Aurum Deal of the Month – March 2017

Consumer Electricals major, Havells India is acquiring the consumer durables business of Lloyd Electric & Engineering Ltd.

Equity Value : INR 16,000 mn
EV/ EBIDTA : 14.5x

The Transaction

On 19 February 2017, Havells India (Havells) announced that it has entered into an agreement to acquire Lloyd’s consumer business in India for an Enterprise Value of INR 16 billion on a debt free and cash free basis. The acquisition will mark Havells foray into the consumer durables business in India. As a part of the transaction, Havells is acquiring Lloyd brand (includes logo, trademark) and the consumer durable business that includes its existing business, employees, consumer business infrastructure and distribution network.

The manufacturing facilities of Lloyd are not part of the deal, and Lloyd’s OEMs business will continue to supply room ACs to Havells to ensure continuity of business and will enter into manufacturing agreement with the buyer. The transaction is expected to close soon subject to due diligence. Havells plans to finance the transaction via debt and internal accruals.
The stock market had a neutral reaction to the merger announcement, as is evident from the grapgh below that tracks stock movements of Havells India and BSE Sensex, 15-days before and after the marger announcement.

Havells India

About Lloyd’s Consumer Business

Incorporated in 1989, Lloyd Electric & Engineering Limited (LEEL) was a supplier of high quality coils to original equipment manufacturers (OEMs) of heating, ventilation and air conditioning (HVAC) equipments. The company entered into the Consumer Durables segment in 2011 by purchasing the consumer product division and the Lloyd brand of Fedders Lloyd. With this acquisition, the company moved its focus from the business-to-business (B2B) segment to the business-to-consumer (B2C) segment, which now contributed to 59% of revenues for FY 2016. The consumer durables business of the company has a pan-India presence with a strong network of over 10,000 dealers spread across India, 34 sales branches, 485 authorized service centers and 31 Company owned service centers.

For 9 months ended 31 December, 2016 the Consumer Durables business of LEEL had revenues of INR 12,420 mn and EBIDTA of INR 750 mn, and based on its run rate and past performance, full year (FY 2017) revenues is estimated at INR 18,500 mn and EBDITA at INR 1,100 mn. Within the consumer durables segment of the company, air-conditioners (ACs) comprised nearly 70% of revenues, LED televisions comprised 20-22% and the remaining 8-10% was from washing machines and some other household appliances.

Deal Rationale for Havells

A. ‘Lloyd’ a recognized brand in the Consumer Durables market with a 13-14% market share in the air conditioning market in India

The Indian consumer durables market (ACs, television, LCDs, washing machine, refrigerator) is approximately INR 375-400 bn in size and is growing at 10-12% per annum. The market is dominated by Korean majors like LG, Samsung, Japanese Hitachi and Panasonic and few large, well established Indian brands.

Figure 1: India Consumer Durables Market (INR Billion, CRISIL)

India Consumer Durables Market

In this highly competitive market, Lloyd has been able to establish itself, having a 13-14% market share in the Room ACs market in India, while in LED TVs and washing machines its market share is less than 5%. In the last 4 years from 2012-2016 the company’s annual revenues have grown at a CAGR of 27% per annum and EBIDTA

B. Business is ‘Complementary’ to Havells and Provides Opportunities to Cross-sell

The consumer durables business of Lloyd with over 10,000 dealer networks spread across India, 485 authorized service centres and 31 company owned service centres is highly complementary to Havells existing distribution network, which is predominantly focussed on selling home electrical products like fans, appliances, lighting, switch gears, flexible cables etc

C. Havells focus is on the Brand and Business, and not low-margin manufacturing

Havells focus is on the brand, distribution network, employees and the consumer durables business of Lloyd’s, and therefore have been able to strip this from the low-margin, high capex manufacturing business, that they will enter into a contract manufacturing arrangement with LEEL.

D. Transaction funded largely from Cash in the balance sheet with very limited debt funding

In December 2015, Havells sold its 80% stake in its international arm Havells Sylvania Malta BV for INR 10,700 million to Shanghai Feilo Acoustics of China. The deal is expected to be funded by cash (INR 11,415 mn as on 30th September 2016) and via debt to be raised.

Conclusion

The valuation of EV/EBITDA of 14.5x on FY 2017 numbers of Lloyd seems fair, though it nearly 20%-25% discount to larger listed peers in the industry, like Voltas trading at 18-19x EV/EBIDTA, as Voltas maintains a leadership position in the air conditioning market in India.

Overall, we think that this is an excellent deal for Havells, as it provides Havells with a head start in the consumer durables market in India. Organically building a distribution network and team for Havells for this business would have been difficult and taken several years given the highly competitive nature of the market.

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.