Good Lloyd! Havells’ Investors will Likely Say in the Long Run
The deal will help India’s largest electrical products co to deploy idle cash in a fast-growing business, although there are concerns about margin dilution in the near term
ET Intelligence Group: Shareholders of India’s largest electrical products company Havells India are likely to benefit in the long term from its acquisition of Lloyd Electric & Engineering’s consumer durables division that makes ACs, LED TVs and other home appliances.Thedeal,doneat a reasonable valuation, will help it deploy idle cash into a fast-growing business. But there are concerns in the near term on margin dilution, as the operating margin of Lloyd’s consumer business is just about half that of Havells.
Noida-based Havells is acquiring Lloyd’s consumer business for an enterprise value of ₹ 1,600 crore. On the basis of the annualised run-rate of its performance in the AprilDecember period, the consumer business is expected to post an oper- ating profit of ₹ 110croreonrevenue of ₹ 1,850 crore in fiscal 2017. This implies Havells has valued the consumer business at 14.5 times its EVEBIT,atnearlya40%discounttothe current valuation of Voltas, the leader in local air conditioner market. The valuation, though, fairly captures the difference between margindiscountsof thetwocompanies. Voltas’ air conditioner division enjoyed a margin of 13-14% last fiscal year, while for Lloyd’s, it was 7.6%.
Also, Havells has been sitting on ₹ 1,200 crore cash on its balance sheet after selling its overseas assets, which can be utilised to fund the purchase. The return on the investment will be much higher than from putting the cashinabankaccount.Withoperating profit of ₹ 110 crore, the transaction though would be neutral for profit before tax in FY17, given that the company would have earned a goodssegmentbyusingthecurrent infrastructure of Lloyd. Havells – predominantly a home electricals company – has been looking to expand its appliance business, such as in water heaters, mixer grinders and fans. The acquisition will give it access to 10,000-plus direct and indirect dealer networks in India, 485 authorised service centre and 31 company-owned service centres, highly complementary for its existing consumer durables business.
The biggest concern for investors will be the low margins of Lloyd’s consumer segment. Lloyd has expanded revenue growth of the consumer division by adopting an aggressive volume growth strategy, but that came with low margins. In FY16, Lloyd registered revenue growth of 60%. But its operating profit expanded just 10%, even as the margin shrank by 3.5 percentage points. Havells’ operating margin was 13.4% in the first nine months of FY17; Lloyd’s consumer division had a margin of just 6%.