MUMBAI: Havells IndiaBSE -1.61 % is in advance negotiations with Lloyd ElectricBSE 4.21 % and Engineering Limited to acquire its consumer durables business for around Rs 1200 -1500 crore, to get a toehold in the fast growing Indian air conditioners market that is dominated by global brands, said multiple sources involved.
In a market crammed with about two dozen brands, Lloyd is third largest player in the room AC segment after Voltas and LG.
Ever since HavellsBSE -1.61 % sold its 80% stake in its international arm Havells Sylvania Malta BV—one of the top four lighting brands in Europe and Latin America — for Rs1,070 crore to Shanghai Feilo Acoustics of China in December 2015, it has been scouting for targets for emerging markets and India for brands that have strong business adjancencies. It also has an option to sell the balance stake in three years from the time of sale, or even earlier.
The consumer business for Lloyd Electric is its mainstay accounting for the 58% of its total revenues and 44% of the operational profits of the company in the December 2016. Its other business divisions – heat exchangers, original equipment manufacturing and packaged AC business – have seen flat or declining sales.
Over the last few years, the company has expanded its branded product portfolio such as air purifiers, inverter Air Conditioners, portable Air Conditioners, Dry Coolers, tate-of-the-art Air Conditioners, Ultra HD technology LED TV’s, Washing Machines, Chest Freezers, Refrigerators, Room Heaters, and other small appliances.
New Delhi based Lloyd had mandated EY last July to find a potential suitor for its business. The company had then said it was exploring strategic and financial alternatives to enhance shareholders' value.
“Both sides are engaged in advanced negotiations and Havells is only keen to buy the branded business and not the low margin original equipment manufacturer (OEM) piece. The final negotiations are now predominantly focussed on the valuations,” said an official involved directly. “Some of the global players including Electrolux as well as home grown competitors like Voltas had evaluated the prospect but let go.”
The Lloyd promoters led by Brij Raj Punj had been seeking a significant premium for his business and that has been a deal breaker. Another spoiler has been the stock that has appreciated 37% in the last 6 months expecting a sale. It closed at Rs 324.40/share on Thursday.
“It will be an interesting play but I don’t think it will get sold at 4 times sales that was their initial expectations,” said a CEO of a competing brand.
Lloyds also is an OEM of ACs for other brands, besides supplying air-conditioning products to Indian Railways.
However, Nipun Singhal, Director and CEO of consumer durables at Lloyd Electric told ET that they are not aware of any development about any potential sale to Havells India.
Mails to Havells spokesperson did not generate a response till the time of going to press. Repeated calls to Anil Rai Gupta, chairman, Havells also went unanswered.
But in earlier interaction in January, Gupta, had said he will acquire only brands or businesses in emerging markets that help in securing new technologies or expand his existing business portfolio. He declined to comment on Lloyd then.
COMPLIMENTARY MOVES
Analysts say, the rationale of Havells buying the consumer business to bring long term scalability to its consumer business, which account for nearly 21% of the total standalone revenues of the company. Havells – predominantly –a home electricals company has been looking to expand its appliance business such as water heater, mixer and fans. The acquisition of Lloyd will give it access to 10,000 plus direct and indirect dealer networks spread across India 485 authorized service centre and 31 company owned service centre, highly complementary for its existing consumer durable business.
Havells is sitting on cash and cash equivalent of Rs 1344 crore at end of FY16 mainly due to selling its overseas assets. It had seriously evaluated buying the consumer business of Crompton Greaves as well as the appliances brand Kenstar from Videocon.
Operationally, the company in the last year also restructured its go-to-market operations in India from a wholesale business model to retail to secure greater visibility and control over its inventory and sales. This has led to a slight bump to its topline growth during the year, which was up 4% to Rs 5,436.88 crore. Simultaneously, it has branched into newer areas like home automation, end to end solar lighting solutions, air purifiers, and water heaters and personal grooming. Solar rooftops is also a new growth area for the company for which it has increased its stake in Promptec Renewable Energy Solutions, a Bangalore based solar lighting company from 51% to 70%.
CONDITIONING FOR GROWTH
Lloyds consumer business that sells its products under the eponymous brand name, has been one of the fasting growing segment for the company in the past few years, rising from a meagre 20% in FY12 to 59% in FY16. Lloyd’s revenue too grew at annualized growth of 27.3% to Rs 2382 crore in the same period on account of growth of this portfolio. Its total debt stood at Rs 816 crore at end FY16, largely related to the working capital requirement of the business.
Within the consumer business, it is the higher sales growth in the ACs -- where its market share in the room AC segment has increased to 14% at end of December 2016 compared with less than 8% just 2 year ago – that’s driving growth. Nearly more than 80% of the total sales of consumer business originates from the AC and balance from the rest of products.
In December 2016, consumer business grew 43.4% to Rs 306 crore due to scheme of zero down payment launched by the company during period of demonetization, while the total revenue rose 19.8% to Rs 531 crore.
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