Eveready investors may see gains

Electrical and lighting division shows a lot of potential

In recent history, Eveready is one of the shares to have successfully transformed itself from a small-cap to a reasonable mid-cap stock. The stock was trading at sub-Rs 30 levels till December 2013, picked up pace, and went till Rs 360 in July 2015, its all-time high till date. But the stock has corrected over 40 per cent since and the question is, can Eveready once again give them strong returns? 

Most tracking the stock say it has potential to grow into a more sizeable mid-cap stock in the medium term, because of the recent initiative to demerge its packaged tea business. Management is also open to rope in a strategic partner for this business. “A move to get out of non-core assets and deploy proceeds towards strengthening its promising business such as its electrical and lighting division is well-taken,” says Sanjiv Bhasin of IIFL. In fact, this business of late is shaping up well for Eveready. From 10 per cent of revenues in FY12, the division now accounts for 20 per cent of revenues. 

Analysts expect the segment’s contribution to increase to 23 – 25 per cent by FY19. The division is also viewed as operating profit margin-lucrative, likely at 28-30 per cent from FY19 once marketing spends are well-absorbed as against current 10 -12 per cent. 

“Customers’ preference shifting from tube lights to LEDs provides immense replacement opportunity,” Bhasin says. Analysts at Nomura believe growth will now come from newly launched product segments such as appliances and LED luminaries. Nomura sets a 12-month target price of Rs 373, implying 27 per cent gains. (Nomura India Investment Fund Mother Fund holds 3.7 per cent stake in Eveready.)

The Street is counting on new product segments because some traditional revenue streams could see plateau in medium term. Core business of battery, which accounts for 60 per cent of revenues, saw three per cent year-on-year volume growth in December quarter. Though Eveready is leader in batteries market, being a cash-dependent business, volumes may remain low. Increasing lead and zinc prices may also restrict operating profit margin. Similar pressures are seen for flashlight vertical, where if not for recent price cuts, sales volumes may have been impacted in December quarter. However, given these are mature businesses, where Eveready has dominance, a steep decline in revenues is unlikely.