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Crompton's appliances business to get wings through 'Butterfly'

ICICI Securities 24 Feb 2022

Buzzing

Acquisition of Butterfly to strengthen Crompton Greaves Consumer's (CGCEL) appliances business but weigh on its margins.

Context

CGCEL will acquire 81% stake (55% promoter & 26% through open offer) in Butterfly Gandhimathi Appliance limited (Butterfly) for the consideration of ~Rs 2077 crore. Butterfly has recorded revenue CAGR of 21% in FY17-21 The company is no1 brand in Table top wet grinders & LPG stove in south India and amongst the top 3 brands in mixer grinder & cooker category. Except for mixer grinder, none of CGCEL's appliance product overlap with Butterfly kitchen portfolio. Hence, acquisition of Butterfly will immediately expand appliances revenue contribution in CGCEL's topline from 10% to ~23%. However, Butterfly's EBITDA margin of 9% is lower as compared to CGCEL's 15%. The acquisition will be funded through mix of internal accruals and debts.

Our perspective

At the deal price, Butterfly is valued at Rs 2526 crore (i.e. 25x FY24E earnings). We believe the deal is a fairly valued considering Butterfly’s presence is largely in the southern regions and lower margin profile compared to its peers. CGCEL will strengthen its presence in  south India through established dealer network of Butterfly. Company will also leverage its pan India dealer network to strengthen its appliances business through Butterfly brand. However, lower EBITDA margin of Butterfly and addition of debt (~ Rs 600 crore to fund the acquisition) in balance sheet of CGCEL will slowdown company’s bottomline growth to 5-6%. We believe a significant rise in input costs and higher advertisement/promotional expenditure (to combat national players such as Bajaj Electricals, TTK prestige) will keep CGCEL’s EBITDA margin under check for FY23E-24E.

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