Eveready Industries: The spark appears to be fading
The why and the how of the company
The annual report of the company for FY10 does not bring forth any positive energy. It appears to be slowly but steadily losing the plot. It is a pity that the father and son duo of Mr. B M Khaitan and Mr. Deepak Khaitan, who collectively control close to 41% of the voting stock, are pushing the company onto the road less travelled. The management does drive home the point that the company still has 51% share in the dry cell battery business and a 76% share in the organized flashlight market. These two product lines account for its bread and butter survival kit. What is left unsaid is that, the reason for this dominance is the lack of energetic competition in this mass market low value added industry, which is growing at a nibbling pace. A player in this business requires a vast outreach to remain in contention. Eveready gives an idea of the path that it has to negotiate. The directors’ report states that in the FMCG universe of 7.3 m outlets, the penetration of the battery stocking universe was 65%. Eveready batteries were stocked in 66% of such outlets.
Little brand building
The present management has done precious little to add to the company’s brand equity. As a matter of fact, and in retrospect, the only move that the Khaitans appear to have got right following the regime change was in effecting a domain name change from Union Carbide India to Eveready Industries India. There is little other traction gained in its functioning. Resorting to such gimmicks as merging the operations of Bishnauth Tea Company with the company must be viewed as comic. Close to 10% equivalent by volumes of the packet teas that the company sold in FY10 was given away as freebies, in sales promotion schemes, by the company’s own admission. The management’s argument that the tea business is a part of the FMCG smorgasbord does not quite wash. (It also gave away some 71 m batteries (64m), or 6% equivalent of volume sales, as freebies during the year.)
Selling its family silver
It may also be in the process of selling its family silver, having just transferred its leasehold premises in Navi Mumbai for Rs 1.2 bn, and in April 2010 it downed the operations of its manufacturing unit in Hyderabad. In all probability this land may also be put on the auction block shortly. (To put matters in the right perspective, in FY09 the company sold fixed assets realizing Rs 555 m, while in FY10 it realized a much larger Rs 1.2 bn). The management has also tried to gain some brownie points by twice revaluing its landed assets, buildings, and plant and machinery in the last 15 years, which led to boosting its revaluation reserves by Rs 3.1 bn.
The Company Law Board
There are also some indications that all is not well with the management of the affairs of the company. The Company Law Board, following an application made by the Central Government under section 408, had in end 2004, directed the Central Government to appoint 3 directors to the board of the company. (For those not familiar with this section, it refers to the powers of the Central Government to deal with oppression or mismanagement.) The company had very sensibly obtained a stay in the Kolkata High Court against the implementation of this order, on the ground that the order suffers from various legal infirmities. In spite of a passage of 6 years the stay order still continues! What type of justice system is this please?
The product lines and outsourcing
So what is the company up to? Very little really has changed since the Khaitans took control of the corner office, other than the addition of a few pinpricks of sorts. It is still primarily in the business of dry cell batteries, flashlights, a new range of lighting solutions for homes, rechargeable batteries, packet tea, and insect repellents. The total sales revenues for the year amounted to Rs 10.1 bn against Rs 9.3 bn in the preceding year. The battery business brought in 59% (66%) of all sales, followed by flashlights with 23.5% (19.1%), lighting products with 9% (4%), and packet tea with 7.5% (8.8%). Collectively batteries, flashlights, and lighting products brought in 91% of sales against 89% in the preceding year. On paper it has the capacity to make sundry other items, but they have either been phased out or not implemented.
Outsourcing is the new mantra though. It even outsources batteries, though on a small scale, when close to 40% of its installed capacity of 2.1 bn pieces per year for battery manufacture is lying unutilised. At the same time it is also pumping up the capacity of its battery manufacturing units precisely when it is recording lower volume sales! The real thrust on outsourcing is in the sales of flashlights and lighting products. Assuming that the company sold all the flashlights that it outsourced in FY10, then in effect, 60% of the flashlight volume sales were outsourced. It sold 27 m pieces during the year against 23.6 m pieces in the preceding year. And it completely outsources and sells Lighting Products. Volume sales of the latter amounted to 32.8 m pieces as compared to 4.8 m pieces in the preceding year. This line of business is the new focus it appears.
No segmental details
The company has avoided giving a segmental breakdown of its operations on the rather specious plea that all its items of sales fit into the omnibus term of Fast Moving Consumer Goods! The fact of the matter is that batteries, flashlights, general lights, and packet tea are independent profit centers, and merely seeking refuge under a wonky interpretation of the requirement to disclose segmental data does not quite add up, and besides, it shows up the management in poor light. The point is also that flashlights are consumer durables and cannot be classified as coming under the FMCG umbrella.
Getting a fix on operations
In any event one can still get a fix on the operational aspects. The profit margins of the battery division was definitely under pressure in FY10, as witnessed by the fall in the average gross rupee realizations per battery sold, and the simultaneous hike in input costs per kg of zinc smelter consumed. The flashlight biz is more tacky. Against an average purchase cost of Rs 37 per flashlight, the company realized an average sale price of Rs 88 per unit sold, (including on the in-house flashlights), which would imply a sizeable gross margin. However against an average purchase cost of Rs 22 for general lights, the company eked out an average sale price of Rs 28, implying that this product line is not contributing much to the bottom-line either, and the company may well have to generate volumes to make real sense of this product line. Then there are sales of yet other purchased items amounting to Rs 113 m. One cannot quite get a fix on the tea business though, due to the due process of identifying costs, but presumably it too contributed its mite. In any event the company appears to have redoubled its marketing and sales effort in FY10 by spending Rs 655 m against Rs 378 m in the preceding year. This effort in part helped revv up sales by value by 12.5%. But, in any event, full marks are due to the company for its ability to sell cash down. Trade debtor receivables at year end averaged a mere 14 days cumulative sale. And this is also an indication of the might of a power brand, when it is the market leader in the FMCG segment. If only the company could leverage on this inborn strength.
The new delusion
So what else is it doing? Apparently overcome by a sudden burst of delusion perhaps, rather than out of any reasoned thinking, it decided to become an Indian MNC of sorts by signing a deal with C G Holdings, France to acquire a French company Novener SAS, for Euro 10 m, or Rs 411 m, with effect from July 1, 2009. Separately it has advanced a loan of Rs 63 m to the subsidiary. (The proceeds from the sale of landed assets came in very handy). The latter in turn holds the controlling stake in Uniross SA, France. (As one can see it makes for a complicated web of holding companies.) Uniross makes and markets rechargeable batteries and allied products in Europe, North America, Hongkong, and China. Together there appear to be 16 companies totally, including step down subsidiaries.
The reason for the deal becoming effective July 2009 is that the companies that it acquired close their books of account on June 30 each year. So the management of Eveready gets a one year’s reprieve in disclosing more intimate details of the companies that it acquired. For the present, we are informed that the new siblings had a collective turnover of Rs 1.3 bn, and recorded a loss of Rs 150 m. This is an anticlimax of sorts, and in a manner of speaking, there are almost as many companies in this mix, as the collective turnover! (Eveready informs that the French parent faced financial difficulties on account of a high cost acquisition not going as per plan and also on account of a commodity led cost push.) Now the new management, which does not quite have a fix on how to take Eveready forward, gets a chance to iron out the difficulties that its new acquisitions are faced with.
The moot point here is also on how Eveready can help, as the acquirer is in itself a financial pygmy, among other shortfalls. But as the deal has been consummated, we have to now await the magic mantra. If this is not enough, it has also floated a subsidiary based out of Hong Kong, whose stated objective is to obtain commercial benefits for the parent in sourcing input materials from China. Why this late reaction to such a possibility which has been out on the open for years? It will be interesting to see how this new brainwave pans out.
All in all, it appears to be a company which has very little to offer to minority shareholders.
PLEASE NOTE THAT I AM NOT A SHAREHOLDER OF THIS COMPANY
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.