Havells deal closure in 6-8 wks; focus on B2B biz:Lloyd Electric

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Havells India Board yesterday approved the acquisition of Lloyd Consumer Durable Business Division (Lloyd Consumer) of Lloyd Electric and Engineering . The acquisition is proposed to be executed at an enterprise value of Rs 1,600 crore on a debt free, cash free basis subject to closing adjustments. It will be a slump sale. Throwing more light on the deal, Nipun Singhal, Director, Lloyd Electric & Engineering Ltd said the closure of the deal would take about 6- 8 weeks. However, the company was ambiguous on how they would be spending the money received from the sale but mentioned that they would look at rewarding the shareholders in some way or the other. Their main aim is to deleverage the balance sheet and increase investments into high margin businesses like OEMs, rail and defence air conditioners, transport air conditioners etc, said Singhal, adding that going forward the concentration would be on B2B businesses. As of now there is no need for significant capex into the B2B business, said Singhal. Below is the verbatim transcript of Nipun Singhal’s interview to Prashant Nair, Anisha Jain & Ekta Batra on CNBC-TV18. Prashant: Could you first start by telling us the money that you are getting via this sale how are you going to use that money? A: First I would like to step back a little bit and talk about that what is the transaction which has happened. We have been doing very well and growing in the consumer business for the last seven- eight years and have achieved a very good market share in air conditioners and also made considerable progressed on TVs and washing machine. Now thing is that from here if we had to grow forward, we would have to invest a lot of growth capital and if you see our balance sheet it was already quite leveraged. So, the Chairman that is Brij Raj Punj decided that look, may be it is time that we sell the consumer business and focus on the B2B businesses which have been in the company and look at this as a growth engine going forward for the company. Prashant: This is a slump sale right? A: This is a slump sale, indeed, yes. Prashant: Usually in a slump sale existing shareholders who will no longer have any nothing to do with the business which has been sold expect to get rewarded in some form or fashion. The point is you are saying all of this money is going to be invested back for your B2B businesses, capital expansion etc.? A: No, it will deleverage the balance sheet that is one objective, the second objective is that we would look at investment in high margin areas where we can get better margins. Mr. Punj was just now on an investor call and he had said that when the deal is closed he will also see and think about ways and means how he can reward the shareholders. Prashant: Why not say that some sort of special dividend or something will be paid out, does that look like a likely possibility or does it sound remote to you? A: These are all possibilities. Mr. Punj himself, the chairman was in the investor call and he had told investors that right now we have just signed a memorandum of understanding (MoU). The closure will take 6 to 8 weeks. Upon closure we will announce what kind of money will be deployed for deleveraging the balance sheet, what money will be put into high growth areas and high potential areas. Also then what could be possibilities of looking at rewarding shareholders? He has not spelt out anything because he is saying let the closure happen. Anisha: I just wanted to understand even if you pare down the debt you would be left with net cash of around Rs 600-700 crore other than the special dividend that just mentioned do you think even buyback can be an option to give value to the shareholders? A: There are all possibilities opened as I just now repeatedly said that Punj has gone on investor call, about five minutes back he ended that call and he was categorically saying that all the options will be considered and more finer details will be given to shareholders on allocation of the proceeds. Once the deal is closed we have six to eight weeks now minimum for closure. But what we have to see is that we have a robust residual business as well. The consumer business has been growing and has been the growth engine, but if you look at the residual business that is also a robust business which has got in fact higher margins than the consumer business. Anisha: Then talking about rest of your business, you did mention on the concall as well that there was a part of the original equipment manufacturer (OEM) business that was actually being factored in the consumer durable segment. Now what can be that portion that will come back to the OEM business and what can be the jump up that we can see in the OEM and the heat exchange business going forward? A: That is a good question and exactly what we mentioned on the call that right now because it was intersegment sale, it was not adding to the revenues. Now going forward, it will be a sale transaction and it could be to the extent of 30 percent of our air conditioner business. Anisha: You did mention on the call that Rs 50 crore is what went to Fedders Lloyd but are there any talks of merging the two businesses now – Fedders Lloyd and Lloyd Electric? A: I am not aware of any such transaction, I am here on the channel to comment on the deal which has happened and I am delighted because I think personally it is a win-win situation. The brand has reached a very strong point and it has gained acceptance. Now from here this brand can go in multiples forward if you have the right backing in terms of financial resources. We could have done that but it would have further leveraged our balance sheet. So, the core valuation, we have backed out given the brand to Havells India who can take this forward because that is one situation. Second, we will also enjoy the future fruits by being suppliers to Havells India. Ekta: Your remaining business which is going to be primarily B2B, I think your FY15 EBIT was around Rs 109 crore odd which rose to around Rs 130 crore odd in FY16. What is the projection that you might be working with and how much of capital would you be employing in the remaining business? A: The capital employed in the remaining business will be very minuscule, it will only be sort of streamlining capacities etc, so it is not a very sizeable capital injection required to maintain the existing business. Anisha: Your B2B business is already running at capacity utilisation of 90 percent wouldn’t you need to invest more into that business given that you are looking to grow that business? A: Not very sizeable capex because that is only rationalising of bottlenecks, it will not be a Greenfield, new plant. If I have to take it from Rs 600,000 to Rs 800,000, it is not really a very large capex required. Anisha: You also mentioned that you are looking to grow organically and inorganically over the call, so what are the various avenues you are looking to grow at organically and both inorganically. Which are the avenues or the areas that you are looking at? A: Mr. Punj was very clear during the investor call. He said we are looking at increasing our OEM business, we are looking at growing in the rail and defence air conditioning, in transport air conditioning and these are all high margin businesses. Prashant: You are well aware of what the stock did yesterday. It was down sharply and I think shareholders would who bought the business not just for the B2B or the B2C but for both lines of businesses. Now that one line of business is being completely sold in a slump sale transaction, the existing shareholders will be rewarded in some way, some fashion. We take all your points about B2B margins being higher and that offering greater growth avenues etc, but you are saying that option is on the table as Mr. Punj outlined in the concall just a few minutes back right? A: That is right; he clarified this to the shareholder on the concall and what I believe is that price is a slave to earnings. If earnings are good and earnings are going to grow then shareholders are in for a good time. The question is that are the earnings going to grow, are the earnings going to be continually growing. However, what we see here is a balance sheet is completely deleveraged; we have cash available to invest in these areas. These are all very positive signs going ahead to increase and grow earnings which is what I think share prices should depend upon. Anisha: A lot of experts have been saying that it would have been better or the street was looking at the two businesses would be demerged there would be a consumer electric business and there would be an OEM business and that would have been better in terms of value unlocking for the investors. Is there any rationale why we went for a slump sale basis and not that demerger route? A: This was also answered on the investor call; Mr. Punj himself said we have preferred this route after taking into consideration the tax implications and other implications also. So, he had clarified this on the investor call clearly that looking at the overall structure and the tax implications, this is a preferred route.