Premium8The deal complements V-Guard’s portfolio. Sunflame has strong presence in the non-south regions (roughly 80% of revenues) and this offers V-guard opportunities to strengthen its brand in the region given its negligible presence there.
V-Guard Industries Ltd’s investors have welcomed its move to expand presence in the kitchen appliances segment through the acquisition of Sunflame Enterprises Pvt. Ltd. Since the announcement, V-Guard’s shares have risen by over 6%.
8The deal complements V-Guard’s portfolio. Sunflame has strong presence in the non-south regions (roughly 80% of revenues) and this offers V-guard opportunities to strengthen its brand in the region given its negligible presence there.
Sunflame’s Ebitda (earnings before interest, tax, depreciation and amortization) margin is 12%. This is higher than V-Guard’s overall Ebitda margin of almost 8% in the half year ended September. Hence, blended margins would slightly be higher. “There is scope for margin expansion in Sunflame. The operating cost is currently on the higher side and this can be curtailed with the new management coming in," said Harshit Kapadia, analyst at Elara Securities (India).
Another lever for margin expansion would come from scale. Sunflame has poor presence in modern trade and the e-commerce channel. It clocked a mere 5% revenue compound annual growth rate over FY14-22, according to ICICI Securities. Ramping up Sunflame’s products through these channels would boost sales but it also means there could be a rise in advertising and promotion spends, which could weigh on margins.
Nevertheless, the benefit at the Ebitda level would be curtailed by the rise in interest cost. V-Guard is planning to fund the acquisition via internal accruals and debt. The consideration for 100% stake is ₹660 crore, out of which roughly ₹350-400 crore would be funded via debt.
V-guard expects the transaction to be earnings per share neutral in FY24 and accretive thereafter. The acquisition is valued at 1.9 times price to sales (P/S) for FY22. This is reasonably priced when compared to the acquisition of Butterfly Gandhimathi Appliances Ltd by Crompton Greaves Consumer Electricals Ltd in the earlier part of CY22. The consideration for Crompton deal was around ₹2,080 crore for about 81% stake, which implies P/S of 2.5-3 times basis FY21 financials, say analysts at Jefferies India.
Shares of V-Guard are near their 52-week highs of ₹273 apiece. Hereon, meaningful upsides for the stock would depend on the extent of traction gained in the non-south markets. Investors would also do well to closely track the pick-up in demand for consumer electrical goods.