Crompton Greaves Consumer Electricals Ltd recently proposed a scheme of amalgamation of the company with Butterfly Gandhimathi Appliances Ltd.
In a filing with the stock exchanges, Crompton Greaves stated that its board had authorised merging with Butterfly Gandhimathi Appliances. After the merging is complete, Crompton Greaves will issue 22 fully paid up shares of ₹2 for every five fully paid up shares of Butterfly that are worth ₹10.
As a result, Butterfly shareholders will own nearly 3% of the merged company.
Following the announcement, the management of the company held a conference call to go over the strategic rationale for the planned merger of its business with Butterfly. The deal is expected to be completed within the next 12 to 14 months, and the management expects it to be earnings per share (EPS) accretive within FY24 itself.
Here are some of the key takeaways from the management call:
Strategic rationale for the merger: The management claimed that the company's merging with Butterfly would speed up and smooth out the synergies generated by the combined company. Additionally, it would combine Butterfly's public shareholders at the parent level and streamline Butterfly's business and governance structure. Furthermore, it would assist both companies' shareholders' interests align, which would be advantageous for all stakeholders.
Revenue synergies: Revenue synergies are expected to materialise with little segment overlap through cross-selling products across channels and a quick go-to-market strategy. Due to this, Crompton should be able to meet its internal goal of double-digit increase for Butterfly.
Cost synergies: Crompton expects cost savings from locating raw materials and integrating other non-operating expenses (IT, warehousing, etc).
Other benefits: According to the management, Crompton will assist Butterfly in growing outside of the southern markets and pursue cross-selling possibilities.
Additionally, the combined entity will probably have more common distributors, which will strengthen the positioning of the brands in the face of the intense competition that is currently present.
What do brokerages say?
Systematix Institutional Equities
The brokerage believes that the company's decision to merge is the correct one because it will strengthen its place in the small appliance market and enable it to grow more quickly by realising cost-saving benefits.
"We estimate compound annual growth rate (CAGR) of 18%/17%/12% in revenue/Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA)/Profit after Tax (PAT) over FY22-25E, respectively, with 13.7% EBITDA margin and nearly 23% Return on Equity (RoE), largely driven by the Butterfly acquisition. While we expect margins in core segments (ECD, Lighting) to improve, consolidated earnings and RoE could bear the brunt of Butterfly’s relatively weak operating performance.
Post 23% decline in Crompton's scrip in last 1-year, we find the company's valuation comfortable. Thus, we maintain 'buy' rating on the stock, with a target price of ₹387. Growth and margin uptick should trigger the company's stock performance," said the brokerage in its report.
Nuvama Wealth Management Ltd
The brokerage claims that despite the company's near- and medium-term demand forecast for durable products remaining weak in an inflationary environment, Butterfly's focus on branding and integrated distribution network does provide some comfort.
"Crompton’s leadership team has displayed strong on-ground execution and rigour as far as current portfolio is concerned. That said, how the new strategy of in-house manufacturing shapes up and impacts returns remains a key monitorable, in our view. Post the recent stock price slip, we see crompton attractively priced. Our analysis shows that the stock factors in nearly 15% earnings growth for the next 8-10 years, which we believe is achievable. We retain ‘Buy/So’ on Crompton with an unchanged target price of ₹370, valuing it at a price–earnings (P/E) of 35 times on our FY25E estimates," said brokerage Nuvama in its report.
Batlivala & Karani Securities India Pvt Ltd (B&K Securities)
The brokerage in its report stated that the merger is a crucial strategic move in the development of the business. On the strength of distribution leverage, economies of scale, and manufacturing capabilities, the brokerage anticipates that the business will start realising distribution and cost synergies from the following year, even though the project will take 12 to 14 months to complete.
The merger will open up more opportunities for growth and development and help the merged company realise its full potential. Additionally, it will improve productivity and effectiveness and result in the efficient allocation of capital.
"We believe, company's focus on growth and investment in brand building, innovation along with scaling up of Butterfly brand will yield strong results going forward and hence we maintain 'buy' rating on the stock. Our target price remains unchanged at ₹363. The stock is currently trading at 28.4x FY24E earnings," said the brokerage in its report.
