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Midcap Mania: Eveready pins hope on newly launched businesses but debt, loans to promoters play spoilsport

Investors who put money in Eveready Industries India Ltd (EIIL) in 2018 can relate it to their older tagline, Give Me Red, as it has given plenty of red to investors. In the past one year, the stock has lost more than 60 percent from the highs seen in January 2018.
Now, the stock has come under Midcap Mania's radar as its flirting with its 52-week low and has guided for a strong H2FY19.
The stock has seen a sharp correction post the Competition Commission of India (CCI) order in April 2018, in which the regulator had imposed a penalty of Rs 172 crore on EIIL for indulging in anti-competitive practices in the zinc-carbon dry cell battery market in India. In May 2018,  National Company Law Appellate Tribunal (NCLAT) stayed the order and asked the company to deposit 10 percent of the penalty amount with the registry of the tribunal.
The other reason was that financials haven’t looked special in the first half of FY19 as its revenues saw some growth, margins were flattish and net profit is down by more than 10 percent.
EIIL is the largest player in India in the dry batteries sector with a market share of more than 50 percent of the organised segment. In the flashlight market, it has a dominant market share of about 70 percent of the organised segment. But in India, the unorganised market is bigger than the organised market.
Taking that into account, EIIL has more than 25 percent market share. The company has been looking to leverage its wide distribution network with a range of product offerings in branded tea, lighting and electrical segments. It has also forayed into the small home appliance segment to leverage its brand equity for which a dedicated network for distribution has been set up. The appliances business is yet to break even on the EBITDA (earnings before interest, tax, depreciation and amortisation) front but it has been growing at a fast clip.
Despite the move in the stock price, the management seems optimistic in its financials going ahead. "The company expects EBIDTA to grow by 40 percent in FY19," the management told CNBC-TV18.
The company is also aiming to reduce debt to Rs 150 crore from 350 crore and also expect Rs 150 crore revenue from appliance business in FY19 against the 110 crore in FY18, the management said.
The key triggers going ahead include a slide in zinc price which will benefit their core dry cell business as zinc constitutes 30 percent of the cost of production. The recent entrance in the high margin consumer luminaire segment and professional lighting, a turnover build-up in the small home appliances category could also be a major contributor going ahead.
Though the segment is recording losses but with turnover growth over the next few quarters should allow this segment to cover its costs – and thereafter look to contribute to the company’s profitability and finally the continued asset monetisation. It also expects a growth in recently launched confectionery segment under the ‘Jollies’ brand. The brand leveraged the existing FMCG distribution of the company.
The key overhang going ahead is Rs 172 crore penalty order levied by the CCI and also the loans to promoter group companies as under their current assets loans have doubled to Rs 187 crore in October 2018, from Rs 90 crore in March 2018.
The management in their 2018 annual report said they are looking to consolidate the traditional businesses -- battery and flashlights -- and also scaling up the newly formed businesses such as home appliances and confectionery.
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