ICICI Securities Bet On This Electricals Company Stock For 29% Gains

The markets are expected to consolidate and despite the continuing Ukraine and Russia tensions, the US Fed action on interest rates will have a deeper rub-off effect on the Indian markets. Amid it on stock specific action, ICICI Securities is bullish on Crompton Greaves for a target price of Rs. 504.

Company's acquisition of Butterfly Gandimathi:

Crompton has announced acquisition of 55% stake inButterfly Gandhimathi Appliances for a consideration of Rs13,796.8mn. It will also acquire 26% equity stake in Butterfly via open offer worth Rs6,666mn. This apart, it will acquire trademark rights for a consideration of Rs304mn. It has valued Butterfly at Rs25,263mn, as against closing market cap of Rs24,875.8mn on 22nd Feb 2022.

Likely earnings accretion:

Considering 5% synergy benefits (of Butterfly sales) inFY24, the acquisition is likely to be earnings accretive even after adjusting for loss of other income for Crompton. We believe there will be synergy benefits due to (1) higher scale of operations, (2) efficiencies in sourcing of raw materials and media buying, (3) merger of distribution network and efficiencies in freight and transportation and (4) relatively strong access to south India markets.

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

Valuation and Rationale for a Buy in Crompton as per the brokerage:

The acquisition values Butterfly at MCap/sales of 2.3x on annualized FY22E sales (TTK FY22E Mcap/Sales: 4.2x). The acquisition will help Crompton to (1) have stronger connect in south India, (2) expand distribution network, (3) will offer better right-to-win in kitchen appliances and (4) reduce over dependence on Crompton brand. (Refer detailed note on analysis of Butterfly financials link) Assuming 5% synergy benefits by FY24, the Butterfly acquisition will lead to earnings accretion. We believe there will be synergies in raw material sourcing, distribution, media sourcing and distribution. With 26% correction in stock price over past six months, we maintain BUY rating with a DCF-based target price of Rs504 (implied P/E of 40x FY24E EPS).

 

Disclaimer:

Please note, investing in equities 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 now are highly volatile due to global cues from which Indian markets are not insulated, hence cautiousness should be exercised.