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Acquires Butterfly Gandhimati Appliances

Forays into small Domestic Appliances; diversifies its product portfolio

Transaction details: a) Crompton has entered into a share purchase agreement with the promoter group of Butterfly Gandhimathi Appliances (Butterfly) to acquire up to 55% stake at INR1,403/share, aggregating to INR13.8b. b) It will also acquire the trademarks relating to the Butterfly brand from various promoter owned entities for INR303.8m. c) It will make the mandatory open offer to public shareholders of Butterfly (to acquire up to 26% stake) at INR1,433.90/share (3% premium to its CMP), aggregating to INR6.7b. The entire deal will be at a total consideration of INR20.8b.

The transition of existing promoters’ stake to Crompton will be completed in FY22 itself, while the open offer will follow the SEBI prescribed timeline. Post transition of promoter shares, existing promoters will be stepping down from managerial positions and will not hold any directorship in Butterfly

Butterfly promoters have signed a non-compete agreement with Crompton for a finite period.

About Butterfly

Butterfly is among the top three Indian Kitchen and small Domestic Appliances companies. Its product portfolio includes Mixer Grinders, Table Top Wet Grinders, Pressure Cookers, Stainless Steel Vacuum Flasks, LPG Stoves, and Non-Stick Cookware.

In South India, it is numero uno in Table Top Wet Grinders and LPG Stoves, second in Mixer Grinders, and third in Pressure Cookers.

It has over 500 exclusive distributors and is present in more than 25,000 retail outlets.

Key highlights from the management interaction

Kitchen Appliances is an INR80b market, with Mixer Grinders constituting ~40%

The management expects double-digit growth potential in the long-term

Butterfly has a strong manufacturing base. It has backward integrated its facilities to a large extent (all the way to molding). This is a very critical capability, which in the long term will provide operational benefits. It also has a strong R&D team in place.

The management believes the deal will be EPS neutral in the first year (FY23), but EPS accretive from the second year onwards

The only overlap with Crompton’s product portfolio is in Mixer Grinders. The management sees space for two different brands in the market. Its major focus area going forward will be on Butterfly’s business.

There is no promoter family dependence on distributors of Butterfly (there is a minuscule percentage in the back-end but none in the front-end).

Our view

The deal is in line with the management commentary in the past few results. It has on a number of occasions stated its intention to enter into a new category and its openness for inorganic growth. This deal will help Crompton immediately scale up in its key Kitchen segment.

We expect the deal to be financed through a mix of internal accruals and debt. As on Sep’21, Crompton had a gross debt/cash balance (including investments) of INR3b/INR12b. This indicates it may have to take on debt to execute the deal

Butterfly has a deep distribution network in South India, which will help Crompton expand and gain market share. The company will also benefit from Crompton’s pan-India reach.

Crompton tends to benefit from Butterfly’s backward integrated manufacturing facilities and R&D capabilities. It can use this acquisition to optimize its logistic footprint.

Valuation: On FY21/TTM basis, deal implies EV/Sales of ~2.8x/~3.4x and EV/ EBITDA of ~31x/28x.

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