Siemens falls 10% after board approves selling low voltage motors, gears biz for Rs 2,200 crore

Siemens Ltd shares plunged more than 10% on May 22 after the company announced the sale of the company's low voltage motor and geared motor businesses to a Siemens AG affiliate, Siemens Large Drives India, for Rs 2,200 crore.

The stock plunged as much as 11% from its previous close, reaching a low of Rs 3,338. The stock traded at Rs 3,363 on the BSE at 10:06 a.m., down 9.45 percent, while India's benchmark Sensex increased 0.08 percent to 61,780 points.

By doing so, Siemens is exiting an outsourced manufacturing business that has grown at a mid-to-single-digit CAGR over the last decade.  Proposed valuations tend to assume a comparable future growth track. In our opinion, the business has solid potential for growth at an overall market level  stated Kotak Institutional Equities in its most recent note.

We retain Rs 3,200 FV while noting the possibility of Rs 3,000 FV if this transaction is completed. We factor in a 15% lower SIEM multiple than the Street does. These variables, among other things  reduce corporate growth/value accounting for 50% of RM costs such as stock-in-trade purchases according to the Kotak research.

Siemens Limited's Board of Directors has approved the transfer and sale of the company's low voltage motors and geared motors firms, as well as related client service businesses, to Siemens Large Drives India Pvt Ltd, an entity wholly owned by Siemens AG, for a price of Rs 2,200 crore, effective October 1, 2023, according to a statement from the company.

The business accounted for 7% of FY22 revenues and 9% of profits, with a 15X FY2022 EBITDA and 17X FY2022 earnings from operations valuation. Although this industry is not deemed significant for Siemens' Transmission and Railways prospects in the future, its selling at a lower enterprises value-to-sales (EV/sales) ratio resulting in an implicit losses of Rs189 for investors, according to Jefferries.

As long as the company's double-digit orders and profit growth remain, and given that this is a smaller division this is likely to have only a short-term stock impact. However, we will keep a close eye on multiple if a more significant event occurs, Jefferies wrote in a note to shareholders.

Meanwhile, brokerage company Nomura has downgraded the stock from Neutral to Reduced and raised its target price to Rs 3,521 from Rs 3,008 per share. Concerns have been raised by the brokerage company about the appropriateness of the valuation for the business being sold to the parent.

The Board has also decided to explore distributing 100% of the sale consideration, less applicable Capital Gains Tax and any other taxes that apply, as a special dividend at the first meeting of the board following the conclusion of the proposed deal.

Kotak forecasts a 7% drop in the price of the stock and a 9% loss on the bottom line from the planned sale, despite a post-capital gains tax dividend of Rs 1,800 crore to investors. "We maintain valuing SIEM at 47X two-year forward revenue, at a discount of 15% to the Street's and ABB's multiples. Such was the level of rerating above and above that of ABB that SIEM experienced over the last 21 months, during which it lagged ABB in terms of EBITDA growth, according to the Kotak research.