Eveready Industries

Eveready Industries is the largest dry cell manufacturer in India and has got a strong brand positioning in India. Being the market leader in a stable industry this is how the stock has fared.

This is I think because of the prices of Zinc which is the major raw material and account for 57% of their total expenses has shot up. Zinc inventories have been low in the past few years and as a result the company had to raise prices. However zinc prices are expected to deescalate now due to increased production. Though the escalation could continue in the short term, mine production is likely to increase in 2008 and 2009. That said the margins of the company can considerably improve and we can see profitability.

Their EBITDA margins have been reasonably strong at 16-22% and then it has suddenly dropped to 6% in 2007 that is largely due to the price rise of Zinc. Considering that their margins improve to as low as 10% and that their topline is almost flat the stock looks to be very cheap at forward multiples of 4.75 for FY07 and 2.82 for FY08.
Talking of a long term, we can expect the topline to increase significantly. Given the consumerism that is prevalent today there is no reason why battery sales shouldn’t increase. The per capita GDP is increasing and we could well be near an inflexion point. I think Eveready should be a good buy at these levels.
Eveready expects that after initial adjustments to the high prices the demand would grow and that the current downturn is only because the consumers have not been able to digest a sudden downturn. They also say that they have a 46.4 percent market share. The Eveready brand and its strong market dominance have been overlooked and the low stock prices seem to be only a reaction to the numbers. Their debt position is not very bad given all the pressures they have been facing. It surely doesn’t look like a disaster piece.