In January 2009, Siemens India Limited (SIEM) decided to sell its wholly owned subsidiary Siemens Information System (SISL) to its parent company Siemens AG.
We believe SIEM stands to lose from this deal as it received less-than-adequate consideration in exchange for SISL; the deal valued at an EV/Sales of 0.5x, much below the industry average of 1.4x, resulting in a potential loss of value for the investors.
Going forward, we expect net sales to fall ~20% in FY09; excluding SISL, we expect the fall to be in the range of 15-18%. We expect the major segments - Industrial and Power to show a negative growth of ~7% and ~25%, respectively.
The power segment’s revenue is likely to fall due to the completion of several big-ticket projects in FY08, and we do not expect any mega order inflows in the near term.
Meanwhile, we believe that strong growth in small segments such as transportation, healthcare, and BPO will help in cushioning the downside in revenue.
However, we expect revenue to grow substantially post FY10 once the orders in the power segment start coming in from the 12th Five Year plan.
At the CMP, SIEM’s stock trades at a forward P/E of 14.9x for FY09E and 13.7x for FY10E earnings.
Based on our DCF valuation, assuming a 15.6% WACC and a 5% terminal growth rate, we believe that the stock is fairly valued. Hence, we give a HOLD rating.