C&S Electric acquisition is margin accretive: Siemens: Sunil Mathur, MD & CEO, Siemens India

Update on the Indian Equity Market:

On Tuesday, NIFTY closed at 12,060 (-0.5% down its previous close).  The top gainers for the day were BPCL (+2.5%), HDFC (+1.6%) and Bajaj Finance (+1.2%). The stocks that were down in today’s session included Vedanta (-4.5%), Bharti Airtel (-4.4%) and Tata Motors (-3.2%). The sectoral gainers for the day were NIFTY Financial services (+0.3%) and NIFTY IT (+0.3%). The top losing sectors were NIFTY Metal (-2.4%), NIFTY Auto (-1.2%) and NIFTY Media (-1.1%).

Excerpts from an interview with Mr Sunil Mathur, Managing Director and Chief Executive Officer, Siemens India from Livemint dated 28^th January 2020:

• C&S Electric is an excellent acquisition for them. They are in a space that is a market for the future. Infrastructure is a huge market in India. A lot needs to be done and this is in the low voltage space of infrastructure.
• They were present in low voltage but very strong on the industrial side. What they lacked was a presence on the infrastructure side.
• They are looking at smart infrastructure as being a thrust area for them in the country and so this is perfect in that space. So, strategically it is a very good growth area and it is EPS accretive as well.
• C&S Electric did about ₹1,200 cr in terms of revenue and profitability in the range of 10-15% in last year. They are growing very well.
• They see a huge potential in this business not only from a domestic purpose but also from an export perspective. They see markets that are hugely competitive and what they would like to use this acquisition for is to also develop a manufacturing hub here and they can use them for design and manufacturing into low-cost markets outside the country.
• The profitability is in the 10-15% range, and if we look at the multiples from that perspective, both the revenue multiples as well as the EBITDA multiples, they are very comparable to the Schneider-L&T deal as well as compared to a lot of the other deals in the same space.
• It will improve RoCE because they are sitting on a lot of cash. They have ₹5,000 cr of cash. This is a ₹2,000 cr acquisition. So this should improve their RoCE and as it is margin accretive so it will help return on investment (RoIs) as well.
• A lot of it depends on when they get the regulatory approvals and when they start up over there, but if we take a volume of ₹1,200 cr topline and take a 10% bottom line and we are already there. Of course, that is a starting point.
• For export businesses, they will have to use their global network to start getting into customers and introducing their products to customers. So, they will build this up over a period of time but the potential is huge.
• The multiples today are terrifically high and so they have got to balance all that together and see whether it makes sense or not.

Consensus Estimate: (Source: market screener website)

• The closing price of Siemens Ltd was ₹ 1,502/- as on 28-January-2020. It traded at 49x/ 36x/ 31x the consensus earnings estimate of ₹ 30.5/ 41.7/ 48.6 for FY20E/ FY21E/ FY22E respectively.
• Consensus target price is ₹ 1,462/- which implies a PE multiple of 30x on FY22E EPS of ₹ 48.6/-