Will Butterfly deal help Crompton take wings?
PremiumThis acquisition might not be able to add anything meaningful to Crompton’s margins immediately
Crompton Greaves Consumer Electricals Ltd’s acquisition of a controlling stake in Butterfly Gandhimathi Appliances Ltd has cheered investors. Crompton’s shares rose 7.3% on NSE on Wednesday and shares of Butterfly touched a new 52-week high.
Crompton has a big presence in fans and residential pumps. It also wants to become a leader in kitchen appliances but has less reach in small domestic appliances that are seeing increased demand because of urbanization, social trends, and the rising number of nuclear families. Enter Butterfly, which has a strong portfolio of small domestic appliances such as pressure cookers, non-stick cookware, and table top wet grinders. This will support Crompton’s ambitions in the kitchen appliances segment.
View Full Image
“Crompton has been struggling for many years to scale up its kitchen appliances business. This acquisition will help it move from the bottom of the pyramid to the top in kitchen appliances and be neck and neck with Bajaj Electricals," said Rahul Gajare, an analyst at Haitong Securities India Pvt. Ltd.
Crompton has signed an agreement to acquire 55% stake in Butterfly for ₹1,380 crore. It will also acquire 26% equity stake through an open offer for ₹667 crore. This values the company at ₹2,526 crore, marginally higher than Wednesday’s market cap of close to ₹2,500 crore. “The acquisition values Butterfly at MCap/sales of 2.3x on annualized FY22E sales (TTK Prestige FY22E Mcap/Sales: 4.2x)," said ICICI Securities analysts in a report.
Crompton will also acquire certain trademarks for ₹30.4 crore. The management expects the acquisition to be earnings per share neutral in FY23 and to be accretive from FY24. It aims for the revenue growth to be faster than that of the market and margin growth to be in line with revenue growth.
“We believe there will be synergy benefits because of higher scale of operations, efficiencies in sourcing of raw materials and media buying, merger of distribution network, and efficiencies in freight and transportation and relatively strong access to south India markets" added the ICICI Securities report.
MINT PREMIUM See All
For Butterfly, this transaction is expected to boost margins. “With average gross margin of about 40% during FY18-21, we believe Crompton has all the ingredients to improve the current Ebitda margin of about 9% (TTM and FY21) to ~12-13% in two-three years’ time frame," said Manoj Gori, analyst, Equirus Securities. Ebitda is earnings before interest, taxes, depreciation and amortization. TTM is trailing 12 months. “This acquisition might not be able to add anything meaningful to Crompton’s margins immediately but Crompton can leverage on the distribution network of Butterfly," he added.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!