Crompton Greaves Consumer Electricals - Maintain Buy - ICICI Securities

Butterfly acquisition likely to be earnings accretive in FY24 assuming 5% synergy benefits

The acquisition values Butterfly at MCap/sales of 2.3x on annualized FY22E sales (TTK FY22E Mcap/Sales: 4.2x). The acquisition will help Crompton to (1) have stronger connect in south India, (2) expand distribution network, (3) will offer better right-to-win in kitchen appliances and (4) reduce over dependence on Crompton brand. (Refer detailed note on analysis of Butterfly financials Link) Assuming 5% synergy benefits by FY24, the Butterfly acquisition will lead to earnings accretion. We believe there will be synergies in raw material sourcing, distribution, media sourcing and distribution. With 26% correction in stock price over past six months, we maintain BUY rating with a DCF-based target price of Rs504 (implied P/E of 40x FY24E EPS).

- Acquisition of Butterfly: Crompton has announced acquisition of 55% stake in Butterfly Gandhimathi Appliances for a consideration of Rs13,796.8mn. It will also acquire 26% equity stake in Butterfly via open offer worth Rs6,666mn. This apart, it will acquire trademark rights for a consideration of Rs304mn. It has valued Butterfly at Rs25,263mn, as against closing market cap of Rs24,875.8mn on 22nd Feb 2022.

- Likely earnings accretion: Considering 5% synergy benefits (of Butterfly sales) in FY24, the acquisition is likely to be earnings accretive even after adjusting for loss of other income for Crompton. We believe there will be synergy benefits due to (1) higher scale of operations, (2) efficiencies in sourcing of raw materials and media buying, (3) merger of distribution network and efficiencies in freight and transportation and (4) relatively strong access to south India markets.

- Higher right-to-win in kitchen appliances: We believe Crompton brand has relatively strong connect with men consumers considering its product profile of water heaters, lighting, fans etc., whereas a kitchen appliances brand like Butterfly has stronger connect with women consumers. With the acquisition of Butterfly, Crompton will have better right-to-win in kitchen appliances.

- Lower dependence on Crompton brand: Crompton was largely dependent on single brand 'Crompton'. With the acquisition of Butterfly, the company will have access to two strong brands which will relatively de-risk the business model.

- Maintain BUY: We model Crompton to report PAT CAGR of 8.6% over FY21-FY24E and RoE to be at ~28% over FY23-24E. We remain positive on the company's business model due to its competitive advantages and growth opportunities. We maintain BUY rating with a DCF-based TP of Rs504 (implied P/E of 40x FY24E EPS).

Shares of Crompton Greaves Consumer Electricals Limited was last trading in BSE at Rs. 408.40 as compared to the previous close of Rs. 378.60. The total number of shares traded during the day was 213972 in over 5787 trades.

The stock hit an intraday high of Rs. 410.40 and intraday low of 377.20. The net turnover during the day was Rs. 85594740.00.

Source : Equity Bulls

Keywords

CromptonGreavesConsumerElectricals INE299U01018 Acquisition ButterflyGandhimathiAppliances ICICISecurities