Crompton wants to occupy more kitchen shelves. Can Butterfly add wings to its dreams?


by 5paisa Research Team Last Updated: 2022-03-18T10:15:59+05:30

Not long ago, Crompton Greaves—part of the Gautam Thapar-led Avantha Group—was in doldrums even though it had become the flagship company of the Delhi-based diversified conglomerate. The group was until a few years ago known more for its paper business. But a raft of debt-funded overseas acquisitions in the engineering segment and investments in the power sector, which subsequently faced severe financial pressure, took the company back by almost a decade when it was a piled under debt trying to break out.

Given the circumstances, the group was forced to look at various deleveraging options, and one key decision it took was to demerge the consumer business unit that made fans, lighting and other electrical appliances such as geysers.

In a simultaneous move, the erstwhile promoters sold their stake in the demerged consumer products unit to a consortium of American buyout major Advent International and Singapore state investment firm Temasek.

This demerged business, which is listed as a separate company now, has had a steady growth since then. In the last five years, its stock has grown three-fold. While the lead investor Advent exited the company last year with gains that marginally beat the benchmark for alternative investors, the company is not letting go of its expansion mode.

Last month, Crompton Greaves Consumer Electricals said it signed a deal to acquire a majority stake in kitchen and small appliances maker Butterfly Gandhimathi Appliances Ltd for as much as Rs 2,076.63 crore.

Crompton will acquire 55% of Butterfly from its controlling shareholders for Rs 1,379.7 crore. It also made an open offer to acquire another 26% of Butterfly from public shareholders, as per India’s takeover norms. Assuming full acceptance of the open offer, it will shell out Rs 666.6 crore.

Mumbai-listed Crompton will also spend Rs 30.38 crore to acquire Butterfly’s trademarks.

While Crompton is paying Butterfly’s controlling shareholders Rs 1,403 per share, it has made the open offer at Rs 1,433.90 apiece.

Crompton said that the transaction will be subject to completion of customary closing conditions and that it will finance the deal through a mix of internal accruals and debt.

Synergies

Butterfly specialises in appliances such as mixer grinders, stoves and cooktops, table top wet grinders, and pressure cookers. In 2020-21, Butterfly reported revenue of Rs 870 crore and EBITDA of Rs 80 crore. In the first nine months of 2021-22, it has posted revenue of Rs 806 crore and EBITDA of Rs 75 crore.

The acquisition will help CG Consumer increase the share of small domestic appliances and, in particular, those targeted at kitchens in its portfolio to 24% of revenue from 10% at present.

Crompton is a key player in segments like fans, geysers and coolers while Butterfly is particularly strong with stoves, grinders and cookers in South India.

The kitchen appliances business remains highly fragmented even as scores of branded players have tried to corner a larger chunk of the pie through the years. Traditionally, there were standalone market leaders for different micro categories with key pieces of the jigsaw being higher valued segments such as microwave ovens, chimney and stoves and hobs besides mixers, cooking appliances and others.

Brands such as Philips, Faber, Bajaj, Elica, Sunflame, Morphy Richards, Prestige, Glen, Usha, Hawkins, Havells, IFB and even large appliance firms such as Whirlpool, LG and Samsung to name a few have been slowly trying to consolidate the market away from the unorganised sector.

If we factor out higher valued categories like microwave and chimney, the small kitchen appliance products market is pegged around Rs 8,000 crore and is growing in double digits. Butterfly says it is the third-largest brand in the small kitchen appliances space and is a particularly strong player in South India.

Besides the basic synergies from the cost side, be it procurement, logistics and R&D, the deal will allow Crompton to leverage its wide distribution network, especially in North India as also in East and West India to make Butterfly reach many more households.

The product overlap between the two companies is also not too significant, thereby not cannibalising into each other. The only category where the overlap is significant is for mixer-grinders.

Still, given that around 80% of Butterfly’s products are manufactured inhouse it would have strong backward linkages overall.

Is it worth the buy?

The key concerns for all acquisitions are how are those funded. Crompton has not shared details of how much debt it intends to take on. Given that it has a comfortable debt-to-equity ratio, it may not end up with a huge debt pile even if it uses loans to finance a good chunk of the total payout.

Then again, the firm is likely to end the current financial year with reserves topping Rs 2,000 crore and still nominal lending rates (that are expected to rise), so acquisition finance is not going to cross the red line.

Given the buy calls by several brokerages on Butterfly Gandhimathi, Crompton may end up with shelling out around Rs 1,410-1,450 crore only as the shareholders of Butterfly may like to hold on to the stock given high growth prospects.

The other key risk to the transaction being a success is operations, integration and execution.

Butterfly is likely to grow faster than Crompton over the next two years and the transaction would help Crompton likely cross the $1 billion revenue mark in the first year ending March 31, 2023. On the flip side, Crompton enjoys better operating margins. Either way, the deal does make sense from a product and market fit, and the comfortable balance sheet will also support the inorganic expansion move by Crompton.

“Initially, the company is expected to raise short-term funds to close the transaction, and then replace the same with long-term funds,” according to ratings firm CRISIL.

“Nevertheless, while the acquisition will be EBITDA accretive with immediate effect, the sizeable debt that will be raised will lead to temporary moderation in Crompton’s debt metrics in the near term; gross debt to EBITDA is likely to rise to close to 2 times in fiscal 2022, and then gradually improve to 1.2-1.4 times by fiscal 2023, supported by healthy cash generating ability,” CRISIL said.

To be sure, not many companies have made the transition from products that cater to one side of the house to another. But some have tried it with mixed results. Havells, for instance, has gained heft and transformed its business from electrical appliances to larger consumer durables and electronics space despite heavy competition.

Havells’ acquisition of Lloyds catapulted the company to compete with established multinationals like LG, Samsung and Daikin in the living and dining rooms as against being present largely as a fans and geyser maker (like Crompton). While Havells may not be counted as among the top brands for products like a refrigerator, air conditioner or television, it has scaled up in size with potential to churn more juice from higher-margin and higher-value products.

Crompton is in a much sweeter spot. It has taken a much safer bet with Butterfly and the risk of a deal sinking the mothership is low due to its earnings accretive nature and strong balance sheet.

That said, it won’t be a cakewalk for Crompton to occupy more kitchen shelves in the same households where it already sells products for bedrooms and bathrooms. In the kitchen, it would be facing not just other branded peers but also several local players and unorganised firms that cater to the economy end of the market. But it also has the opportunity to take advantage of the shifting consumer purchase decisions to brands with rising disposable income.


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