Lloyd buyout a blockbuster deal but has Havells paid the right price?

Acquiring Lloyd Electric’s consumer durables business has every ingredient to be a blockbuster buyout in the long run. For one, given Lloyd’s 12 per cent market share in the air conditioners industry, it gives Havells the much-needed entry into the white goods segment. Lloyd also manufactures televisions and washing machines apart from a few other consumer products.

The acquisition also comes at a time when Havells’ core business — switchgears — is facing problems on volume and profitability fronts. While Havells’ cables business remains strong, it offers limited diversification opportunities. Therefore after this acquisition, Havells can scale up to cater to all fronts of consumer durables. 
 
But, has Havells paid the right price for the deal is the Street’s concern.
 
Analysts expect Havells’ stock to open in the negative zone on Monday as questions on valuations emerge largely due to the margin-depletive nature of the transaction. Havells consumer business operates at 24 per cent profit margins currently, whereas that of Lloyd’s is around 7.7 per cent. Even overall operating margins of Havells (13 per cent) is far higher than that of Lloyd’s. Therefore, a substantial dilution in Havells’ profitability is quite likely. Consider this, Havells’ consumer business revenue stood at Rs 1,023 crore for the first nine months ending December 2016, whereas Lloyd’s consumer business revenue was Rs 1,242 crore in this period. A simple math would put the blended margins at 15 per cent for the combined business.
 
In addition, analysts at Quant Capital feel marketing spends may also be elevated for Havells after the acquisition. According to analysts, Havells will now face competition from some of the largest players in the world where operating profit margins are lower than the past levels. “Thus, we expect significant increase in the marketing spend of the company (currently at three-four per cent of revenue) over the next few years,” an analyst says. 

Seen in this context, another analyst from a domestic brokerage doubts if Havells has paid the right price for the deal. “I find the deal overpriced,” says the analyst. 
 
For now, the Street will keep a close watch on the investor call scheduled on Monday afternoon to understand the rationale of the deal. 
 
“Given Havells’ past track record with acquisitions, unless the company clearly defends the price it has paid to Lloyd, you could expect significant derating for Havells stock,” the analyst adds. 

Even at current valuations (32x FY17 earnings) Havells’ stock is seen as expensive, offering little upside to investors.