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Acquisition of Butterfly Gandimathi by the company:

Crompton has announced the acquisition of a 55% stake in Butterfly Gandhimathi Appliances for Rs 13,796.8 million. It will also acquire a 26% stake in Butterfly through an open offer worth Rs 6,666 million. That aside, he will acquire the trademark rights for a consideration of Rs304mn. It valued Butterfly at 25,263 million rupees, compared to a closing market capitalization of 24,875.8 million rupees on February 22, 2022.

Probable accretion of profits:

Probable accretion of profits:

Given synergy benefits of 5% (of Butterfly sales) in FY24, the acquisition is likely to be earnings accretive even after adjusting for the loss of other revenue for Crompton. We believe there will be synergy benefits due to (1) greater scale of operations, (2) efficiencies in raw material sourcing and media buying, (3) merging distribution network and efficiencies in freight and transportation and (4) relatively strong access to South Indian markets.

Acquisition of Butterfly: The acquisition of Butterfly will give Crompton the edge even in kitchen appliances.

Evaluation and justification of a purchase in Crompton according to the brokerage:

Evaluation and justification of a purchase in Crompton according to the brokerage:

The acquisition values ​​Butterfly at MCap/Sales of 2.3x on FY22E annualized sales (TTK FY22E Mcap/Sales: 4.2x). The acquisition will help Crompton to (1) have a stronger connection in South India, (2) expand the distribution network, (3) provide better earning rights in kitchen appliances and (4) reduce overreliance on the Crompton brand. (See detailed note on Butterfly Financials Link Analysis) Assuming 5% synergy benefits by FY24, the Butterfly acquisition will result in increased earnings. We believe there will be synergies in raw material sourcing, distribution, media sourcing and distribution. With a 26% correction in the stock price over the past six months, we maintain the Buy rating with a DCF-based target price of Rs504 (implied P/E of 40x FY24E EPS).

Warning:

Warning:

Beware, investing in stocks is risky. Neither the author nor the brokerage firm nor Greynium Information Technologies would be responsible for any losses based on the above article. Markets are now very volatile due to global indices of which Indian markets are not isolated hence caution is warranted.

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