Nomura bullish on Crompton Greaves after Butterfly Gandhimathi merger, maintains 'Buy'

As Butterfly Gandhimathi is set to merge with Crompton Greaves, brokerage firm Nomura maintained its Buy rating on Crompton Greaves Consumer Electricals with a target price of Rs 377, indicating an upside of 28% from the current market price of Rs 294/share.

Last week, Crompton Greaves Consumer Electricals and Butterfly Gandhimathi Appliances announced a merger to accelerate and smoothen the realisation of synergies of the combined business. Under the merger deal, the public shareholders of Butterfly, as of the record date, will receive 22 equity shares of Crompton for every 5 equity shares held by them in Butterfly. Post the completion of the merger, the public shareholders of Butterfly will hold a 3% stake in the combined entity, said a joint statement.

The scheme is subject to necessary statutory and regulatory approvals and is expected to be completed in 12-14 months, it said.

"The merger is seen driving various revenue and cost synergies to be realised over the short to medium term. It will lead to a faster go-to-market strategy for pan-India expansion. It is seen as having the ability to cross-sell products across channels and simplify corporate and governance structure, leading to more efficient capital allocation," the brokerage firm Nomura said.

At 1.13 pm, the stock was trading 0.9% higher at Rs 295 on BSE.

The brokerage firm said that the share swap implies a market cap of Rs 2,310 crore to Butterfly, or Rs 1,294 per share, compared to a price of Rs 1,275 on March 24. In the past, Crompton acquired a nearly 81% stake in Butterfly in two tranches, effectively at Rs 1,403/share in Feb-22, and later sold a 6% stake in Sep-22 at Rs 1,370/share due to regulatory requirements. Thus, it currently holds around 25% stake in Butterfly.

Nomura further stated that it maintains its view that Butterfly commands higher gross margins (36.3% in 9MFY23) than Crompton (31.1% in 9MFY23), but its EBITDA margins (10.2% in 9MFY23) are depressed due to higher overhead and marketing costs.

Given Crompton’s reach and brand equity, Nomura expects Butterfly to grow revenue at a 16% CAGR over FY23-25F and EBITDA margins improving to 13.5%/15.2% in FY24F/25F. "Thus, we expect the transaction to be EPS accretive by FY25F," it said.

"We maintain our Buy rating on Crompton with a TP of Rs 377, based on our target P/E of 30x, applied to FY25F EPS. The stock trades at ~23.3 FY25F P/E, which is attractive, in our view, brokerage firm Nomura said.

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