Monday, May 23, 2016

NBCC INDIA LTD: BEST IN SECTOR TO OWN !!!

* NBCC quotes ex-split basis from June 02, 2016. Company declared split in face value of its shares from Rs. 10 to Rs. 2.00 .

Scrip Code: 534309 / NBCC

CMP: Rs. 193.51 (Rs. 967.55); Market Cap: Rs. 11,610.60 Cr; 52 Week High/Low: Rs. 1,214.40 / Rs. 705.50

Total Shares: 12,00,00,000 shares; Promoters : 10,80,00,000 shares – 90.00 %; Total Public holding : 1,20,00,000 shares – 10.00 %; Book Value: Rs. 110.34; Face Value: Rs. 2.00 (Rs. 10.00); EPS: Rs. 5.14 (Rs. 25.73); Dividend: 55.00 % ; P/E: 37.60 times; Ind. P/E: 22.62; EV/EBITDA: 23.02 times.

Total Debt: ZERO Cr; Enterprise Value: Rs. 10,943.51 Cr.

National Buildings Construction Corporation of India Ltd: NBCC Limited was founded in 1960 and is based in New Delhi, India. NBCC Ltd is a public sector company engaged in the business of project management consultancy services for civil construction projects (PMC), civil infrastructure for power sector and real estate development and have 10 regional offices across India. NBCC came with an IPO in March, 2012 of 1,20,00,000 equity shares of Rs. 10 each at Rs. 106 raising Rs. 127.20 Cr. The object of the issue was to carry out the disinvestment of 10 % equity shares by the Government of India and to achieve the benefits of the listing. NBCC declared split in face value of shares from Rs. 10 to Rs. 2 on May 2016. National Buildings Construction Corporation Limited provides project management consultancy, real estate development, and EPC contracting services in India and internationally. It’s Project Management and Consultancy Services segment offers services for various civil construction projects, including residential and commercial complexes, redevelopment of buildings and colonies, hospitals, educational institutions, infrastructure works for security personnel, border fencing as well as infrastructure projects such as roads, water supply systems, storm water systems and water storage solutions. Some of their clients are ESIC, Ministry of Defence, Ministry of Home Affairs (including Security forces like CRPF, CISF, NSG, BSF), Ministry of External Affairs, MoUD, Ministry of Commerce and Industry, Ministry of Corporate Affairs, Ministry of Finance, Haryana Urban Infrastructure Development Board, IIT Roorkee, IIT Kharagpur, IIT Patna, SVNIT etc. NBCC’s EPC Contracting segment provides engineering and construction for power projects, including design and execution of civil, structural, and architectural works; cooling towers; and chimneys. Its Real Estate Development segment primarily undertakes residential projects, such as apartments and townships; and commercial projects, such as office buildings and shopping complexes. This segment has land reserves of approximately 145 acres located in Delhi, Patna, Gurgaon, Kolkata, Kochi, Alwar, Meerut, Ghaziabad, Faridabad, and Lucknow. NBCC Ltd's civil Infrastructure for power sector segment includes providing engineering and construction services for power projects, including design and execution of civil and structural works for power projects, Cooling towers and Chimneys. Some of their clients in this segment include NTPC Limited, BHEL, APGENCO Ltd, Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd, MAHAGENCO Ltd and Karnataka Power Corporation Ltd. Their real estate segment includes residential projects and commercial projects. NBCC Ltd can be locally compared with DLF, Oberoi Realty, Parsvnath developers, Prestige Estates, Indiabulls Realestates, HDIL, BS Ltd, Continental Construction Ltd, Raunaq International Ltd, IVRCL Infrastructures & Projects Ltd, Jaihind Projects Ltd, Jyoti Structures Ltd, SPML Infra Ltd, C & C Constructions Ltd, Mukand Engineers Ltd, Engineers India Ltd, Jai Corp and Globally compared with KBR Inc of USA, Costain Group PLC of UK, Compagnie d’Enterprises of Europe, Yit Oyj of Finland, Nippon Koei Company Ltd of Japan, Samsung Engineering from South Korea, Hyundai Engineering & Construction of South Korea, Petrofac from Middle East, Saipem from Abu Dhabhi, National Petroleum Construction Company of Middle East, Technip from French, Technicas Reunidas from Spain, Jacobs Engineering from California, Watabe Wedding Corporation of Japan, central Security Patrols Company Limited of Japan, Mortice Ltd of Singapore.

Investment Rationale:

National Buildings Construction Corporation Ltd. (NBCC) is a Schedule A, Public sector undertaking under the aegis of Ministry of Urban Development (MoUD), incorporated in year 1960. The Company enjoys a Status as a NAVRATNA CPSE, conferred upon it by the Govt. of India from June 23, 2014. It’s a construction major under the Ministry of Urban Development, Govt. of India, and provides Civil Engineering Construction Services in wide Gamut of Projects of varied nature, complexities & at socio-political Geographical locations, both at home & overseas. Company is carrying out its business in three segments (i) Project Management Consultancy (PMC), (ii) Engineering, Procurement and Construction (EPC), and (iii) Real Estate Development. NBCC also offers post construction services i.e. maintenance of assets. NBCC is certified ISO 9001:2008 from Bureau of Indian Standard in respect of Project Management & Consultancy. The Indian Real Estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 % over the next decade. The real estate sector comprises four sub sectors - housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. It is also expected that this sector will incur more non-resident Indian (NRI) investments in both the short term and the long term. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun. The Indian real estate market is expected to touch US$ 18,000 Cr by 2020. The housing sector alone contributes around 5 % to 6 % to the country's Gross Domestic Product (GDP). In the period FY08-20, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 %. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs. Real estate has emerged as the second most active sector, raising US$ 120 Cr from private equity (PE) investors in the last 10 months. Mumbai is the best city in India for commercial real estate investment, with returns of 12 % to 19 % likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR). Also, Delhi-NCR was the biggest office market in India with 110 million sq ft, out of which 88 million sq ft were occupied. Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for office space in recent times. Delhi’s Central Business District (CBD) of Connaught Place has been ranked as the sixth most expensive prime office market in the world with occupancy costs at US$ 160 per sq ft per annum. The project management consultancy (PMC) division of NBCC is the cash cow business for the company. Its PWO status helps in getting contract on a nomination basis. NBCC gets 70 % to 80 % contract on a nomination basis from various ministries. As a result, in Q4FY16, the PMC division revenues grew 45.1 % YoY to Rs. 2,059.9 crore. NBCC has a unique advantage of generating cost-free float from its PMC division where it is able to get revenue upfront from clients. On the other hand, it gets an extended credit period from contractors. Consequently, this has led to a negative working capital cycle and healthy Cash Flow from Operations and FCFF over the years. It is one of the biggest economic moats of NBCC compared to its peers in the industry. In FY14, NBCC enhanced its land bank to expand its real estate business, which led to an increase in the inventory, in turn, leading to a higher working capital and lower CFO compared to those in the previous year. Hence, it earns from both operations as well as float. While the PMC division can get projects from diverse sectors and grow at a steady rate on the back of a macroeconomic revival, the next big opportunity lies in redevelopment of old government properties. The government has started focusing on redevelopment of ramshackle buildings and old government colonies in Delhi and across India to build multi-storeyed residential and commercial complexes. Currently, the company is awaiting approvals from government for redevelopment of three old colonies in Delhi which are worth Rs. 25,000 crore. They expect it to come by July, 2016. The successful execution of the New Moti Bagh project and PWO status for NBCC has opened up a huge opportunity in other government/PSU properties. Currently, NBCC is implementing similar redevelopment projects of a government colony in East Kidwai Nagar, Delhi. It is the first of 30 government colonies across Delhi spreading over 1100 hectares of prime real estate. NBCC has been executing many landmark projects as a PMC as its core strength & leveraging its rich experience in diverse sectors. The company has also been designated as the implementing agency for executing projects under Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Pradhan Mantri Gram Sadak Yojna (PMGSY), solid waste management (SWM) and developmental work in the North Eastern Region. NBCC has signed an agreement with the state government of Punjab wherein it will build 18 de-addiction centres at an initial cost of Rs. 100 crore using prefab technology. Also, the company is in the process of sending a Cabinet note for redevelopment of 18 government presses across India wherein presses will be modernised and the rest of the land will be used for commercial exploitation. Recently, in the state budget speech, the Rajasthan chief minister announced the formation of a JV with NBCC to execute various redevelopment works and construction projects in Rajasthan. NBCC’s strategy has always been to invest part of its surplus cash flow into the value enhancing real estate business in a disciplined manner which also helps them to keep its balance sheet debt free. Currently, NBCC has accumulated 170 acres of land reserves which is spread across 12 states in India. However, the company is not aggressive in this segment and does not wish to launch any new projects but would focus on completion of the existing projects. Mainly, the projects are for affordable housing and middle income group. NBCC was incorporated as a pure EPC player wherein it has been executing engineering and construction services for projects such as chimneys, cooling towers and various types of power plant works. However, growth has remained subdued in the last few years. Currently, mere 5.00 % of the revenues are contributed by the EPC business. Going ahead, the government’s priority to boost infrastructure will create opportunities for the construction industry. NBCC is well poised to grab this opportunity. NBCC became the fifteenth Navratna Company on June 23, 2014 among 250 PSUs in India. Navratna status gives the company freedom to tie-ups in the international market and also allows its autonomy on Investment decision up to Rs. 1000 crore. The government is considering a proposal to hive off real estate owned by sick PSUs such as Bengal Chemicals, National Bicycle Corporation and Richardson & Cruddas in Mumbai's Worli, Byculla, etc. to NBCC. NBCC will be using the direct sale of land or JV for the development of real estate. This is expected to pave the way for long-term opportunities for NBCC in the real estate segment. The company is also looking at strategic alliances with domestic and international players in West Asia, Europe and Commonwealth of Independent States (CIS) countries to scout for EPC contracts as the acquisition route would be time consuming. NBCC has already signed a JV with Oman based Al Naba Construction LLC for EPC contracts in Oman and the UAE. Also, it is looking at similar opportunities in political stable geographies like Turkey and CIS countries. The redevelopment projects, huge land bank and project execution capabilities makes NBCC first choice.

Outlook and Valuation:

NBCC is one of the valued Navratna companies and amongst very few public sector companies engaged in the three verticals of PMC, EPC and Real Estate development business. NBCC became the fifteenth Navratna Company on June 23, 2014 among 250 PSUs in India. NBCC is under the administrative control of the Ministry of Urban Development, which provides project management consultancy services for construction projects, civil infrastructure for power sector and real estate development. The Company has earned a niche for itself in construction of Green Buildings. Office of The Indian Institute of Corporate Affairs at Manesar (Haryana); CSOI at New Delhi; Aayakar Bhawan at Noida (UP); SIB at Kolkata; Coal India Building at Kolkata etc. are some important Green Buildings by NBCC. The Government of India along with the governments of the respective states have taken several initiatives to encourage the development in the sector. The Smart City Project, where there is a plan to build 100 smart Cities, is a prime opportunity for the real estate companies like NBCC. Government initiatives like India’s Prime Minister approved the launch of Housing for All by 2022, the Sardar Patel Urban Housing Mission; 30 million houses will be built in India by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership (PPP) and interest subsidy. The Government of India has relaxed the norms to allow Foreign Direct Investment (FDI) in the construction development sector. This move should boost affordable housing projects and smart cities across the country. The Securities and Exchange Board of India (SEBI) has notified final regulations that will govern Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This move will enable easier access to funds for cash-strapped developers and will create a new Investment avenue for institutions and high net worth individuals, and eventually ordinary investors. The Government of Maharashtra announced a series of measures to bring transparency and increase the ease of doing business in the real estate sector. The State Government of Kerala has decided to make the process of securing permits from local bodies for construction of houses smoother, as it plans to make the process online with the launch of software called “Sanketham”. This will ensure a more standardised procedure, more transparency, and less corruption and bribery. The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the tune of US$ 24.1 billion in the period April 2000-June 2015. Responding to an increasingly well-informed consumer base and, bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most marked change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised processes to source material and organise manpower and hiring qualified professionals in areas like project management, architecture and engineering. The growing Flow of FDI into Indian real estate is encouraging increased transparency. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards. NBCC is taking up more and more work in remote and difficult areas to encash business opportunities with assured profit. A major work is being taken up in remote Arunachal Pradesh for development of roads in dense jungle area for 185 km valuing approximately Rs. 1400 crore. NBCC has signed MOUs with various foreign parties like: M/s Al Naba Services LLC, Sultanate of Oman; M/s Construction Industry Development Board Holdings Sdn Bhd., Malaysia; M/s Form Yapi Malzemeleri Insaat Samayi Ticaret Ltd, Turkey etc. NBCC is into the Real Estate business since 1988 and has many Real Estate projects to its credit both residential and commercial at various locations across the country which includes Kolkata, Delhi, Lucknow, Cochi, Cuttack, Vadodara, Ghaziabad, Faridabad etc. NBCC has land bank of around 132 acres and is likely to generate sizable business and steady income over a longer period of time. NBCC has achieved its target revenue of Rs. 4,200 crore, PAT margin of 5.6 % and order inflow of Rs. 5,000 crore in FY15 as per the MoU signed with Government of India. Considering the current order book, its ongoing projects and strong opportunities, it can be expected that its revenues can show robust growth at 38.1 % CAGR to Rs. 10968.0 crore in FY16-18E. EBITDA is expected to grow at 48.2 % CAGR to Rs. 759.8 crore in FY16-18E. NBCC’s bottom line has grown at 19.0 % CAGR during FY10-15 largely led by its robust top line growth and zero interest expenses. The government has issued revised guidelines for central public sector enterprise (CPSEs) to pay annual dividend of 30 % of PAT or 30 % of Government of India's equity, whichever is higher. This is in lieu of previous guidelines in 2004 communicating a dividend policy of 20 % of PAT or 20 % of equity, whichever is higher. However, this should not impact NBCC much as it has paid 47 % of PAT as dividend in FY16. Going forward, it is expected that NBCC to maintain a similar dividend pay-out ratio. The average RoE and RoCE of NBCC during FY10-15 have remained at the level of 21.6 % and 30.5 %, respectively, on the back of a strong bottom line show. They were at 20.7 % & 31.2 % in FY16, respectively. Going ahead, it is expected that RoE and RoCE to bounce to 29 % & 44.6 %, respectively, in FY18E with anticipated bottom line growth. NBCC witnessed strong order inflows of Rs. 17517 crore in FY16. Its current order book is strong at Rs. 37,000 crore, 6.4x TTM construction revenues, providing strong revenue visibility. The order book consists of 85 % from PMC, 10 % from real estate and 4-5 % from EPC division. The management expects approvals for redevelopment of three old colonies worth Rs. 25000 crore to come from government by July, 2016. Further, NBCC will also have to make an equity investment of Rs. 300-500 crore in these for the first six months. Given the strong order book, huge opportunities, it is expected that its topline, bottomline to grow at a CAGR of 38.1 % & 36.6 % in FY16-18E to Rs. 10968.0 crore & Rs. 576.3 crore, respectively. NBCC will be a key beneficiary of the government’s ambitious schemes like Housing for all and Smart Cities mission aimed at urban development. Further, NBCC is already implementing a few smart townships like Kidwai Nagar and New Moti Bagh. It is looking to provide an all-round smart city solution including both, construction and technical (IT/Electronic) services for which it had tied up with IBM and a Malaysian JV firm. NBCC has asset light business model, as it operates in Project Management & Consultancy (PMC) services which contribute 85 % of total revenues and more than 65 % of the PBT. In FY15, the company enjoyed high RoE and RoCE above 22.6 % and 35.2 % respectively and expect to maintain the same. The company is debt-free and thus has no interest cost. It maintains a current ratio of more than 1.2x which is clear evidence of its robust fundamentals. At the CMP of Rs. 193.51 (Rs. 967.55), the stock is trading at 28.29x FY17E P/E and 22.39x FY18E. Given the healthy order book in the PMC division and cash rich balance sheet, NBCC’s revenues have grown at a CAGR of 14.00 % during FY12- FY16 despite the challenges being encountered by the industry. Going ahead, NBCC’s can show a growth in revenues and net profit at a sturdy CAGR of 38.1 % and 36.6 %, respectively, during FY16-18E. Also being a cash rich balance sheet company it will have healthy return ratios. On SOTP basis the valuation of NBCC’s PMC business on the DCF basis comes at Rs. 528 per share & redevelopment opportunities at Rs. 500 a share. The value of real estate business comes at Rs. 95 a share, while the value of EPC business comes at Rs. 20 a share. Giving me the value of Rs. 228.60 (Rs. 1143.00) per share. The company can post Earnings per share (EPS) of Rs. 34.20 in FY17E and Rs. 43.20 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

SOTP valuation (FY2017E)

BUSINESS SUBSIDIARY	Value per Share(₹)
PMC Business	528.00
Re-development Opportunities	500.00
Real Estate Business	95.00
EPC Business	20.00
TOTAL VALUE PER SHARE	1,143.00

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	4,621.00	5,749.20	7,430.50	9,613.90
NET PROFIT (₹ Cr)	277.30	308.80	410.00	518.60
EPS (₹)	23.10	25.70	34.20	43.20
PE (x)	42.70	38.40	28.60	22.60
P/BV (x)	8.90	8.00	6.70	5.50
EV/EBITDA (x)	37.10	30.60	26.00	19.20
ROE (%)	20.90	20.70	25.30	26.70
ROCE (%)	32.00	31.20	34.70	36.50

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*As the author of this blog I disclose that I do not hold NBCC LTD in my any of the portfolios.

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Friday, May 13, 2016

EVEREADY INDUSTRIES INDIA LTD : CHARGE UP YOUR PORTFOLIO !!!

Scrip Code: 531508 / EVEREADY

CMP: Rs. 239.95; Market Cap: Rs. 1,744.13 Cr; 52 Week High/Low: Rs. 375.00 / Rs. 192.25.

Total Shares: 7,26,87,260 shares; Promoters : 3,19,90,995 shares – 44.01 %; Total Public holding : 4,06,96,265 shares – 55.99 %; Book Value: Rs. 85.95; Face Value: Rs. 5.00; EPS: Rs. 7.17; Dividend: 00.00 %; P/E: 33.46 times; Ind. P/E: 23.85; EV/EBITDA: 15.15 times.

Total Debt: Rs. 207.27 Cr; Enterprise Value: Rs. 1,949.22 Cr.

EVEREADY INDUSTRIES INDIA LTD: The Eveready Industries India Ltd (EIIL) was incorporated in 1934, but its journey started in 1905 in India, whiles the company and became a part of the Williamson Magor Group in 1993. In 1994 the Williamson Magor Group through McLeod Russel (India) Limited bought 51 % of the equity shareholding of Union Carbide India Limited. The company was renamed Eveready Industries India Limited in 1995. The company manufactures and sells dry batteries and allied products, flashlights cases and parts, zinc alloys, strips & plates, Stellite super alloys, cinema arc carbons, carbon electrodes & electrolytic manganese dioxide and cultivation, manufacturing and selling of tea. The company came with an IPO of 32,94,500 equity shares issued at a premium of Rs. 6 per share in 1978. The company till have has declared bonus in the year 1980 in the ratio of 1 new share for every 2 held. The tea division McLeod Russel India Limited was merged with Eveready Industries India Limited to form a new company with two Divisions—the Bulk Tea Division (which managed the tea estates of McLeod Russel) and the Battery Division (which produced and marketed the popular Eveready batteries and flashlights). In April 2004 Eveready Industries de-merged the two divisions into McLeod Russel India Limited (Bulk Tea business) and Eveready Industries India Limited (Dry Battery business). The company launched lanterns with portable rechargeable products in 2012 and in 2015 it launched India’s brightest ever 8W LED bulb. EVEREADY INDUSTRIES is locally compared with Indo National Ltd, Panasonic Energy India Co Ltd, Khaitan Electricals Ltd, High Energy Batteries India Ltd, Exide Industries Ltd, HBL Power Systems Ltd and globally compared with Duracell Inc of USA, Hitachi Maxwell Ltd of Japan, EuroForce Battery Co. Ltd of China, Panasonic Corporation of USA, Cell-Con Inc of USA, China Nice-Power Group of China, Chung Pak Battery Works Ltd of Hong Kong, Sharp Corporation of Japan, Sony Corp, Eurobatt Sp Zo.o. of Poland, GBT German battery Trading GmbH of Germany, Energizer Holdings of USA, Leclanche S. A. of Switzerland.

Investment Rationale:

Eveready Industries India Ltd. is an India-based company engaged in the business of marketing dry cell batteries, rechargeable batteries, flashlights, packet tea and general lighting products. The Company offers products, including dry cell batteries, flashlight (torches), and lighting and electrical products. The Company's products are available under the brand name EVEREADY. The Company offers alkaline batteries, EVEREADY ULTIMA; rechargeable batteries, EVEREADY RECHARGE; brass torches, EVEREADY JEEVAN-SATHI; light-emitting diode (LED) flash lights, EVEREADY DigiLED, and packaged tea, including EVEREADY PREMIUM GOLD, JAAGO and TEZ. The Company has distribution network all over India with around 15 branches. The Company's manufacturing units are located in Kolkata, Noida, Uttaranchal, Chennai, Lucknow and Maddur. The Company also has its own flashlight design and development unit. It has packaging unit for packet tea at Chuapara tea estate. Eveready currently has six manufacturing plants across India with 15 sales offices. Distribution footprint includes 4,000+ distribution pints and a reach of 32 lakhs outlets. Its Brand power clubbed with vast distribution network gives Eveready a leadership in market despite it charging 5 % to 20 % premium in battery business. Eveready’s market share continues to be the highest at 52 % in the organized dry battery industry due to its strong brand recall. Company’s consistent investment of 5 % of sales in advertisement campaigns during the last 10 years has created a strong brand recall for itself. Further, its vast network of 32 lakh outlets across the country covers almost 45 % of the FMCG distribution universe and 70 % of the battery outlet universe. Post completion of transition from D-Size to AA-Size, the company has led the price increase in the battery business, with 23 % realization improvement over FY13-15 and a recent hike of 5 % in September 2015 improved its EBITDA margins from 3.9 % in FY12 to 9.7 % in FY15. Digitization will drive its volume growth in battery business. The India’s per capita consumption of batteries is very low a mere 2 units p.a as against 10 units p.a. of China’s. Indian dry cell batteries market is estimated at 280 Cr pieces in volume and Rs. 1,600 Cr in value. As per the digitization plan, sales of set top boxes are expected to be 12.4 Cr in FY17 and around 15.1 Cr in FY18; this shall lead to strong demand for AA batteries. The TV remote segment is the biggest consumer segment which accounts for 40 % of the total consumption of batteries; growing at 20 % p.a on the back of digitization followed by flashlights which has 25 % share. In the case of LED flashlights, the trend is moving from 0.1W to 0.5W and 1W LED lights as a result, replacement cycle has reduced from 100hrs to 30-40hrs; this will lead to increased demand for batteries. Wall clock has a 25 % share, which is growing at slow pace. The last category includes toys and games, which is a very nascent category at 3-4 % of the share. Compared with China’s per capita consumption of 10 batteries per year, India’s per capita consumption is a mere 2 batteries. Thus, there is considerable scope for growth in the battery market. In recent years low-priced Chinese batteries have been taking away larger pie of this opportunity in the primary sales, but demand for Eveready continues to remain strong in replacement market, where it has maintained its market share. The LED-based lighting industry is expected to grow at 36 % CAGR to Rs. 21,600 Cr over 2014-2020, as per a report by ELCOMA. The growth in LED is on the back of shift from CFL and incandescent bulb towards LED due to energy efficiency and cost savings. Eveready is well placed to capitalize on the LED opportunity on account of increasing its presence in electrical outlets from 30,000 to 60,000 outlets, tie-ups with online players, dedicated 70 % of total advertisement spends on LED, set up of own manufacturing facility which shall help to save Cost of Goods Sold of 5 % and participate in government tenders. The industry is characterized by high competitive intensity, with new entrants like Syska which has the market share of 21 %, established players like Phillips which has little lower share than Syska, while Bajaj, Havells and Eveready share would be 7 % each and many unorganized players in LED market. Flashlight is the second biggest contributor to Eveready’s revenue at 19 % in FY15. The company has leveraged the ‘Eveready’ brand to build its flashlight business and now enjoys 70 % market share in the organized flashlight market. The company has a wide product portfolio in the segment, catering to almost all price points and market segments. Another key advantage that Eveready enjoys is that it has been an early innovator and first mover in several key products. The company was an early mover in the LED torch segment, and introduced Digi LED technology in torches. Recently, Eveready announced the launch of economy range of flashlights which is estimated to be Rs. 250 Cr to Rs. 300 Cr market. The total Indian dry battery is estimated at 280 Cr pcs and has grown at 4 % CAGR over FY11-15. In FY15, the organised players constituted about 91 % and unorganized players mainly low priced imports from China constituted around 9 % of the total market. The Indian dry battery market is mainly dominated by three players, led by Eveready Industries Ltd which has a market share of 52 % in volume terms, also it’s the highest in the segment under its strong brand name ‘Eveready’ and Powercell’, followed by Indo National under the brand ‘Nippo’ and Panasonic Energy under the brand ‘Panasonic’. Chinese batteries are available at 1/5th the price of Indian batteries i.e. Rs. 2 pc as against Rs. 10 to 4 pc. The share of unorganized players was negligible during the period 2002 to end of 2013 as anti-dumping duty was applicable on Chinese import. Post removal of the anti-dumping duty the share of unorganized players has gradually increased to 9 %. The Carbon zinc is the dominating category in India’s dry battery business about 97 % share, followed by alkaline about 2 % and rechargeable about 1 %. The key difference between Carbon Zinc and Alkaline battery is the type of electrolyte used due to which the Capacity of alkaline battery is higher compared to carbon zinc and the shelf life is also higher. In a price-sensitive market like India, carbon zinc batteries are generally preferred for low-drain items like remote controls, clocks, flashlights and low-end toys whereas alkaline batteries are preferred for high-drain items like gaming consoles, digital cameras, MP3, radio, wireless mouse and high-end toys. However, in practice in India, carbon zinc batteries are used even in high-drain items owing to the prohibitive cost of alkaline batteries which is an AA alkaline battery costing Rs. 35 pc compared with Rs. 10 to Rs.14 pc for an AA carbon zinc battery. Eveready is present in all the three battery segments, reflecting the same pattern of mix as the industry. The company’s ‘Give Me Red’ campaign in the early 90s caught the imagination of people and irreversibly powered the brand into the consciousness of Indian audience, who came to associate the company’s batteries with Red colour. The campaign received a new fillip when Eveready signed the famous Bollywood action hero Mr. Akshay Kumar as its brand ambassador to promote the company’s LED business. Eveready has been regularly invested in advertising and sales promotion to maintain its brand strength. Eveready is amongst the best quality product in the market at the most in-expensive pricing which has also been well captured in its advertising communication and this will give the company an edge over the competitors. Company has been fairly pro-active in terms of building up the distribution network for the business and has been working hard to establish a pan-India presence in the electrical outlet channel in the coming years. It has already established a direct reach of 30,000 outlets and aims to cover the entire universe of 90,000 outlets soon. This will enable the company to reach out to more consumers, giving the brand more visibility and help to boost the growth. Eveready’s marketing strategy is targeted towards leveraging the mega brand “Eveready” which already has a strong consumer connect in the lighting, flashlights and batteries space and this will provide the company an advantage over its competitors. “Everyready” is one of the most best and cost effective in its products. Its 100 lumens per watt costs Rs. 449 whereas for Phillips its Rs. 599 for 86 lumens watt; for Syska it is Rs. 599 for 93 Lumens per watt; for Bajaj it is Rs. 485 for 86 Lumens per watt; for Halonix its Rs. 550 for 86 lumens per watt; for Surya its Rs. 600 for 80 lumens per watt, for Havells its Rs. 600 for 74 lumens per watt and for Wipro its Rs. 650. This cost effectiveness helps Eveready to bid for government projects. Eveready recently bid for Madhya Pradesh government LED bulb tender which is its first tender in government order. It has been declared L2 and expects order of 70 Lakhs bulb pcs to be executed over 6months. The bid price is Rs. 64.6 per LED bulb and its impact on revenue is expected to be seen in 1Q and 2QFY17. As per industry sources, the total LED tender opportunity available in next 12months stands at 15 Cr pcs of bulb which will be either in 7W or 9W category. The company intends to participate in more such orders during FY17. The company also intends to set up its own manufacturing unit in the form of a JV with a domestic player by January 2016 and this will reduce costs by 5 % to 6 % and ensure its steady supply. Brand recall value, new launches, cost effectiveness, raising demand and government bids will ensure stable growth for Eveready and better margins will protect its profits and in all Eveready is all set to take advantage of new trend to use fuel efficient bulbs and appliances.

Outlook and Valuation:

Eveready Industries Ltd has a well-diversified product portfolio spanning four products, with strong leadership in two key products segments such as batteries which has 52 % market share in the 2.7 bn pieces Indian battery market and in flashlights it has 75 % market share of the 35mn pieces Indian organised flashlights markets. It commands premium pricing over its peers driven by regular brand building exercise and vast distribution network of around 32 lakh outlets. Company’s battery segment contributes 60 % to revenues, flashlights contribute 19 % to revenues, lighting and electrical contribute 15 % to revenues while packet tea contributes balance 6 % to the revenue. Eveready will launch at least 19 products, such as ceiling fans, electrical kettles and mixer-grinders, which will be contract manufactured in China and India. Eveready will be launching at least 60 products over the next three months. Though it will position itself as a “value-for-money brand”, Eveready will split its home appliances between two categories: popular and premium. Put together, the company expects the category to yield an operating margin of around 10 % -12 %. The Rs. 15,000 crore home appliances market is fragmented and even a 2-3% share of the market will give a huge fillip to Eveready’s revenue and profitability. The company has so far been selling batteries, flashlights, LED bulbs and packet tea. Eveready has for long been trying to expand its product portfolio to get the most out of its pan-India distribution network and brand recall. Eveready’s existing distribution network should be able to sell at least 25 % of these new products. A bigger driver of sales is expected to be digital marketplaces. At least 30 % of home appliances currently sell through e-commerce platforms. The company is eyeing a 4-5% share of the home appliances market in three years. The sale of these goods in India is expanding at around 15 % a year. Eveready Industries may sell assets like land as well as close off some of its unproductive plants to cut costs and raise funds for its new diversification in response to continuing Chinese dumping. The company is looking to monetise surplus real estate in next two years. The company had a land bank comprising of properties in Noida, Kolkata, Lucknow and Hyderabad, which would be monetised depending upon market conditions. Eveready, which so far has been financing its foray into LED lighting category from internal accruals, now need money to fund its recent diversification into electrical appliances. The company will continue to invest heavily in brand building in the LED business that would help it to command a position among the top three players in the category. Eveready currently has plants at Taratola Road, in Kolkata, Tiruvottiyur in Chennai, Noida in UP, SIDCUL industrial estate in Haridwar, KIADB Industrial Area in Karnataka, Aishbag in Lucknow and at Vaikadu in Chennai. And are setting up a 400 million battery plant which would get completed by March 2017. As the north east still enjoys excise duties and IT exemptions we see a payback of three years for this investment. This gives them the flexibility of shutting down some of our older plants which run at higher costs. The unorganised segment, primarily cheap Chinese imports, has been rising for the past two years after the removal of the long-standing anti-dumping duty. Its share in the industry has risen from 7 % to 9 % over the past few quarters. As a result, even though the ‘AA’ and ‘AAA’ segments are growing at 6 % to 7 % and 13 % to 15 %, respectively. While the Eveready batteries business will continue to be the largest contributor to revenue and profits over the next few years, the new LED business should provide additional growth over the long term. As a result, it can be expected that the company can deliver a 35 % EPS CAGR over FY15-17F. The company has announced a capex of Rs. 100 Cr for shifting its battery manufacturing to Assam by March 2017 in order to enjoy excise and tax benefits. The management expects a payback after 2.5 years. A part of the capex will be funded through debt, though Eveready also has plans to monetize certain assets within 18-24 months, which will raise a similar amount as the required capex. On financial side Eveready Industries’ posted moderate 4QFY16 numbers. Its revenue grew moderately by 3 % to Rs. 283.3 Cr on account of a flattish growth in the battery business and decline in flashlights, which was compensated by a healthy growth in the LED business. Its EBITDA reduced its growth 39 % to Rs. 13.7 Cr while EBITDA margin declined by 2.20 % to 4.8 % mainly due to a mark down of LED bulb inventory and higher advertisement & promotional spend. According the management, there was a sharp decline in LED bulb prices in 4QFY16, which led to the mark down of old LED bulb inventory. Eveready’s battery business, which contributed 57 % of its total revenue in FY16, remained flat during the year due to the import of cheap Chinese batteries. As per management, there is a high possibility of anti-dumping duty being levied by the end of 1HFY17 and if this happens, then domestic battery companies are likely to record high growth and margin expansion. The lighting and electrical segment grew by 46 %, driven by LED and will remain in the high growth trajectory, helped by government order of 70 lakhs bulbs to be executed in FY17. Given this, Eveready will trade closer to FMCG multiples rather than capital goods companies such as Havells. Eveready will be able to deliver consistent mid-teens revenue growth over the medium term with possibility of driving some margin improvement as well. This will mean that the company’s earnings growth is more likely to be closer to the FMCG sector which is another factor which will mean the trading multiples will eventually be closer to the FMCG average. Eveready Industries has been able to build a strong brand over a long period which is clearly visible in the pricing power that the company has. The company will be able its sustain its leadership 52 % market share and enjoy competitive advantages in the battery segment. Robust growth in LED business, opportunity to diversify into new product categories like small home appliances backed by its brand power and vast distribution network, margin expansion, high RoCE and cash flows makes Eveready Industries an attractive play in the given sector. At the current market price of Rs. 239.95, the stock is trading at a PE of 27.58 x FY16E and 19.99 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 8.70 in FY16E and Rs. 12.00 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	1,278.90	1,323.30	1,532.60	1,773.90
NET PROFIT (₹ Cr)	48.90	50.60	75.55	109.00
EPS (₹)	8.50	8.70	12.00	16.70
PE (x)	28.70	28.30	20.40	14.60
P/BV (x)	2.90	2.70	2.50	2.30
EV/EBITDA (x)	16.10	15.90	12.60	9.70
ROE (%)	10.20	9.80	12.80	16.30
ROCE (%)	13.50	13.80	17.20	20.00

As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase. (Why Strict stop loss of 8 % ?) -

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*As the author of this blog I disclose that I do not hold EVEREADY INDUSTRIES LTD in my any of the portfolios.