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Siemens Global demerges operations
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What's the deal?
 
Siemens AG's (global operations) last week approved the spinoff of its 'Gas & Power" business into a new independent entity - Siemens Gas & Power (SGP). 
 
  1. It will comprise the oil & gas, conventional power-gen, power transmission and related service businesses. 
  2. Siemens AG will also transfer its holding in Siemens Gamesa (SGRE) to this new entity. Thus making SGP a play on conventional and renewable energy. 
  3. SGP’s proforma revenue split would be 35% Conventional Power Generation, 33% Renewable energy (SGRE), 21% Grids and 11% Oil & Gas. 
  4. It is planned to list SGP separately by September 2020 in which Siemens AG will be an anchor shareholder with diluted stake of less than 50% but above 25%. 
  5. The Gas & Power divisions in global subsidiaries of Siemens AG will be carved out.
 
Rationale for this action?
 
Siemens AG wants to optimise its resources towards high margin high growth businesses and focus on its automation business. G&P is expected to grow at 2-3% CAGR over the next five years against the residual industrial business growth of 4-5%. In addition G&P will have a lower margin profile (8-12% EBITA margin in 2023) compared to the residual business margins of 14-18%. They want to reduce its focus on structurally challenged conventional energy businesses. Siemens would continue to own a majority stake in the demerged entity. It will now have only two reporting segments (from a peak of 11 segments in FY10) representing its industrial core- automation business. 
 
Implications on Siemens India? 
 
Power & Gas (PG) and a major part of Energy management (EM) segments in India would form part of this restructuring. These segments accounted for 52%/56% of Siemens India’s FY18 revenue and segmental EBIT. However, it is still not clear if Power Distribution products would form part of the deal or would remain with the residual business. Nonetheless, we expect > 45% of Siemens India revenues to get impacted by this event.  Demerger in Siemens India is expected to happen 6 months after the Global operations are done i.e April 2021.
 
How will this play out for Siemens India? 
 
In our view there are two ways through which this global corporate action could be executed for Siemens India. 
 
1) An identical listing arrangement for G&P business in India post carve out. This we believe will be a more cash and tax efficient option for the parent entity. 
2) Slump sale of the PG and EM segments to Siemens AG, just as it was done in case of Healthcare (in FY16) and Metal technology (FY15) businesses. 
 
We believe that the demerger of the G&P business is a positive development for Siemens India in the long term. However, in short term this can act as deterrent on the share price as valuations teeter on the higher side. 
 
Disclosure :  The author(s) may have positions in this stock or may have recommended to clients. Kindly assume we are biased. Equity investing throws various special situations in the market and this is only an attempt to understand business implications on the stock.

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