Butterfly merger not a game changer for Crompton investors
2 min read 28 Mar 2023, 09:38 PM ISTWith demand expected to be soft, investors looking for triggers from Q4 results are likely to be disappointed.
PremiumShares of Crompton Greaves Consumer Electricals Ltd are down by 11% since it announced lower-than-expected December quarter earnings (Q3FY23) on 2 February. With demand expected to be soft, investors looking for triggers from Q4 results are likely to be disappointed.
Crompton had refrained from channel loading of non-rated fans in Q3 due to the transition to Bureau of Energy Efficiency norms. But, peers such as Havells India Ltd, Orient Electric Ltd and Bajaj Electricals Ltd flooded the channel with non-rated fans, said Nilesh Bhaiya, analyst at BNP Paribas Securities India, in a report. “As Crompton misses out on sales of non-rated fans, we think it will lag peers in the fans segment and risk losing volume market share in the upcoming summer," he said. The new energy-efficient fans are priced higher.
In this backdrop, the merger announcement by Crompton with its 75%-owned unit Butterfly Gandhimathi Appliances Ltd did little to alter investor sentiments with the former’s shares staying flattish in the past two days. Upon merger, the public shareholders of Butterfly, which has a significant presence in kitchen appliances, will get 22 shares of Crompton for every 5 shares they hold. Crompton’s existing shareholding in Butterfly will be cancelled. Post the merger, the latter’s public shareholders will hold a 3% stake in the resultant company.
Indeed, the merger would bring in cost and revenue synergies apart from simplifying the corporate structure. Crompton has realized cost synergies of ₹18-20 crore after the acquisition of Butterfly till date. Crompton bought a controlling stake in Butterfly in February last year. As such, meaningful gains could be limited, at least in the near term. Also, post-merger, Crompton aims to move towards in-house manufacturing, which would mean an increase in capital expenditure levels and hence, pressure on return ratios. Crompton expects the Butterfly acquisition to be earnings per share accretive in FY24 and the merger to be accretive from the first year of it being effective. The proposed merger is likely to be completed by FY24-end.
To be sure, Crompton’s core portfolio of fans, lighting and pumps is facing several challenges, including rising competition. “Our channel checks suggest there has been down trading happening in the kitchen appliances space, while competitive intensity has increased in the electrical space," Yes Securities (India) said in a 27 March report. As things stand, Crompton’s shares are down by almost 20% in the past one year, while the Nifty 500 index has fallen by 3%. Given the headwinds, significant upsides may be capped for now.
