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MOSL: SIEMENS (Downgrade to Neutral)-C&S Electric acquisition not the best use of cash

Siemens: C&S Electric acquisition not the best use of cash; Downgrade to Neutral

(SIEM IN, Mkt Cap USD8.1b, CMP INR1625, TP INR1705, 5% Upside, 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/medium-voltage 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 value-engineered products of C&S Electric.