Shares of Siemens Ltd fell by as much as 30% in just three trading sessions after it announced late last week that it would transfer its information technology (IT) business to its German parent, Siemens AG.
Siemens’ Indian arm is a part of the Nifty index but is right at the bottom of the pile in terms of disclosures and transparency. Typical of its communication style, it didn’t even bother informing investors the price at which it transferred its IT business to the parent company.
Investors responded by hammering the stock down by about 10% in each of the next three trading sessions, forcing Siemens to finally disclose the consideration late on Tuesday.
Siemens has now said that it will receive Rs449 crore from its parent company. The stock has now recovered a bit, but has still lost 25% since its first announcement related to the IT business transfer.
This isn’t only a vote against Siemens’ poor disclosure norms but also against issues of corporate governance. The company has explained the transfer of the IT business as a result of the parent company’s decision to have all of its software development work under one umbrella. That’s reasonable but what’s suspect is the valuation of Rs449 crore, which an independent firm, Grant Thornton, has arrived at.
In the year ended September 2007, Siemens’ IT subsidiary, Siemens Information Systems Ltd, had revenues of Rs1,023 crore and a pre-tax margin of 15.6%. But in the year till September 2008, margins have dropped to as low as 7.3%, which the company explains is part of the realignment of the captive software business in line with the parent company’s plans.
At least some in the investing community suspect that the subsidiary company’s margins were deliberately beaten down before the planned transfer to the parent company.
If one were to use the pre-tax profit the IT company made in the year ended September 2007, the valuation would be less than three times profit.
Even if one were to use the profit for FY08, the valuation seems low at six times profit, but the bigger worry is the sharp dip in profitability just before the transfer.
Besides, there have been rumours that Siemens AG is looking to sell its global IT business. The move to transfer the Indian IT subsidiary to the parent could be seen as an attempt to consolidate all of the IT divisions before the sale.
These are but theories in the market, but Siemens’ weak communication policy has only enabled them to fester.
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