When Crompton Greaves Consumer Electricals Ltd. said on February 2 that its December quarter (Q3FY23) earnings were lower than expected, shares of the company fell 11%. Investors looking for a trigger are likely to be disappointed by Q4 results because demand is expected to remain weak.
In the third quarter, Crompton avoided channel loading of non-rated fans as a result of changes in Bureau of Energy Efficiency standards. However, friends, for example, Havells India Ltd, Situate Electric Ltd and Bajaj Electricals Ltd filled the channel with unrated fans, BNP Paribas Protections India expert Nilesh Bhaiya said in a report. ” We believe that Crompton will fall behind its peers in the fan market and run the risk of losing volume market share this summer due to its failure to sell non-rated fans. Fans that save energy now cost more.
In light of this, the shares of Butterfly Gandhimathi Appliances Ltd., which is 75% owned by Crompton, have remained unchanged over the past two days despite the merger announcement. The public shareholders of Butterfly, a major manufacturer of kitchen appliances, will receive 22 Crompton shares for every 5 Butterfly shares after the merger. The stake Crompton currently holds in Butterfly will be cancelled. The public shareholders of the latter will own 3% of the new company following the merger.
In point of fact, the merger will also result in cost and revenue synergies in addition to simplifying the corporate structure. After acquiring Butterfly, Crompton has realized cost synergies of 18 to 20 crores up to this point. In February of last year, Crompton had purchased a controlling stake in Butterfly. As a result, significant advancements may be limited, at least in the short term. Additionally, Crompton intends to shift toward in-house manufacturing following the merger, putting pressure on the return ratio due to an increase in capital expenditure. Crompton anticipates that the merger will take effect in the first year and that the Butterfly acquisition will have a positive impact on earnings per share in FY24. By the end of FY24, the proposed merger is likely to be finished.
Certainly, Crompton’s primary product line, which includes pumps, lighting, and fans, continues to face a number of difficulties, including increased competition. “Our channel analysis suggests that the kitchen appliances segment is trading down, while the competitive intensity in the electrical sector has increased,” Yes Securities (India) stated in a report dated March 27. The Nifty 500 index is down 3%, while Crompton’s shares are down nearly 20% in the last year. The significant bounce may be limited by the unfavorable circumstances.