Consumer electrical and electronics major V-Guard Industries (V-Guard) is all set to acquire 100% stake in Sunflame for `660 crore on a cashfree, debt-free basis. Sunflame’s portfolio includes cooktops, chimneys, cookers, mixer grinder and small kitchen appliances. Of this, `25 crore will be paid after two years from transaction closure. The deal is likely to close by mid January 23. Maintain buy with a PT of `315.
Sun Flame posted FY22 sales of `3.5bn (+32% y-o-y) with a PAT margin of 9.4%.
Key rationale: Consumer durables was ~31% of VGRD’s FY22 sales, posting growth of +44% y-o-y. This acquisition is likely to help VGRD in different ways: (i) Leverage ‘Sunflame’ brands to strengthen its kitchen appliances portfolio, (ii) Enable deeper customer engagement, capitalising on product portfolio & brand recall, (iii) Leverage product development capabilities of SEPL, coupled with manufacturing facility at Faridabad and front-end and backend linkages and (iv) Unlock synergies in areas such as geographies, product portfolio, distribution and channels.
Implied valuation: On a trailing FY22 basis, this acquisition would be valued at ~1.9x P/S and ~20x P/E. This appears reasonable given that average 1-yr fwd. P/E for durables/appliances players under our coverage is ~35x whereas average 1-yr fwd. P/S is ~2.7x.
Earlier acquisitions in this space were: Crompton acquired Butterfly Appliances in Feb 2022 and Havell acquired Lloyd in 2017. For the Crompton deal, total acquisition consideration of `20.8 bn for ~81% stake implied P/S multiple of 2.5x-3.0x basis FY21 financials. Havell acquired Lloyd in 2017, for EV of `16bn, implying P/S of ~1.1x. Thus, VGRD-Sunflame deal implied valuation of P/S at 1.9x FY22 seems reasonable vs Crompton-Butterfly deal in Feb’22.
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Outlook; Buy: Our current estimates do not factor the impact of this acquisition, as we await further details regarding the company’s business strategy post the new acquisition. For VGRD, over FY23-25e, we estimate sales/PAT CAGR at +13%/+26%, driven by improving profitability in Non-South markets, traction in margin-accretive categories and focus on in-house manufacturing.