Published on 6/02/2020 10:42:22 AM | Source: Motilal Oswal Services Ltd

Neutral Siemens Ltd For Target Rs.1,705 - Motilal Oswal

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C&S Electric acquisition not the best use of cash

Downgrade to Neutral

* Acquisition of C&S Electric’s product portfolio at EV of INR21b: Siemens has announced the acquisition of 99.22% stake in C&S Electric Ltd at an EV of INR21b. C&S Electric is engaged in the business of low-voltage/mediumvoltage switchgears, busbars, diesel gensets, solar and EPC; the company has been in the Indian market for over 50 years. The scope of the acquisition comprises low voltage switchgears and panels, low/medium voltage power busbars as well as protection and metering devices. Other businesses of C&S Electric, such as MV switchgears and package sub-station, lighting, diesel generating sets, EPC and the Etacom busbars will be retained by the promoters (Refer tables for market share data across different products).


* Financial profile of C&S Electric: In FY19, the company clocked revenue of INR12.4b. EBITDA stood at INR1.2b with EBITDA margin at 9.5%. Adjusted PAT stood at INR527m, while reported PAT at INR329m was due to impairment of INR197m. Net D/E stood at 0.4x as the company had gross debt of INR2.1b; RoE/RoCE ratio stood at 10.3%/9.7%. However, as Siemens is acquiring C&S Electric’s product business, the financial profile of the acquired portfolio could be different than that of the entire company. Assuming the other businesses to be non-material, the acquisition implies transaction multiple for FY19 EV/sales at 1.7x, EV/EBITDA at 17.9x and P/E at 36x. Note that the actual transaction ratios may be lower, but is not expected to deviate too much.


* Rationale behind the acquisition: In the low voltage switchgear segment, Siemens lacks the distribution network capabilities of Tier-1 brands, such as Schneider, L&T and ABB. With the acquisition of C&S Electric’s portfolio, the company is aiming to improve its presence in the low voltage switchgear business, especially in the building segment, where it has limited presence. Moreover, Siemens is hoping to tap the export market through valueengineered products of C&S Electric.


* Is the acquisition a reaction to the Schneider-L&T deal? In our view, Siemens’ acquisition of C&S Electric is a reaction to the fear of losing market share in the switchgear business, especially after Schneider’s acquisition of L&T’s portfolio. Our channel checks suggest that C&S Electric’s products sell at 7-8% discount to Tier-1 brands and lack scope of automation currently. As the C&S Electric brand migrates to Siemens over the next 5 years, there might be scope to increase its brand perception (else it may not be easy to tap export potential). However, the inorganic way to acquire a Tier-2 brand is clearly RoIC dilutive.


* C&S Electric to lose out on white label opportunity from Schneider-L&T deal, in our view: As the Schneider-L&T deal would create a monopoly position for various products (ACB, MCCB, Contactors, Overload Relays, and SDF), Schneider had offered the Competition Commission of India (CCI) to allocate these products for white labeling to third-party LV switchgear manufacturers. C&S Electric was a contender for such an opportunity. However, the CCI order exclusively mentions that the white labeling opportunity can’t be used by ABB, 25 January 2020 Update | Sector: Capital Goods Siemens 27 January 2020 12 Siemens and their successors. Thus, C&S Electric stands to lose out on the white labeling opportunity after acquisition by Siemens, in our view.


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