Butterfly acquisition a boost for Crompton Greaves Consumer's kitchen biz

The Rs 2,076 crore buy to earnings accretive from second year of acquisition

The Street is positive about the earnings accretive acquisition of South India-based kitchen appliances company Butterfly Gandhimathi Appliances (Butterfly) by home appliances major Crompton Greaves Consumer Electricals (Crompton). The Crompton management indicated that the Rs 2,076 crore acquisition will start adding to the net profit of the combined entity from the second year of the acquisition.

Butterfly is the largest player in stoves and wet grinders and among the top three in mixer grinders and pressure cookers in South India. The deal is expected to be complementary as small appliances/kitchen products form 10 per cent of Crompton’s portfolio and this will expand to 24 per cent post the deal. If FY21 figures are taken into consideration, Butterfly adds about 17 per cent to the combined entity’s revenues.

The Butterfly acquisition, according to the Crompton management, will add scale to its current range of kitchen products which is limited to mixer/wet grinders, electric kettles and toast makers. A backward integrated manufacturing base, a distribution network, research and development as well as design capability are the key positives which will enable it to boost its presence in the kitchen products portfolio, believes the company.

In addition to an expanded portfolio, the acquisition also offers long term growth opportunity for Crompton. Kitchen appliances is a Rs 8,000 crore category and Butterfly which ended FY21 with revenues of Rs 870 crore has been growing its topline at a compounded annual basis of 21 per cent in the last five years. A portfolio with double digit growth coupled with cost synergies could help reduce the 500-600 basis point margin gap between Crompton and Butterfly.

Analysts led by Aniruddha Joshi of ICICI Securities highlight that the acquisition will derisk the business model of Crompton as the company now has access to two strong brands. The acquisition values Butterfly at market capitalisation to sales of 2.3 times on FY22 figures while TTK Prestige is valued at 4.2 times on the same parameter.

The Street gave a thumbs-up to the deal; the Crompton stock gained 8 per cent on Wednesday and was the biggest gainer among BSE 100 companies. Butterfly has gained 25 per cent since its lows on February 18.

Brokerages are positive on Crompton’s growth prospects led by government schemes (housing), urbanisation and expansion of dealer network. A focus on premium products is expected to drive operating profit margins.