Good Lloyd! Havells’ In­vestors will Likely Say in the Long Run

The Economic Times - - Companies: Pursuit Of Profit -

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%.

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