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  • Stock Recommendation | EVEREADY INDUSTRIES INDIA LTD (EIIL) – BUY – Target Price : 310

    Publish date: FEBRUARY 20, 2019

    EIIL Q3FY19 adj. PAT outperformed our estimates due to a tax write back Q3FY19 revenue/adj.PBT estimate was largely in line with our estimate. We believe that most of the challenges are close to get sorted and situation across verticals have largely stabilized now signaling bottoming out of margins.

    EIIL reported modest revenue growth of 2.6% y/y, reported at Rs 3.8 Bn in Q3FY19 due to improvement in lighting/battery and consumer appliances segments.

    Company has maintained operating margin on y/y basis. However, inclusion of an exceptional loss of Rs 232 mn resulted in negligible PAT in the quarter.


    Currently, EIIL stock is trading attractive at 12.7x PER and 9.6x EV/EBITDA on FY20 earnings. Broadly maintain FY20 forecasts and DCF assumptions, we recommend ‘BUY’ with unchanged target price of Rs 310.




    Core business shows stability in 9MFY19; consumer appliances business is expected to drive future growth for the company

    EIIL reported modest revenue growth of 2.6% y/y, reported at Rs 3.8 Bn in Q3FY19 due to improvement in lighting/battery and consumer appliances segments.

    Battery business reported 6.2% y/y volume growth in Q3FY19. Management sounded confident that the import of cheap Chinese batteries should get obviated by implementation of BIS standards. We believe that the margins too have bottomed out in the battery segment and EIIL would likely benefit from soft Zinc prices going ahead. EBITDA margin for the segment is reported at healthy 18% in the quarter.

    Lighting division reported severe drop of 11% in sales, reported at Rs 881 mn due to 1/ continuous fall in the LED bulb prices (however few players like Havells India and Surya Roshni has reported healthy growth of over 16% y/y in Q3FY19 in the lighting segment) 2/ continued supply related issues from one of the company’s suppliers, affecting luminaire sales in the quarter. However, management sounded confident about sales/margin improvement in the lighting business driven by luminaire and professional lighting business. EBITDA margin for the segment was reported weak at mere 5% in the quarter.

    Appliances business reported robust sales growth at Rs 410 mn in Q3FY19 vis-à-vis Rs 231 mn in Q3FY18. EIIL reported EBITDA loss of Rs 42 mn in the appliances segment. We note that the consumer appliances segment is still in the built-up phase and expansion/promotion related costs continues to outgrow revenues. The distribution base has been constantly growing taking company’s reach to over 15000 outlets currently. Management believes that the consumer appliances business has the potential to grow revenues to c. Rs 3 Bn (with 10% EBITDA margin) in the next three to four years and expects to break-even in FY20.

    Overall EBITDA margin stood at 9.2% in Q3FY19. We believe that the EBITDA margin would be aided by c.14% y/y reduction in employee expenses, (reported at Rs 404 mn in the quarter vis-à-vis Rs 411 mn in Q3FY18) on account of savings ascertained by closure of its Chennai plant (resource moved to Assam plant). The Chennai plant closure would likely result in the annualized savings of c. Rs 150 mn going ahead.

    Company also reported an exception loss of Rs 232 mn in the quarter against VRS settlement with employees at Chennai plant. Finance cost increased by 143% y/y to Rs 168 mn in the quarter due to 1/ increased working capital requirement in the quarter and 2/ increased borrowings which in turn is utilized for investment in ICDs on which EIIL earns interest (resulting in subsequent increase in other income). Tax expense reported at negative Rs 22 mn vis-à-vis Rs 58 mn in Q3FY18. EIIL reported close to nil PAT in the quarter, however adjusted for exceptional loss, PAT is estimated at Rs 234 mn.

    EIIL is set to enter the FMCG space in JV with Indonesia based Universal Wellbeing Pte. Ltd; it also eyes opportunity in confectionary market in the fruit chew segment with its ‘Jollies’ brand

    In FY18, EIIL had announced entering into 30% JV with Indonesia based Universal Wellbeing Pte. Ltd to enter into FMCC market. Universal Wellbeing Pte. Ltd (UWL) is one of the leaders in the FMCG market in South East Asia with active presence in several countries. It develops, manufactures and sells a wide variety of products in household and personal care.

    As per management, EIIL has strategized to distribute UWL products in India leveraging on its vast distribution network. EIIL distribution network consists of over 4000 dealers providing access to 3.5 mn outlets (including grocery stores).

    EIIL had also entered into the confectionary market in the fruit chew segment with its ‘Jollies’ brand. As per management, fruit chew market has been less cluttered and is pegged at Rs 4-5 Bn and has been growing at 17-18% per year. Competitive landscape includes players like ITC (Candyman and Mint-o brands) Falero and Alpenliebe (brand Juzt Jelly).

    As per management, fruit chew is a high gross margin business (similar to other business areas of the company) and could potentially clock Rs 350 mn in FY19 and further grow to Rs 1 Bn by FY20. EIIL aims at attaining pan India reach of Jollies in 2HFY19.

    EIIL balance sheet likely to get de-leveraged post monetization of Chennai land for Rs 1 Bn. Management sounded confident about 1/ monetizing other non-strategic assets in the near term and 2/ strengthening balance sheet further, achieving debt free status by FY21.

    CCI imposed penalty on EIIL along with other key industry players for colluding to fix prices of zinc-carbon dry cells

    EIIL stock price suffered a significant following the announcement from the CCI (Competition Commission of India) to impose penalty (in Sou Moto case) on Eveready, Nippo (Indo-National and Association of Indian Dry Cell Manufacturers (AIDCM) for colluding to fix prices of zinc-carbon dry cell batteries in India.

    CCI notice alleged that the anti-competitive practices were being carried out from 2008 till August 23, 2016, the date of search and seizure operations by the Director General of CCI.

    The quantum of penalty has been fixed at Rs 1.72 Bn (c.2x of FY17 reported PAT) for EIIL which in our view, could have a sizable negative impact on company’s balance sheet.

    EIIL has appealed and got a stay order on this order from NCLAT (National Company Law Appellate). It has made a deposit of 10% of the penalty amount with NCLAT and awaits further directions in this regards.

    We note that EIIL has got respite in the flashlight business where it is recently cleared of all charges.


    Currently, EIIL stock is trading attractive at 12.7x PER and 9.6x EV/EBITDA on FY20 earnings. Broadly maintain FY20 forecasts and DCF assumptions, we recommend ‘BUY’ with unchanged target price of Rs 310.


    Eveready Industries India Ltd (EIIL) is market leader in Indian batteries industry, commanding c.55% market share in batteries and holding c.75% market share in India’s organized flashlight market. EIIL became part of the Williamson Magor Group in 1993. Founded in 1869, the Williamson Magor Group, gradually progressed to become the world's largest tea producer (McLeod Russel India Limited) and diversified into consumer goods, engineering and construction, emerging as a multi-business enterprise with a turnover of Rs. 50 Bn. The Group is headquartered in Kolkata and has expanded its operations worldwide through its subsidiaries. Mr. Amritanshu K. Khaitan, has been the Managing Director of Eveready Industries India Limited since May 5, 2014. Under his leadership, company has undergone incessant transition in terms of diversifying itself into other segments like small home appliances and lighting businesses.


    EIIL activities are spreads mainly across five areas-1/Batteries 2/ Flashlights, 3/ Lighting & electrical products, 4/ Small home appliances and 5/ Packet tea.


    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ADD - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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