Analysts raise concerns on Havells EBITDA margin post Lloyd deal

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Havells and Lloyd Electric
saw some selling pressure on Monday after the former announced its decision to acquire Lloyd’s consumer durable business.

Lloyd Electric shares tanked over 19 percent intraday, while Havells fell over 2.5 percent.

While analysts are comfortably placed with the deal’s pricing, they have highlighted some challenges such as hit in EBITDA margins, lack of synergies, among others, for Havells that will emerge from this deal.

Macquarie feels that the deal is reasonably priced and is likely to be neutral for the company’s near term earnings. However, it sees potential risk to return ratios as well as cash flows of Havells on the back of this deal. Furthermore, it says there is no overlap in the distribution channel for Havells and Lloyd Electric and that the lack of synergies could make this integration challenging for the firm.

Citi said that the acquisition value of the deal, prima facie, does not look excessive. However, EBITDA margin of Lloyd’s at 6 percent is low when compared to Havells’ EBITDA margin of 13-14 percent. It expects the deal to be marginally negative to neutral for Havells’ profit after tax (PAT) as well as earnings per share (EPS) for FY18.

Meanwhile, Kotak expects a dilution in Havells EBITDA margins on the back of this transaction. The brokerage states that Havells is set to enter the most competitive market segment of consumer durables. It will be far more challenging for it to execute strongly in the air conditioner market. On the deal’s dynamics, Kotak feels that EPS for Havells will be neutral at present. But, going forward, it may be come significantly EPS accretive in the medium term.

Havells on Sunday announced the acquisition of the consumer durables business of the Lloyds group at an enterprise value of Rs 1,600 crore on a slump sale basis. The company plans to finance the debt-free, cash-free deal through a mix of debt and internal accruals. It could raise anywhere between Rs 500 crore and Rs 700 crore as debt to fund the deal, the company’s Chairman and Managing Director Anil Rai Gupta told Moneycontrol.

The Noida-headquartered company will only be taking on some working capital debt of Lloyds on its books, he said, adding the deal would be EPS neutral but not margin neutral. Lloyds’ consumer business has an operating margin of around 6 percent, less than half of Havells’ around 14 percent at the consolidated level.

As part of the deal, Havells will acquire the consumer business infrastructure, people, distribution network including the right to all intellectual property of the Lloyd brand, logo, trademark, goodwill and attendant rights.

At 09:29 hours IST, Lloyd Electric and Engineering was quoting at Rs 286.55, down Rs 41.30, or 12.60 percent while Havells India was quoting at Rs 420.05, down Rs 5.85, or 1.37 percent, on the BSE.