SIXTY-ONE years after its incorporation in Pakistan, Siemens Pakistan Engineering Company Ltd is slowly transforming itself from a giant producer of engineering products to a trading entity. This is widely believed to be unfortunate.

The company has been the main supplier of high-voltage grid stations, switchgear products and power and distribution transformers. Up until the first half of this decade, it prided itself on being “the largest employer of engineering graduates in the country”.

An old timer in the engineering field concurs. “It was the dream of professional engineering college students to make it to Siemens for the enviable pay package and the opportunities to advance their knowledge about the production of heavy engineering products.” Yet, that seems to be all but over.

Last week, Siemens Pakistan MD and CEO Guenter Zwisckl told investors at the stock market that the company was contemplating selling its immovable properties in Islamabad. A fortnight ago, the company had agreed in principle to sell land and buildings in the Sindh Industrial Trading Estate in Karachi.

Trade is twice as profitable as manufacturing. Just look at industrial estates. Industries are being replaced by warehouses, CNG stations and multi-storey buildings — former KCCI chief Majyd Aziz

“It is a prime piece of property of 13 acres in the heart of SITE,” said a property dealer, who believes that at the going price of Rs100m per acre, the company may fetch around Rs1.3bn.

Earlier in March, Siemens had announced that its board had decided to sell the transformer business; the decision to dispose of the ‘core’ product had come as a ‘rude’ shock to investors.

“If the company is selling lock, stock and barrel, is it on its way out of Pakistan,” people wondered. The company did not specifically dwell on that point, but issued a ‘profit warning’ last week saying its profitability for the financial year ending on September 30 was adversely affected by ‘multifarious reasons’. As a result, it expected to report a loss.

A person in the know of things, however, confided that Siemens is not walking away and that it would maintain its presence in the country. “The company will retain manufacturing rights of transformers of certain specifications,” he asserted. The remaining transformers business is proposed to be sold, with a couple of buyers already engaged in conducting due diligence.

“The company has now rescheduled its last date of bidding from mid-October to November 7,” said this person, who asked not to be named. He believed that the company would continue to sell Siemens products manufactured outside Pakistan.

In essence, Siemens would convert from a manufacturing unit to a trading entity. An industrialist sympathetic to the company argued that it may have been forced to cease much of the manufacturing activity given the shortage of power and water, and an uncertain law and order situation, particularly in Karachi.

Yet, industrialist Majyd Aziz, a former president of the Karachi Chamber of Commerce and Industry, sees method in this madness. He does not subscribe to the view that shortage of utilities could drive away a profitable company, pointing out that large numbers of manufacturing units were still operating in SITE. He observes that trading is twice as profitable as manufacturing.

“Government policies are anti-industry and pro-imports,” he said, and added that even banks are quick to advance credit to traders, instead of industrialists. “Just look at purely industrial estates. Industries are being replaced by warehouses, CNG stations and multi-story buildings.”

But for all that, the fact remains that Siemens Pakistan is counted among the companies with the strongest balance sheets. At the close of nine months ending June 30, the company had built up reserves of Rs5.6bn, which were eight times the capital of Rs82.5m. It carried total assets of Rs18bn on its balance sheet. The break-up value of its Rs10 par value share works out at a high Rs543, and the market price of the stock is as high as Rs1,126, valuing the company at Rs9.3bn.

Siemens has not yet indicated if it would seek de-listing from the stock market, but it had repurchased its own shares a year ago. It was a silent ‘off-market’ deal of 0.716m shares, valued at $8.47m. Market players speculated the buyer was its parent company Siemens AG Germany, which already held 66.1pc of the Pakistani subsidiary’s stock.

For FY13, the company had incurred loss-before-tax of Rs821m, with net sales down to Rs13bn from Rs13.8bn in the earlier year. The ‘profit warning’ issued by Siemens last week prepared investors to await another grim performance this year.

A senior investment analyst pointed out that in FY13, the company had produced negative return of 22.25pc on its equity. “If Siemens opts for trading instead of manufacturing, it makes quite sense for it to quit the business that cannot be carried on but at a loss,” he added.

Published in Dawn, Economic & Business, October 20th, 2014