Crompton-Butterfly merger: Cost synergies to 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

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To enable cost and revenue synergies, product innovation, as well as accelerate the go-to-market strategy, Crompton Greaves Consumer Electricals and Butterfly Gandhimathi decided to merge, said the management in an investor concall on March 27. However, the synergies will not flow to bottom line immediately, they added.

The management expects the mandatory National Company Law Tribunal (NCLT) approval for the merger by Q4FY24, following which additional shares of Crompton will list and trade. This means EPS accretion will 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.

On March 27, shares of Butterfly Gandhimathi fell 5 percent in early trade to Rs 1,201 while shares of Crompton were trading flat at Rs 293.

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

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,” they added.

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 South regions while the rest is ‘non-South’ regions.

“Butterfly’s reach will increase and the merger will be key enabler for that, as we bring both brands under same distribution network,” said the management.

That said, the synergies will not trickle down to the bottom line immediately, cautioned the top brass. “It will be reinvested in marketing and product innovation.”

Analysts take

As per CLSA, realization 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 an 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 explained.

Nomura, too, has a buy call, with a target price of Rs 377 per share.

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