Hold Crompton Greaves Consumer Ltd For Target Rs.465 - ICICI Direct
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Expansion through acquisition…
About the stock: Crompton Greaves Consumer (CGCEL) is among India’s leading fast moving electrical goods (FMEG) companies, present in electrical consumer durables (78% of revenue) and lighting businesses (22% of revenue
Market leader in the domestic fan industry with value market share of 27%. The company has enhanced focus on increasing market share in home appliances categories like (air coolers, water heater and kitchen appliances)
Robust balance sheet with RoE & RoCE of 34% & 39% (three-year average), respectively, with stringent working capital policy
Acquisition Details: CGCEL acquired a majority stake in Butterfly Gandhimathi Appliance (Butterfly) for a consideration of ~| 2077 crore. The transaction includes 55% stake and trademark license from Butterfly’s promoters at | 1410 crore (implied market cap of | 2564 crore for Butterfly). CGCEL will also launch open offer for acquiring 26% stake from public for a consideration of ~| 667 crore (~ | 1434/share). CGCEL will finance this acquisition through mix of debt and internal accruals (CGCEL had net cash of | 1083 crore as on December 2021). With the offer price, Butterfly is valued at 2.9x FY21 sales and 71x FY21 earnings
What should investors do? CGCEL’s share price has grown by 2.1x in the past five years (from ~| 192 in February 2017 to ~| 408 levels in February 2022).
We revise our rating from BUY to HOLD
Target Price & Valuation: With our SoTP based valuation, we arrive at a target price of | 465/share ascribing CGCEL’s standalone business 37x FY24E EPS and 2x FY24E sales to Butterfly.
Key triggers for future price performance:
Total ~1.7 crore new houses under PMAY, replacement of ~20 million water pumps under government’s flagship scheme KUSUM, urbanisation and rising aspiration are demand boosters of home appliances
Dealer addition in areas with population 10,000-100,000 in next five years
Expanding Butterfly products pan India leveraging existing dealer networks
Alternate Stock Idea: Apart from CGCEL, we also like Havells in the same space.
Trigger for Havells’ future revenue growth would be revival in Lloyds revenues and improvement in margin
BUY with a target price of | 1515
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