Siemens demerger could create more room for value unlocking despite high valuation

Shareholders will receive one share of Siemens Energy India Limited for every Siemens Limited share they hold.

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Shares of Siemens soared 7% after the company’s board approved the demerger of its energy business into a new entity, Siemens Energy India Limited, set to be listed on BSE and NSE. This move is part of Siemens’ global restructuring plan but is seen as a positive development by analysts. Both the energy and infrastructure/mobility verticals will benefit from a sharper focus, especially with abundant growth opportunities for both sectors, analysts said.

Under the arrangement, shareholders will receive one share of Siemens Energy India Limited for every Siemens Limited share they hold, ensuring identical shareholding patterns for both companies. Over the past year, Siemens Ltd shares have surged 74 percent, and nearly 5x in the last five years. Can the stellar performance continue?

Strategic focus post-demerger

Post-demerger, Siemens Limited will zero in on technology, infrastructure, and mobility, while Siemens Energy India Limited will concentrate on energy technology. This strategic shift aims to create two robust, independent listed entities with more focused business strategies.

Daljeet Singh Kohli, Head of Research & Strategy at Vasuki India Fund, remarked, “The demerger will unlock value for shareholders, especially as this will allow for market-driven valuation for the rapidly growing energy business.” The demerger and listing are expected to be completed by CY2025.

Also Read | Siemens India board approves demerger of its energy arm into separate listed entity

A powerful business

The energy business is brimming with growth potential. Sunny Agrawal, Head of Research at SBI Securities, noted, “Siemens Energy could see rapid growth in the next five to six years – after all, India’s power capacity is expected to grow from 428 GW to 820 GW by 2030.” Currently, Siemens’ energy business accounts for 33 percent of Siemens Limited’s total operations, focusing on gas turbines and power transformers, which are in high demand both in India and globally. More specifically, Amit Anwani, Research Analyst at Prabhudas Lilladher, points out, “The energy segment has a lot of opportunities in the pipeline, especially due to the global components shortage and demand for sustainable power.”

In terms of profitability, with an EBITDA margin of 14.1 percent for FY24, the energy business is slightly more profitable than Siemens Ltd’s 13.4 percent (excluding the energy business).

On the May 14 earnings call, Siemens’ management also emphasised that India’s growth and government reforms, such as the National Infrastructure Pipeline, are aimed at bolstering power generation and transmission capacities. This will support Siemens' efforts to tap into domestic and export markets, including plans to double power transmission capacity by 2023. As a separate listed entity, Siemens Energy India Limited will have the flexibility to align investments with growth strategies, believe analysts. As of March 31, 2024, the energy business's order book stood at Rs 974 crore.

Also Read | Siemens March quarter consolidated net profit jumps 70% to Rs 803 crore on higher execution

Siemens’ ‘other’ businesses

Equally exciting are the prospects for the non-energy segment, analysts note. Post-demerger, Siemens Limited will thrive on the growing demand for smart infrastructure, building automation, and data centres. Anwani noted the mobility segment’s expansion, including setting up metro facilities to meet local and export demands, particularly in regions such as Australia and UAE. This highlights Siemens Limited’s strong business opportunities.

Financial performance

Siemens Ltd reported impressive Q2FY24 earnings, with net profit soaring 70 percent YoY to Rs 802 crore and revenue growing 18.4 percent to Rs 5,750 crore. The mobility segment saw a 55.7 percent YoY increase in revenue to Rs 757 crore, and the digital industries vertical grew 16 percent YoY to Rs 1,042 crore. The energy business reported revenue of Rs 1,637 crore against Rs 1,555 crore in the previous fiscal. Siemens Limited follows the October-September fiscal year.

Analysts' outlook

The market has embraced the demerger announcement, with Siemens Ltd stock jumping around 8%. Analysts are bullish on the stock. Anwani views the demerger as a value creation opportunity, similar to ABB India’s energy business demerger. Analysts at Antique Stock Broking predict robust revenue growth of 34 percent CAGR over FY2023–2026E and earnings growth of 45 percent CAGR over the same period. They have a buy call on Siemens Ltd with a target price of Rs 7,573, based on a PE of 65x for FY2026E.

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