Havells may not be ready for LG, Samsung, Voltas challenge despite Lloyd acquisition

A day after domestic consumer durables major Havells announced its proposed acquisition of Lloyd consumer durables division for Rs 1600 crore, share prices of both companies fell at the Bombay Stock Exchange. Havells saw an erosion of 2.66 per cent of its its stock price while Lloyd's share price declined 16.75 per cent. Prima facie it is an indication the market has given a thumbs down to the takeover. The consumer durables sector was one of the worst affected by the demonetization exercise of November and the uncertainty regarding a deal of this size at this juncture is perhaps understandable.

There are some genuine concerns. Lloyd has relatively modest operating margins in high single digit as against Havells 25 per cent plus. The joint balance sheet will see the margins decline, never a comforting thing for an investor--potential or otherwise. With the acquisition, the company is foraying into segments that has highly competitive global firms like LG, Samsung as also some domestic heavyweights like Voltas. Competing against them may take a toll and drag Havells profitability further.

Yet, it is not without its merits. Havells is highly profitable, has a strong balance sheet and a cash in hand of nearly Rs 1400 crore. So any fears on funding is somewhat unfounded. Raising a debt of Rs 500-700 to fund it should not be an issue for a firm that has such diversified interests. Its core business of cables, switchgears and lighting is on a solid ground. This is also not the first time when the company is undertaking a large acquisition. In 2007, it had acquired Netherland's SLI Sylvania that made it the fourth largest lighting business firm in the world. So it knows how to manage and handle this sort of a deal.    

In the air conditioning segment, which is the main stay of Lloyd, the company brings with it a network touch point of 7000 and 275 service centres. The latter is the highest in the industry. It is well penetrated in the rural markets, a segment expected to grow robustly as a result of government's increased spending in the hinterland. In the room AC category in India, Lloyd has a market share of 11 per cent in FY 2016 which was 3 percentage points more than in the previous fiscal. For any company to start from scratch and attain a scale of this sort, it would take a lot of investment and time. Typically for any acquisition, Havells has got it on a canter.   

"The proposed acquisition is in line with our objective of driving domestic expansion and owning a brand and distribution oriented asset. We would leverage and extend the trust associated with Brand Havells to consumers, dealers, vendors of Lloyd and create a similar recognition in consumer durables segment," says Anil Rai Gupta, Chairman & Managing Director, Havells India Limited. "We believe Lloyd is undergoing a journey similar to Havells of the past and we could combine together our consumer insights to accelerate its pace of growth. This acquisition gives us an opportunity to serve consumers with a much wider range of products, both in electrical and electronic goods space."

The company's diversification is not restricted to Llyod alone. Just a few days back, it ventured into the personal grooming category--a nascent but fast growing segment in India. This acquisition is a bold statement of intent. But beyond the obvious advantages, there are some latent problems with Lloyd's product portfolio. Among its peers, its line up of energy efficient air conditioners is not that great and companies like Voltas, LG, Samsung, Carrier, Hitachi and Blue Star have a claer edge in this. In the other two segments--TV and washing machines--the company has struggled to garner much traction with marketshare of less than 5 per cent.

"In various aspects, Lloyd isnt a finished product. Its presence in the AC market is significant but there may not be an upside to margins in future because its R&D is not one of the best and it is against top global firms," says an analyst. "Havells does not have much expertise in this field so they have to really bring in some experts to steer the ship. It does not look like a great deal but Havells Lloyd combination does have potential."