Eveready Industries: Sell

Recommendation: Sell

Reshma Krishnan

EVEREADY Industries' stock has fallen from a high of Rs 80 in 2000 to Rs 23 now.

The company recently announced a restructuring programme. Yet, the future looks cloudy for Eveready Industries because the restructuring may not be enough to solve underlying fundamental problems.

Eveready Industries India is the B M Khaitan group's flagship company. In 1994, Eveready Industries (formerly Union Carbide India) was taken over by McLeod Russell and came under the Williamson Magor umbrella.

The merger of the tea and battery companies was to allow for synergies that would be realised by combining the distribution networks of the companies. However, this has not happened and the company has been undergoing restructuring. This is reflected in the company's financial performance which in the last couple of years has been unimpressive.

The latest financials do not provide any glimmer of hope either. For the nine months ending December 2000, income from operations declined 3.1 per cent to Rs 546.86 crore from Rs 564.58 crore in the corresponding previous period. Operating profit fell by 14.57 per cent to Rs 84.79 crore as a result of margins falling to 15 per cent for the nine-month period ending December 2000 from 17 per cent in the same period in 1999-2000.

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Eveready derives 45 per cent of its revenues from the tea division. The income from the tea segment has steadily increased in the last three years. Unfortunately, the tea industry saw a turbulent phase in 1999-2000. Tea prices plunged and margins and earnings have fallen across-the-board due to an increase in costs such as labour.

Margins in the highly competitive battery business have also been affected. The prices of zinc, the main raw material for batteries, have been ruling firm and putting pressure on margins. Revenues from the battery division have fallen from Rs 423.21 crore in 1997-98 to Rs 315.40 crore in 1999-2000. Capacity utilisation is also low at 64 per cent compared to its competitors' utilisation rates of about 80 per cent.

On the cost front, a big burden on profit is the huge interest costs. Interest costs rose by 47 per cent to Rs 55.58 crore and accounted for 65 per cent of operating profit. Its debt as of March 2000 stood at Rs 647.34 crore. Therefore, it is not surprising that the company has embarked on a major restructuring to reduce its interest burden by selling five tea gardens and its stake in Energiser Limited for a sum of Rs 6.75 crore.

On the agenda is a mix of more consolidation and hive-offs. Bishnauth Tea, a group company, will be merged into Eveready Industries. The group is looking to consolidate its tea business which will be subsequently hived-off as a separate company.

At this point Eveready's stock faces a number of risks. Despite the company's strength in distribution and its dominant market share in batteries, the stock has been battered heavily by the market. The management reversing what it did in 1995 will only reaffirm the stock market's perception of a fragmented company with a lack of direction.

The new tea company faces the possibility of slow growth as the tea industry is growing at 2 per cent per annum. It could also become a predominantly bulk tea manufacturer, which would mean lower margins. Also, there is the further threat of imports under World Trade Organisation (WTO). The battery business is set to face the threat of cheaper imports and rising zinc prices. Due to the lack of clarity involving the company's future operations, investors may consider paring exposures in the stock.