05 Mar , 2022 By : monika singh
Key takeaway: Crompton is set to acquire 55% stake in Butterfly for Rs 13.8bn and will launch mandatory open offer for 26%. Total consideration for 81% stake could be Rs 20.7bn, implying P/S of 2.5x-3x basis FY21 sales. Butterfly is a key player in kitchen appliances, esp in South (76% of mix), with 500 distributors and 25k touch points pan-India. This acquisition could help Crompton diversify its product mix. Mgmt expects it to be EPS neutral in Y1 and accretive in Y2. Buy.
Acquisition: Crompton has signed a definitive agreement on 22Feb’22 with promoters of Butterfly Gandhimathi Appliances (Butterfly) to acquire 1) up to 55% stake at Rs 1,403 per equity share, for Rs 13.79bn, and 2) certain Butterfly trademarks from promoter group entities for Rs 303.8mn. Crompton would launch the mandatory open offer to the public shareholders of Butterfly, for acquiring up to 26% stake in Butterfly at a price of Rs 1,434 per equity share, aggregating up to Rs 6.66bn. Thus, total consideration for ~81% stake could be up to Rs 20.76bn. The transaction is expected to be financed via a mix of internal accruals and debt.
Butterfly: Company’s kitchen appliances’ portfolio includes Mixer Grinders, Table Top Wet Grinders, Pressure Cookers, Stainless Steel Vacuum Flasks, LPG Stoves and Non-Stick Cookware. B2C forms the majority of sales mix. While Butterfly is present in 29 states, South accounts for 76% of sales mix. In South, Butterfly is #1 in Wet Grinders and LPG Stoves, #2 in Mixer Grinders and #3 in Pressure Cookers, per company’s press release. Butterfly is amongst Top #3 in kitchen appliances pan-India. In-house manufacturing accounts for 80% of sales.
Key rationale: Crompton envisages to accelerate its strategic goal of diversification and strengthening presence in small appliances. Product mix currently is ~75?D (Fans, Pumps, select Appliances) and ~25% Lighting. Butterfly’s complementary product mix could aid scale and channel synergies for Crompton.
Buy: This acquisition will be subject to completion of customary closing conditions. Mgmt expects acquisition to be EPS neutral in Y1 and accretive in Y2; But, we await further clarity on revenue & cost synergies, cross-selling opportunity, margin trajectory, capex, leverage (interest cost) etc for factoring this in estimates. We currently rate Crompton as a Buy with PT of Rs 590, Target PE at 45x.
Key risks: Poor offtake in Appliances, Margin miss in Lighting, RM volatility (metals, PVC) and supply chain issues, pricing pressures.
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