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

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