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Crompton-Butterfly merger: Cost synergies will not flow to bottom line immediately

The management expects the mandatory National Company Law Tribunal (NCLT) approval by Q4FY24, following which additional shares of Crompton will list and trade

March 27, 2023 / 12:07 PM IST
Public shareholders of Butterfly will hold 3 percent in combined entity

Public shareholders of Butterfly will hold 3 percent in combined entity

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Shares of Butterfly Gandhimathi fell 5 percent in early trade on March 27 while shares of Crompton Greaves Consumer Electricals were trading flat even as the management of the two companies reassured investors in a call that the merger of the two companies was effected to enable cost and revenue synergies, product innovation, as well as accelerate the go-to-market strategy.

The management message that the synergies of the merger will not flow to the bottomline immediately, was a dampener, market observers said.

The company officials expect the mandatory National Company Law Tribunal (NCLT) approval for the merger by Q4FY24, following which additional shares of Crompton will list. This means EPS accretion will gradually happen in FY25, as per analysts.

The public shareholders of Butterfly are set to receive 22 equity shares of Crompton for every 5 equity shares held by them in Butterfly. This values Butterfly Gandhimathi at Rs 2,300 crore, which is lower than the Rs 2,500 crore valuation of February last year, when Crompton had acquired a majority stake in it.

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Crompton currently holds a 75 percent stake in Butterfly Gandhimathi. "Some cost synergies have already started playing out. For instance, we have been doing common raw material procurement like steel, aluminium and so on," said the management, adding that they have realised Rs 18-20 crore synergy here already.

Indirect costs like IT expenditures, logistics and warehousing will also be rationalised once the merger is complete. "There will be no duplication of staff as the skill sets are different," the top brass said.

The near-term focus will be on expanding Butterfly's presence in North and West India. Currently, more than 80 percent of its revenue is coming from the South while the rest is from the non-South region.

"Butterfly's reach will increase and the merger will be a key enabler for that, as we bring both brands under the same distribution network," as per the management.

That said, the synergies will not trickle down to the bottom line immediately. "It will be reinvested in marketing and product innovation."

Analysts' take

As per CLSA, a realisation of this synergy, as well as improving market share and margins, will be key to a rerating of the stock. It has an ‘Outperform’ call with a target price of Rs 350 per share.

Crompton was already consolidating Butterfly’s financials post its acquisition in 2022. In Q3 FY23, Crompton reported consolidated revenue at Rs 1,516.21 crore, which included Rs 248 crore of revenue from Butterfly products as well.

"Post the merger, from an accounting perspective, Butterfly’s business is likely to get reflected as a separate segment or segments within Crompton’s standalone business," noted Abhilash Pagaria of Nuvama Research. He has a ‘Buy’ rating on the stock.

"There will be no minority interest going out but that will be offset by the new equity Crompton shares that will be issued to the Butterfly shareholders. So net-net, no big change there," he said.

Nomura, too, has a ‘Buy’ call, with a target price of Rs 377 per share.

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Shailaja Mohapatra Senior sub-editor, Moneycontrol