After selling its low voltage (LV) motors and geared motors business sector to a parent company for Rs 2,200 crore at 16 times FY22 profits per share, on the basis of slow growth and declining operating profit margins, Siemens’ stock price suffered on Monday. Analysts noted that for FY22, the division contributed 7% of revenues and 9% of profits.
Due to the seeming injustice of the justification and values for the divestiture, Phillip Capital believes that the sale of the company to Siemens AG will have detrimental effects on Indian minority shareholders. It stated that the management of Siemens contends that the LV motors business will eventually become commoditized and would no longer be consistent with their long-term goals.
“However, this business is short cycle in nature and Siemens has Ebitda margins of 12.5 per cent with an asset light model having negative capital employed. Ironically, this move is happening at a time when domestic market is showing strong demand tailwinds for LV Motors & other dominant players like CG Power, ABB India are consolidating their market share by expanding capacities & also investing into motor’s technology for higher energy efficiency.”
According to Phillip Capital, the deal’s valuation, at 16.6 times EV/EBIT, materially undervalues the company when compared to Siemen and ABB’s respective FY22 EV/EBIT of 85 times and 93 times.
On the BSE, the stock dropped 10% to a low of Rs 3,338.05. Despite this, shares of Siemens have increased 18.5% so far this year.
“Considering these concerns, we have lowered our multiple SOTP based implied multiple to 50 times to reflect the potential implications faced by Indian minority shareholders due to the sale and restructuring decisions made by Siemens AG. Consequently, we cut our FY24/ FY25 earnings estimates by 7 per cent/ 8 per cent respectively, accounting for sale of a LV motors biz, subject to approval by minority shareholders,” Phillip Capital said suggesting a revised target of Rs 3,477 for the stock.
According to Nuvama Institutional Equities, this practise of selling lucrative units to the main company at low valuations is “unfriendly” to minority investors. Given Siemens’ offerings in the areas of trains and transmission, Nuvama said it still believes Siemens can provide best in class order inflow growth, despite the less than optimal manner of sale (a third party sale would have been more open and equitable).
“We lower our EPS by 5 per cent for FY23E and 9 per cent in FY24E on the sale of high margin LV motors and geared business. Accordingly, we cut our target price by 9 per cent to Rs 4,120 on 65 times (unchanged) March 2025E P/E. We reiterate ‘Accumulate’ as we expect an earnings CAGR of 24 per cent over FY22-25E and a 15 per cent ROE over FY23-24E as we enter into a multi-year capex cycle of public and private capex. Siemens, with its diversified portfolio, technological edge and parent support, would be a key beneficiary,” Elara Securities said .
This brokerage made a notice stating the sale’s revenues will be distributed to shareholders as a 100% dividend. Elara stated that Siemens AG plans to run Innomotics GmbH as a legally separate and autonomous entity within the Siemens Group after carving off the LV and geared business from among its group companies internationally.
According to Prabhudas Lilladher, a 23% capital gains tax is anticipated to be applied to the deal. It claimed that because Siemen’s competitive advantage is in providing digitalization and automation solutions, and since motors are a commodity product that can be outsourced, the separation of the motors division from the Digital Industries segment won’t have any effect on execution synergies. Additionally, as Siemens AG owns the intellectual property rights (IPR) for these goods, it makes logical to transfer assets. LV motors are used in industries like machine construction, metallurgy, food and beverage, chemicals, power and minerals, among others, it said.