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We met Mr Amritanshu Khaitan, Managing Director of Eveready Industries Ltd. Post appointment of Mr. Khaitan as the Managing Director in May 2014, the company is focusing on leveraging its strong brand and vast distribution network (3.2 mn retail outlets) besides cleaning up its balance sheet. Battery is expected to be a low-growth, steady cash flow business while the Lighting Products business is envisaged to be the key growth driver for the company. It is focused on debt-reduction and may consider write-off of intangibles to clean-up its balance sheet. The management has further indicated that it aims to maintain a consistent 20% dividend payout ratio. In the long run, the company plans to leverage its strong distribution network to enter into related products through tie-ups with established players. The stock is trading at EV/TTM EBITDA of 9.9x, P/Bx of 1.3x and TTM P/E of 38x (on suppressed earnings).
Strong brand and established position in battery business
Eveready enjoys strong market position in the Battery business with a 51% market share in dry-cell batteries while its nearest competitor has ~27% market share. The Indian dry-cell battery market is estimated to be around INR 1,300-1,500 crore (~2.4 bn pcs) and is expected to grow at a steady pace of 3-4% (in volume terms). The dry-cell batteries find applications mainly in Flashlights, Remotes for TV/ACs, Toys and Wall Clocks. Growth in the battery market is expected to be driven by rising per capita consumption (1-2 batteries per year in India vs. 5-6 in China) and increased usage of remote controls. The management has indicated that the decline in “D” size battery market (mainly used in flashlights) is ebbing and the overall market growth will be driven by “AA” (6-7% CAGR) and “AAA” (20-25% CAGR) batteries (used in remotes and toys). Further, we understand that key players in the industry have taken 2-3 price hikes over the past one year (without significant impact on volumes) to offset the increase in input costs, leading to recovery of gross margins. The management expects an average 4-5% pricing growth each year, leading to 8-10% growth in battery business revenues.
Flashlight market still underpenetrated; expect steady growth
The management has indicated that the flashlight market is still underpenetrated with around 40 mn households in India (mostly rural) without flashlights. However, competition is strong in this space from low-cost unorganised players. The management expects this business to grow at a steady CAGR of 11-13% over the next 2-3 years (7-8% volume growth and 4-5% pricing growth). Increasing penetration and gain in market share from the unorganised players through launch of better models and designs of flashlights will drive growth in this segment.
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Lighting products to be future growth driver; execution is key
The Lighting Products business is expected to be the key growth driver for the company in the medium to long-term (40-50% CAGR over next 2-3 years). The company is repositioning “Eveready” from a conventional battery brand to a contemporary Lighting Products brand through a new advertising campaign. (ad spend at 4-5% of revenues over next 2 years). While the current product portfolio of GLS/CFL/LED lamps/table fans is sold through its existing distribution network for batteries, the company is also creating a parallel distribution network in electrical trade business. It currently has 120 dealers and 4,000 retailers, which it plans to increase to 300 dealers and 20,000 retailers over the next two years. The Lightning Products market is estimated at around INR 5,000 crore and it is growing at a CAGR of ~15%. The company plans to expand its product portfolio to include other lightning products and consumer durables. However, the plans for the same are still at a nascent stage. We believe that execution will be key to the success of the company’s strategy in growing the Lighting Products and Consumer Durables business. While the market potential is high, the company will have to compete against established players in this space. Further, the faster growth in low-margin Lighting Products business (20% gross margin vs. 40% in batteries) will lead to blended margins being lower. Further, higher distribution costs to push products in electrical trade network may impact the profits in the near term.
Leveraging strong distribution network for FMCG products through tie-ups
The company has presence in 3.2 mn outlets through 4000+ distributors on a pan-India business. It has a well entrenched network in rural areas through which it sells its batteries, flashlights and CFL/GLS products. The company plans to leverage its strong rural reach to enter into distribution of FMCG products through tie-ups with various FMCG players. However, the plans for the same are currently at a nascent stage. The company currently sells packet tea (6% of total revenues) under its own brands viz., “Premium Gold”, “Tez Premium”, “Tez Red” and “Jaago” in the FMCG business.
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