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Siemens: Stake sale raises red flag - Views on News from Equitymaster

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Siemens: Stake sale raises red flag
Jan 13, 2009

Late last weekend, Siemens India announced sale of its 100% stake in its IT services subsidiary, Siemens Information System Ltd. (SISL) to a fully owned subsidiary of the parent company, Siemens AG. The company, in a press release on its website mentions, “This is pursuant to the change in structure of the global software business, where SISL businesses have also been aligned with the parent group. In the new model, SISL will serve as an internal software factory supporting the R&D and product development initiatives for business sectors globally.” So, does this stake sale in a ‘core’ (as the management had earlier indicated it to be!) business sounds strange for Siemens which has done similar things in the past as well? Not really. In fact, in our research report last updated after the announcement of the company’s full year results in September 2008, we had talked about this issue.

We believed that Siemens had been consistent in selling stakes in profitable subsidiaries to the parent company for reasons duly justified by the management and taken in the name of unlocking value for shareholders. Our concerns however arose from the fact that the subsidiaries that Siemens India sold to Siemens AG in the past witnessed pressure on operating margins just prior to the sale. The sale was subsequently made to justify a better future for the subsidiaries in the hands of Siemens AG.

As an instance, Siemens sold Siemens Public Communication Networks Ltd (SPCNL) in FY07 to Siemens AG. SPCNL had witnessed decline in its margins just prior to this sale. In a similar way, just when we were seeing deterioration in margins of Siemens Information Systems Ltd (SISL) and wondered whether this subsidiary will be the next on block, came the news last weekend that Siemens is actually divesting its 100% stake in SISL to Siemens AG. The valuations for this deal have not yet been divulged.

What to expect?
    Given the severe strain on funding of infrastructure projects in the country, the performance of Siemens is expected to deteriorate over the next few quarters. Margins are also likely to come under pressure despite the decline in commodity prices, as the company might sacrifice on billings to garner business volumes. While the fact that Siemens’ management has attributed this stake sale in SISL to have better focus on the core engineering business, we doubt these intentions as we believe that history repeats itself. It just repeated itself last weekend.

    As far as Siemens’ stock is concerned, while valuations look attractive from a 3 years perspective, we prefer other engineering stocks considering their relative better price versus value equation.

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