Acquisition of Lloyd’s consumer durable business seems a move in the right direction for Havells. This will add more products and increase the reach of Havells. The acquisition is for a price of ₹1,600 crore, of which ₹500-700 crore would be paid through debt and the balance through internal cash accruals.

₹1,590-cr war chest Havells is debt-free now. Its war chest has ₹1,590 crore of cash (in the nine months ending December 2016).

The stock of Havells dropped 2.7 per cent on Monday fearing margin dilution post-acquisition as Lloyd’s consumer business’ margins are much lower. However, we see it bringing benefits for the company in the next one-two years.

This acquisition will help Havells get a foothold in the under-penetrated room air-conditioner market. Compared to other white goods — TV, refrigerator and washing machines, market penetration is the lowest in air conditioners — at about 3-4 per cent. Lloyd’s has 10,000 touch points (dealer/distributor network) across India which will benefit Havells now.

Havells’ management says the deal will be EPS-neutral in the first year.

For the nine months ended December 2016, Lloyd’s consumer business posted revenue of ₹1,242 crore and operating profit of ₹75 crore. Havells has estimated that for the first year, this business will make a profit contribution of ₹110 crore (with sales of ₹1,850 crore) to it. But, given the drop in ‘other income’ of Havells due to reduction of investments in bank deposits and bonds and interest cost on additional borrowing to finance the purchase , any meaningful contribution from the new business to Havells’ EPS is unlikely in the first year. (Havells reported other income of ₹82.3 crore (standalone) in the nine months ended December 2016; so for the full year, it may be around ₹109-110 crore).

Fair price The price paid for the acquisition looks reasonable. Based on the full-year earnings estimate given by Havells for Lloyd’s consumer business, the price agreed for the deal comes to EV/EBITDA of 14.5 times. Peers including Voltas, Hitachi, Blue Star and Whirlpool of India are trading at 22-24 times EV/EBITDA.

For Lloyd Electric & Engineering, the consumer durable business (air-conditioners, washing machines, LED panels, refrigerators and small appliances) contributes 49 per cent to revenue. It has a market share of 14 per cent in the room air-conditioners segment and is among the top three players in the space.

The company is also a vendor of air-conditioners for brands including Voltas, Blue Star, Hitachi, LG and Whirlpool, among others. In the recent December quarter, the consumer durable segment registered a revenue growth of 43 per cent. Margin at the operating level was 5.5 per cent, which was lower by 100 basis points compared to the same period in the previous year. While other consumer durable players in the market enjoy a higher single digit (9-10 per cent) margin, Lloyd’s lower profitability can be attributed to its high marketing and ad spends (significantly higher compared to peers) and higher incentives offered to dealers.

Given the history of successful integration of companies (CrabTree, T-Series’ fans, Promptec) acquired by Havells in the past, and the successful turnaround at Sylvania (before it was sold out), Havells may also be able to improve Lloyd’s business over the next one year.

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