When Siemens reported a loss of Rs 23.90 crore for the first-half as against a profit of Rs 22.40 crore in the corresponding period, few realised that serious problems dogging the company was just beginning to unravel.

But now, with losses mounting to Rs 84.53 crore for 1996-97, Siemens clearly has its back to the wall. In fact, it now looks as if past losses were hidden and suddenly being disclosed at one go. For the first-half loss, Siemens blamed the government's telecom policies.

Siemens had invested in two units (at Calcutta and Aurangabad) for local manufacturing. Perhaps it hoped to get order preference over direct imports. But the government decided to treats all suppliers at par.

Siemens, expectedly, was uncompetitive and its new units are idling. But that still does not explain the declining gross profit margins. For 1996-97, Siemens reported a turnover of Rs 1,165 crore and a gross profit of Rs 73.30 crore yielding a gross profit margin of just 6.29 per cent.

After providing for interest (Rs 93.1 crore) and depreciation (Rs 46.70 crore), the loss was Rs 84.53 crore.

The message: Siemens's regular product portfolio like motors, switchgears, variable speed drives etc. are unattractive. New local and foreign entrants are eroding the margins enjoyed by MNCs in this sector. A gross margin of just 6.29 per cent is pathetic and only reflects that the company's overheads are far too high for the type of products it makes.

Siemens has also witnessed frequent industrial unrest owing to inter union rivalry and the viability of operations in the high wage island of Mumbai/Thane continues to remain questionable.

Finally, Siemens'funding strategy has been flawed -- and is becoming worse. It has funded all expansions only through its paltry internal accruals.

It would have been sensible to have come out with a rights offering to partly fund its Rs 165-crore expansion programme.

But Siemens AG, with 51 per cent stake was perhaps not willing to cough up. Nor did Siemens AG -- on whose "support and sympathy Siemens India depends (words used by chairman F A Mehta in the 1995-96 annual report)" -- organise cheap loans from foreign markets. The company just kept hoping that profits from operations would be adequate to meet additional interest burden. That calculation has obviously gone wrong in a year that witnessed severe liquidity crunch.

The only ray of hope for Siemens' investors is that the company now admits that a management failure has indeed occurred. It no longer blames government policy on telecom or the weak market conditions. It has initiated a restructuring of its operations and hired a local management consultant M Athreya to assist in its restructuring efforts.

The recent steps announced include: Closure of the optical fibre unit at Aurangabad; relocating of its offices to Kharghar, Navi Mumbai; selling its prime property assets at Worli, Prabhadevi and Andheri (all in Mumbai); and finally raising Rs 150 crore through private placement of preference shares at market rates with FIs, FIIs and Siemens AG.

Siemens also plans to rationalise its product mix and introduce VRS to cut employee costs.

The key issue is -- will all these measures ensure a quick turnaround in the 12-18 months time frame indicated by the management? It is difficult to predict. But investors appear to have already forgiven Siemens if the stock price is any indicator. The scrip has steadily climbed up from a low of Rs 210 to Rs 320.

That is surprising. Siemens is unlikely to ever regain the gross profit margins it has so far enjoyed in electrical goods.

The most surprising aspect is that the new funding plan. Siemens, apparently will issue Rs 150 crore preference shares to Siemens AG.

That decision clearly favours the foreign parent. Indian shareholders who have suffered value erosion could have done with a 14 per cent (tax-free) preference dividend. Why should Siemens AG get the benefit alone? MNC stocks get a higher discounting because the market expects their rich parents to stand by them.

Siemens is poor now and is being treated as an orphan. Why should then the stock enjoy an MNC-like price?

(Contributed by Kensource Information Services Pvt. Ltd, Mumbai)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.