Hi's and lo's of majors

B. Krishnakumar

THE DRY cell battery industry is heading for exciting times as import norms get liberalised and new players enter the arena.

In the meantime, domestic producers are gearing to meet the impending competition from domestic and global brands. From an investment perspective, only Indo National may warrant a closer look. With a presence in the alkaline and zinc batteries segment, BPL could emerge a major player. However, the company's future prospects and performance depends on the success of the consumer electronics division, its core area of operation now.

Meanwhile, Eveready Industries has indicated its intention to divest its battery business. Though Lakhanpal National has strong brand and the technical backing of a global major, the company is marginalised by brands such as Nippo, Eveready, and to an extent BPL.

Tough there is no compelling reason to take fresh equity exposures in domestic battery producers, it can be considered in Indo National and BPL, either on price declines or on evidence of improved demand for dry cells.

Indo National

Aided by strong demand growth, the company's performance improved steadily in the last five years. Its Nippo batteries and torchlights have cornered a sizeable chunk of South India market. The company's turnover has doubled since 1991-92, a pointer to the kind of growth rate achieved by the company.

Indo National has a technical-cum-financial collaboration with Japan's Matsushita Electric Industrial Co. It has a significant presence in the UM3 (AAA-size) segment. Apart from the steady improvement in demand, well-timed capacity expansion has propelled the earnings growth. Indo National's decision to fund its capital expenditure projects through a mix of debt and internal accruals has also had a positive impact on shareholder earnings.

Though the industry witnessed a slowdown in offtake in the April-June period, Indo National posted a relatively better performance compared to Eveready and Lakhanpal National. For the quarter ended June 2000, the company reported a turnover of Rs 64.30 crore and a net profit of Rs 3.08 crore.

Technically and fundamentally, Indo National appears well positioned to take on competition and capitalise on the anticipated growth in demand for batteries. The technical backing of Matsushita Electric is also a major plus point for Indo National, given that international producers, such as Duracell and Energizer, already have a presence in India in the alkaline battery segment.

As and when demand picks up, Indo National should be able to set up facilities for the production of alkaline batteries. Till then, the company has the option to market alkaline batteries imported from its overseas collaborator.

From an investment perspective, the lack of liquidity because of the relatively small equity base of Rs 3.75 crore is the only deterrent, especially for major institutional investors. However, long-term individual investors could remain invested and use the price weakness to take fresh exposures in the company.

Eveready Industries

This Williamson Magor group company is the market leader in the dry cell battery industry. It enjoys a prominent presence in the torch and flashlight segments as well. Eveready Industries has integrated backwards and produces carbon rods. It also markets the Energizer range of alkaline batteries through a joint venture.

With effect from April 1996, McLeod Russel (a group company in the tea business) was merged with Eveready Industries. As a result, Eveready Industries' financials are exposed to the vagaries associated with the tea business.

Aided by the strong tea price trend and the steady demand growth from the battery market, the company's 1997-98 performance improved. This was, however, subsequently overshadowed by a downturn in the tea business. The continued sluggishness in the tea industry and the drop in the offtake of batteries have pushed Eveready Industries in to the red in the first quarter this year. For the quarter ended June 2000, the company reported a net loss of Rs 11.28 crore on a turnover of Rs 134.94 crore. The equity base is Rs 36.19 crore.

Recently, the company indicated its intention to sell its battery division. The acquirer would automatically get a competitive edge as Eveready enjoys strong brand equity. Given that the prospects of the tea business would influence the company's performance, existing shareholders could use price rallies to trim exposures in Eveready Industries. Moreover, the company has been slipping out of market favour, evident from the subdued trend in price and the price earnings multiple commanded by the stock. Given the huge interest burden and the unimpressive short-term business prospects, shareholders could use the price rally to cut exposures in the company.