The stock market can be unforgiving. Shareholders of Siemens Ltd were upset after the company announced the sale of its low voltage (LV) motors and geared motors businesses to an arm of its German parent, Siemens AG, for Rs 2,200 crore on May 19. Shares plummeted 10 percent when the bourses opened on May 22 after the weekend and losses are yet to recover.
Fund managers and analysts are not enthused either. At least three brokerages have downgraded the price target and lowered the rating.
They are questioning the valuation at which the company has offloaded its business and fear it leaves minority investors short-changed.
Siemens management maintains the valuation is fair.
“In the absence of closely comparable public listed companies, the valuer has considered multiples of Indian listed companies operating in broadly similar industry and engaged in economic activities partially similar to the business. The valuer has assigned equal weights to the values derived under DCF method and market multiple method,” Managing Director and Chief Executive Officer Sunil Mathur told analysts over a call.
DCF method, or the discounted cash flow analysis, calculates the present value of expected future cash flows using a discount rate.
Since the announcement, shares of the company have fallen nearly 8 percent to Rs 3,431 on NSE.
The bone of contention
The engineering and services company announced last week that it plans to offload its LV motors and geared motors businesses to Siemens Large Drives India Private Limited on a slump sale basis at Rs 2,200 crore, as a part of its global strategy to exit this business.
“We will not have motors (in our portfolio), because our strategy is to move up the value chain– from electrical to automation to digital. We want to move more in that direction rather than get into a business that could eventually become more commoditised,” Mathur told Moneycontrol in an interview after the announcement.
In FY22, the business delivered a revenue of Rs 1,061.3 crore, the company said. Thus Siemens has valued the hived-off business at about two times its sales. Overall, Siemens is valued at over eight times its sales, considering FY22 revenue of Rs 15,255 crore and the current market cap of 1,22,197 crore. Even when considering profits, the business contributes 9 percent to its bottomline but is being sold at 1.8 percent of the total valuation of the company.
This – selling part of its business at a quarter of its valuation to its parent – is hard to digest for some analysts and investors who believe they are being left short-changed.
“We believe the sale…has negative implications for minority shareholders in India as the rationale and the valuations of the divestiture seem unfair,” said Umesh Raut, Research Analyst, Prabhudas Lilladher.
The low voltage motor business, which falls under Siemens' Digital Industries segment, operates with a short cycle and adopts an asset-light model, meaning they outsource most of the manufacturing part. The portfolio includes a range of LV motors, spanning from 0.12 kW to 1.25 MW.
For some, the sale of business at such benign valuations reeks of corporate governance issues at the company. They do not expect minority shareholders to approve the sale.
Priyankar Biswas, an analyst with Nomura Financial Advisory and Securities (India) downgraded the stock following the announcement citing “weak motors growth outlook and additional governance concerns”.
Analysts at Prabhudas Lilladher have also downgraded the stock saying the deal is a “negative” while Kotak Institutional Equities has a ‘sell’ rating on the stock, but has retained the target price at Rs 3,200.
Some analysts point out the fact that the sale is happening at a time when the domestic market is showing strong demand tailwinds for LV motors and other dominant players like CG Power and ABB India are consolidating their market share by expanding capacities.
Thus the prospects of the business are brightening up, they argue.
However, the company management doesn’t share the same optimism about the motors market citing that the low voltage motors market growth in units was a low single digit over the period 2018 to 2023.
Another analyst, on condition of anonymity, said that prima facie, the growth may look modest, but this came at a time when there was no capex happening in the industry. So, the growth can be justified, he added. Moreover, the business has a margin of 12.5 percent, which is higher than the comparable Digital Industries margin of about 10 percent for FY22.
Fair deal
Siemens management insists it is a fairly valued deal which is in line with the parent company’s global strategy and takes care of the interests of minority shareholders.
A few analysts also believe it is not reasonable to value every segment of the business on par with overall valuation of the company. They cite that the company has made inroads into software and servicing business – which are high-growth businesses – and thus justify premium valuation.
On the day the company announced divestment, it also announced the acquisition of Mass-Tech Controls’ EV division acquisition worth Rs 38 crore. Although the acquisition is a small ticket one, it consolidates Siemens' offerings in the fast-growing EV market in India.
“We note a similar Rs 2,100 crore valuation Siemens paid for C&S Electric, a business with similar Rs 1,200 crore top-line, similar low historical growth and much lower ~8 percent EBITDA margin then. Siemens might have potentially accounted for good growth prospects of the switchgear business (domestic and exports) and its synergy with businesses Siemens wants to invest in,” Kotak Institutional Equities said in a note.
Siemens made its biggest acquisition in India in 2021– C&S Electric– which helped the company expand in the mid-segment market from only the premium segment where it was present before.
Siemens also cited the on-time special dividend announced for shareholders. Grant Thornton, the valuer, has recommended a valuation in the range of Rs 2,070 crore to Rs 2,165 crore. Siemens said that the board decided to take the higher end of their recommended valuation and further increased it to Rs 2,200 crore. Based on the FY22 financials, this translates to a revenue multiple of 2.1 and an EBITDA multiple of 15.5 of the business.
But is the slumps sale the best way for price discovery for the minority holders?
“The IPR rights for these motors are with the parent company, and as the parent company outlined in the beginning, they intend post the carve out on 1st of October to potentially look for various options to subsequently carve the business out either through IPO or through various other means. Now, that would mean there is a risk of the IP also being transferred, and therefore it did make sense for us to also transfer this business at this point in time,” Mathur said.
Siemens has in the past too divested businesses to align to the global strategy. The global entity, Siemens AG, is upbeat on expanding its digital business and has said that India will be at the centre of its strategy. This means that such a rejig of the portfolio may continue.
