Parent group’s stake restructuring good for Siemens, but growth concerns loom

Siemens Gas and Power Holding BV (Siemens Gas), a fully-owned subsidiary of Siemens AG, is set to acquire a 24% stake in its Indian arm, Siemens Ltd (Siemens). This ends the uncertainty over the fate of Siemens’ power and gas business division.

With the proposed stake acquisition, Siemens will continue to run all segments, including gas and power, under its umbrella to tap growth opportunities independent of the parent’s global arrangement. The firm’s parent ownership will be split among Siemens Gas (24%), Siemens AG (48%) and Siemens Metal Technologies (3%), totalling to 75%.

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Investors in the Indian entity have been on edge ever since the parent hived off the struggling gas and power division at the global level in May 2019. In a similar (though not like-to-like) move, multinational peer ABB India Ltd’s power grids business was hived off and listed as a separate entity on Indian bourses.

Several questions loomed for Siemens’ investors: What if the Indian operations toed the parent’s line? What would Siemens Ltd be left with?

Unlike at the global level, the gas and power division has been contributing significantly to Siemens’ revenue and profits. It accounted for about 38% of Siemens’ revenue and 51% of the earnings before interest and tax (Ebit).

Taking the average of FY18 and FY19, Edelweiss Securities Ltd estimates that the division contributes about 48% to after-tax earnings in India. The balance accrues from new-age businesses such as smart infrastructure, mobility and digital factories. HDFC Securities Institutional Equities said the 24% stake transfer values the business at about ₹10,500 crore (15x FY19 enterprise value/Ebit).

So, the business being a part of Siemens will support overall valuations. That said, the firm, like other capital goods manufacturers, disappointed investors with its March quarter (Q2FY20) performance. Revenue dropped 21% year-on-year (y-o-y) on the back of a macroeconomic slowdown that affected execution both on government and industrial projects. Brokerages have been critical about the firm’s ability to manage costs during such challenging times. Operating profit plummeted by around 43%.

Although the gas and power business is critical to earnings and valuations, the profitability of the division waned, as it did for all other divisions during the quarter. Worse, with the slowdown against the backdrop of covid-19, weak government and private sector spends will spoil order flows for some quarters.

So, in spite of clarity over the future of the gas and power division, Siemens’ stock is down 33% since early this year. At ₹1,020 per share, it trades at fairly rich valuations of 40 times one-year forward estimated earnings on the Street.