues to reflect the diversified business portfolio of Siemens Limited, its strong market position, technical support and knowhow from the parent, Siemens AG and the strong financial risk profile of the company. These rating strengths are partially offset by susceptibility of operating margin to project implementation risk, largely on account of exposure to structural issues in the power sector and intense competition in the capital goods industry.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Siemens and all its subsidiaries as they are in the same line of business. CRISIL Ratings has also applied its parent notch-up framework to factor in the extent of support available to Siemens from its parent, Siemens AG. CRISIL Ratings believes that Siemens Limited will, in case of exigencies, receive distress support from Siemens AG.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position and diversified business portfolio:  Presence across multiple businesses shields Siemens Limited from cyclicality associated with individual businesses. The company has categorised its businesses under the SI, DI and Mobility businesses. Its strong market position is supported by access to latest technology and brand equity of its parent, the diverse product portfolio, wide geographical reach, and established track record of timely execution of projects.

 

Furthermore, acquisition of the 99.22% stake in C&S Electric Ltd (CSEL, rated 'CRISIL AAA/Stable/CRISIL A1+’) in fiscal 2021, has helped Siemens Limited expand its presence in the low-voltage power distribution and electrical installation segment in India. Post the acquisition, CSEL has become a manufacturing hub for Siemens AG, to supply low-voltage power distribution goods to growing markets in developing countries.

 

Siemens Limited has an established market position with a diversified business portfolio and sizeable order book position of Rs 46,980 crore as on March 31, 2024, should help the company maintain healthy operating performance over the medium term. The order book of Energy Business stood at Rs 9,740 crore. For the remaining 3 segments (SI, DI and Mobility), the orderbook stood at Rs 37,240 crore. Of this, about Rs 26,000 crore (received in early 2023) is a part of the Mobility Business and is expected to be executed over a decade with Siemens to start booking revenues under this project from fiscal 2025. Siemens received the order for 1,200 locomotives of 9000 horsepower (HP) from Indian Railways, marking the single largest order in the history of Siemens Limited. The company will design, manufacture, commission and test the locomotives. Locomotive delivery is planned over an 11-year period, followed by 35 years of full-service maintenance. Locomotive assembly and maintenance will be implemented together with the staff of Indian Railways.

 

• Technical support and knowhow from the parent, Siemens AG, Germany:  Siemens Limited receives technical support and knowhow from its parent, Siemens AG. This enables the company to produce high-quality products and improve service capabilities and thus, maintain its healthy market position.

 

• Strong financial risk profile:  Financial risk profile is marked by nil balance sheet debt, healthy adjusted tangible net worth of around Rs 12,100 crore as on March 31, 2024, and superior liquidity, backed by healthy cash and cash equivalent (around Rs 7,650 crore as of March 2024).

 

Weaknesses

• Susceptibility to project implementation risk, largely on account of exposure to structural issues in the power sector: Profitability remains susceptible to structural issues and volatility in the power sector. A weak demand environment and investment climate may lead to slump in orders, with private power developers likely to shelve their expansion plans. Deferral of any large project could also lead to cost overruns for players, thereby impacting their profitability, given the limited flexibility to pass on any hike in cost to customers.

 

• Exposure to intense competition: Siemens Limited faces intense competition from several domestic and international players. The competitive bidding process for most projects, along with the macroeconomic slowdown, has led to heightened competition and pressure on profitability. CRISIL Ratings believes that Siemens will continue to bid prudently for such projects.

Liquidity: Superior

Liquidity is supported by cash and cash equivalents of around Rs 7,650 crore as on March 31, 2024, strong cash accruals and unutilised fund-based bank limit of Rs 135 crore. Existing cash and cash equivalent and internal cash accrual should suffice to cover the capex investment announced by the company (plus regular maintenance capex) and any incremental working capital requirement.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes that Siemens Limited’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The thermal power sector has a significant on environment impact owing to emission of Green House Gas (GHG) and high-water consumption. Also, the sector has significant social impact because of its direct bearing on the health and well-being of its workers and customers. Siemens Limited’s focus on addressing these ESG risks support its already strong credit risk profile.

 

Key ESG highlights:

1.                 Siemens plans to achieve net-zero in its operations by 2030, in-line with the Science Based targets Initiative (SBTi). With focus on reducing emissions, the company saw its scope 1 and 2 emission and energy consumption intensity per crore of revenue reduce over the fiscals 2021-2023.
2.                 All the company owned factories and offices are equipped with zero liquid discharge facilities.
3.                 The company has adopted ISO 45001 certified occupational health and safety management system and took several measures including launching a ‘Zero Harm Culture’ campaign to proactively ensure a safe and healthy workplace.
4.                 Its governance structure is characterized by ~33% of its board comprising of independent directors and  ~11% woman directors. Further, it saw a ~93% investor complaint redressal rate in fiscal 2023, and has extensive financial disclosures.

Outlook: Stable

CRISIL Ratings believes Siemens Limited will maintain its healthy market position over the medium term, backed by its technological superiority. Financial risk profile is also likely to remain strong, given the conservative financial policy and robust capital structure.

Rating Sensitivity factors

Downward factors:

• Slump in order inflow or dip in operating margin below 5% on a sustained basis, straining the operating performance.
• Significant downgrade in rating of the parent by S&P Global or change in stance of support from the parent, along with weakening of the financial risk profile of Siemens Limited.

About the Company

Incorporated in 1957, Siemens Limited is a technology company focused on industry, infrastructure, transport as well as transmission and generation of electrical power. The company works on creating resource-efficient factories, resilient supply chains, smart buildings, and grids. Siemens Limited is the flagship listed company of Siemens AG in India. The company has categorised its businesses under the SI, Energy, DI and Mobility businesses.

Key Financial Indicators (Consolidated)*

As on/for the period ended September 30	Unit	2023	2022
Operating income	Rs.Crore	19,532	16,132
Profit after tax (PAT)	Rs.Crore	1,962	1,543
PAT margin	%	10.0	9.6
Adjusted debt/adjusted networth	Times	0.0	0.0
Adjusted interest coverage	Times	48.0	30.71

   *As per analytical adjustments made by CRISIL Ratings

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Cash credit/overdraft facility	NA	NA	NA	135	NA	CRISIL AAA/Stable
NA	Letter of credit and bank guarantee*	NA	NA	NA	5,151	NA	CRISIL AAA/Stable

*The BG facility is interchangeable with Letter of credit