Why Eveready Lost 75% Of Its Market Cap In 15 Months

While the company generates almost nothing in cash, its plan to sell land in Chennai to repay debt is yet to fructify. That prompted India Ratings & Research Ltd. to downgrade the company’s long-term debt.

Shares of the battery maker have tumbled 40 percent this year and about 75 percent from the record level of January last year. And even as investors are jittery, Brij Mohan Khaitan, promoter and head of the Williamson Magor Group, resigned as chairman citing old age.

Eveready has more than 50 percent share in the dry and flashlight battery market in India, according to its annual report for FY18. And it accounts for almost 70 percent of the organised market. But the company cited cheaper imports after the withdrawal of anti-dumping duty and competition from unorganised peers as the reason for a decline in sales of both dry batteries and flashlights.

Demand for Eveready’s D-sized costlier batteries fell, while it remained nearly stagnant for other categories. The only segment where demand improved is low-cost AAA. That hurt the company’s margin, which fell to 7.25 percent in FY18 from 8.78 percent a year ago.

As its mainstay battery segment came under pressure, Eveready started to diversify.

• In 2015-16, it began small home appliances.
• Eveready markets and distributes packed tea for Mcleod Russel India Ltd., also part of the Khaitan family empire. In 2017-18, it decided to set up a separate unit for this business.
• The same year, Eveready struck a joint venture with Indonesia’s Universal Wellbeing Pte Ltd. to make consumer goods, and also started selling ‘Jollies’ branded confectionary.

Still, the new businesses don’t make a meaningful contribution to the company’s revenues. And India Ratings & Research expects the appliances, tea and confectionary segments to turn in losses in the year ended March.

Debt Woes

The company, according to its disclosures, had a standalone debt worth Rs 319.62 crore as of September 2018. And it generated just about Rs 5 crore in cash during the period.

India Ratings pointed to a much larger debt burden.

While the company is yet to disclose its fourth-quarter and full-year numbers, according to a report by the rating agency, Eveready had consolidated long-term debt of Rs 712 crore as of March 2019. And it placed the debt on negative watch citing continuous financial support to group arms and delayed asset sales.

Eveready has two wholly owned subsidiaries—Everspark Hong Kong Pvt. Ltd. and Greendale India Ltd. To be sure, it’s not clear if the additional debt highlighted by India Ratings is on the books of the standalone entity or the subsidiaries.

Rising debt increased interest burden, hurting profitability. In the quarter ended December, the company’s finance costs more than doubled to Rs 16.77 crore from Rs 6.89 crore a year ago, according to its filings. Profit declined more than 99 percent to Rs 19 lakh, partly because of an exceptional loss of Rs 23.21 crore on a voluntary retirement scheme for workmen at its manufacturing facility in Chennai.

Asset Sale Plan

Eveready has yet to respond to BloombergQuint’s emailed queries on debt and asset sales.

But the company’s management, in the third-quarter results, said developer Alwarpet Properties Pvt. Ltd. has agreed to buy its land in Tiruvottiyur, Chennai for Rs 100 crore. The deal, however, was not completed as of December. The company also has a property in Hyderabad, which is d at Rs 105.25 crore as of March last year.

Richa Bulani, senior analyst at India Ratings & Research, said in a report that Eveready needs to reduce its debt by Rs 130-140 crore in FY20 for its leverage to come down to an acceptable level, which can only be achieved by asset sale or full repayment of loans by group companies. While the promoters are exploring to raise funds by selling stake, any delay in monetisation or more loans to group companies would be negative for the rating.

To be sure, a chunk of the Khaitan family’s promoter holding in the company is pledged to lenders as a collateral for loans.