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Despite rising 57% in the last 1 year, Motilal Oswal downgraded this stock; here's why

Despite rising 57% in the last 1 year, Motilal Oswal downgraded this stock; here's why

Despite rising 57% in the last 1 year, Motilal Oswal downgraded this stock; here's why
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By Pranati Deva  Jan 27, 2020 2:48 PM IST (Updated)

Despite rising 57 percent in the last 1 year, brokerage firm Motilal Oswal (MOSL) has downgraded Siemens to 'neutral' post its acquisition of C&S Electric. As per the brokerage, C&S Electric acquisition not the best use of cash and asked investors to await a better entry point in the stock.

Despite rising 57 percent in the last one year, brokerage firm Motilal Oswal (MOSL) has downgraded Siemens to 'neutral' post its acquisition of C&S Electric. As per the brokerage, C&S Electric acquisition not the best use of cash and asked investors to await a better entry point in the stock.

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Siemens has announced the acquisition of 99.22 percent stake in C&S Electric for Rs 2,100 crore. C&S Electric is engaged in the business of low-voltage/medium voltage switchgear, busbars, diesel gen-sets, solar and EPC. The scope of the acquisition comprises low voltage switchgear and panels, low/medium voltage power busbars as well as protection and metering devices, MOSL noted in a recent report.
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, the brokerage report stated.
"Our channel checks suggest that C&S Electric’s products sell at 7-8 percent discount to Tier-1 brands and lack the 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," the report added.
MOSL also believes that even though the deal value might be cheaper than the trading multiples of Siemens India, such comparison may not be the right way to look at the transaction.
"Siemens acquisition of C&S Electric looks expensive on EV/EBITDA and P/E basis or at best may be similar, assuming that the acquired product portfolio has a better margin profile than the current financials of C&S. However, L&T’s brand, distribution network, and business scale far exceeds that of C&S Electric, and thus, we find the deal to be expensive," explained the firm.
Meanwhile, as per Phillip Capital, this acquisition takes Siemens further away from the traditional and now structurally challenged utility facing Power & Gas business, additionally, exposing C&S to its global franchise enhances opportunities in the Infrastructure and Industrial segments.
Though, it further noted that it awaits clarity on the roadmap for this business since most of the benefits would accrue with a lag while the upfront payout seems high. The brokerage also has a 'neutral' rating on the stock.
In FY19, C&S Electric clocked revenue of Rs 1,240 crore with EBITDA at Rs 120 crore. EBITDA margin stood at 9.5 percent and the adjusted PAT was reported at Rs 52.7 crore.
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