In an interview with CNBC-TV18, market veteran SP Tulsian and Rabindra Nath Nayak of Dolat Capital Group Company gave their take on the Havells-Lloyd deal.
Below is the verbatim transcript of the interview on CNBC-TV18.
Sonia: How did you read into this news flow and Lloyd Electric and Engineering's has a lower margin business, their margins are around 6 percent compared to Havells India's current margins of 13-14 percent. Do you see a margin dilution for Havells in the very near term? Tulsian: Two things. First, on Havells, I do not think that right now the analysis or the view should be taken on the margin for Havells because Havells is holding cash of about Rs 1,500-1,600 crore since their exit from Sylvania for the last one year and market has been apprehensive that why the cash is not used. So, Havells now is using the Rs 1,600 crore which is the exact amount lying in their kitty, in their books of accounts, is seen to be a very positive. Second, margin is a matter of management capability to expand it - that's why they got the business is for Rs 1,600 crore on a topline or maybe an income to EV ratio of 1. If the margins would have been higher, probably Havells would have got it at Rs 3,200 crore or maybe Rs 3,000 crore.
So yes, this is keeping the scope for Havells to have their managerial capability and good distribution network to ramp up the topline and consequently to increase the margin as well. So seen quite positive for Havells only for the reason that they have been sitting on the cash for the last one year and they have not gone for any acquisition of over Rs 1,600-1,700 crore. Therefore, it's positive from Havells' point of view.
Latha: Give us your views on Lloyd, actually what has left behind appears to be a high margin business; their original equipment manufacturers (OEMs), packaging air conditioning business seems to have a much better EBIT. So is Lloyds therefore also in a good spot?
Tulsian: That is again a point because while Lloyd ventured into marketing of air conditioners because they have all been suppliers of the OEM air-conditioning and the heat exchanger to the industry and maybe five-six years back they plunged into AC business also, where they have started offering the air conditioners at low margin. However, if you see the product price, Lloyd is ruling at the lowest end, for example one tonne AC, the Lloyd's ACs are available at Rs 20000-2,5000 – lower than Rs 30,000. So that is a logical expansion.
Therefore, if I break the revenue of Lloyd in two parts, the business they are divesting, they have topline of 16 percent but EBIT margin of virtually 50-51 percent or 52 percent conversely if you go for other business of OEMs and packaged air conditioning plus the heat exchanger, they have a topline of 40 percent plus the EBIT margin of over 50 percent. However, for nine months they had EBIT of Rs 83 crore from this operation while the air conditioning business which they are divesting, they had an EBIT of Rs 87 crore.
So I fully agree that once the company will be Rs 1,550 crore because maybe Rs 50 crore will be given to Fedders Lloyd for giving up the name of Lloyd. So if Lloyd gets Rs 1,550 crore, they can make the company debt free by about Rs 800 crore, which they have in their books and they can focus more on the heat exchanger and the OEM air conditioning business, their working capital requirement seem to be high.
So this is going to be seen as win-win for both, because Lloyd beyonds a point was not be able to expand their margins on the AC business or they have taken a right exit and to focus more on their core business of heat exchangers and the OEM air conditioning.
Anuj: What is your prognosis of the deal because you have one view that this would be dilutive in terms of margins for Havells and the other is that they are getting an asset at a reasonably cheap price? How would you approach the stock now?
Nayak: This deal is earning neutral and value decretive because entering into white goods business at this point of time which is highly competitive and Havells need to do a lot of homework before getting good margin on this business. Lloyd as such is a very cheap brand, so far as the AC business is concerned and it is also doing a lot of outsourcing particularly from China and other countries. So manufacturing which is Havells’ forte is not there in Lloyd. Therefore, on that basis I feel this is earning neutral but value decretive for Havells. For entire interview, watch accompanying video.
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