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Eveready Industries India Ltd.
 
BSE Code   531508
ISIN Demat   INE128A01029
Book Value   38.56
NSE Code EVEREADY
Dividend Yield %  0.00
Market Cap   26763.45
P/E   0.00
EPS   -41.49
Face Value 5  
Year End: March 2016
 

MANAGEMENT DISCUSSION AND ANALYSIS

INDIAN ECONOMIC OVERVIEW

Global economic landscape continued to be uncertain, characterised by weak growth in world output, declining prices of commodity prices including crude oil. Yet India's growth story has largely remained positive in the wake of a strong domestic consumption. Inflation and fiscal deficit showed marked improvement. According to reports, the country's economy was estimated to have grown at 7.6% during the year under review, despite a somewhat erratic monsoon.

The country however continues to face the challenges of global down turn and recovery is yet to gather speed. Many sectoral deficiencies are still weighing heavily on the overall economy. Despite obvious advantages such as a large consuming young population, relatively lower dependence on exports, lower inflation - overall economic parameters still needs improvement.

Although overall sentiments are yet to gather momentum, it appears that conditions do exist for Indian economy to achieve high growth rates. India continues to stand on the anvil of becoming a 'middle income' economy. Its people will continue to experience higher income levels - and a large percentage of its absolute poor will get lifted out of the abyss of poverty. This transition will certainly ignite consumerism. The fast moving consumer goods sector in which the Company operates in will be able to derive full advantage from this trend.

FMCG INDUSTRY IN INDIA

India has been traditionally a consumption-driven economy. Broadly categorised into urban and rural markets, the Indian consumer segment is attracting increasing attention from marketeers across the globe.

The growing purchasing power and the rising influence of the social media have made the Indian consumer to adopt a more aspirational lifestyle. India could become the world's largest middle class consumer market with total consumer spends of nearly US$13 trillion by the year 2030 (Source - Report titled 'India Matters: Winning in growth markets' by Deloitte). This sector has grown at an annual average of 11% over the last decade and is anticipated to expand at a CAGR of around 15%. Online retailing is expected to grow threefold to become a X 50,000 Crores (US$ 8 billion) industry by 2016 (Source: CRISIL research data). Research from A.C.Nielsen has projected that rural India's FMCG market will surpass US$100 billion by the year 2025.

It is expected that the economy will finally turn around -may be sooner than what is indicated by the current data. This turnaround, coupled with the fundamental strength of the economy will accelerate consumption to its potential in both rural and urban markets, as various research seems to indicate. Hence the outlook for this sector appears quite robust over the coming years.

THE BUSINESS

Eveready Industries India Limited (EIIL) is one of India's leading FMCG companies, with its products and brands being household names over the past century. Over the decades, it has been the leader in the dry cell batteries and flashlights markets in the second most populous country in the world.

The Company's contemporary product portfolio in the domestic market comprises the following:

• Dry cell and rechargeable batteries under the brand names 'Eveready', 'Powercell' and 'Uniross'.

• Flashlights and lanterns under the brand names 'Eveready' and 'Powercell'.

• Packet tea under the brand names 'Tez', 'Jaago' and 'Premium Gold'.

• LED bulbs and luminaires under the brand names 'Eveready' and 'Powercell'

• Devices like mobile power banks, rechargeable fans and radio under the 'Eveready' brand.

• Small Home Appliances under the 'Eveready' brand.

The Company is the largest player in India with regard to dry batteries and flashlights having a market share exceeding 50% in both categories. Its competencies in these product categories are equal to the best in the world. The Company continues to leverage its wide distribution network with a range of product offerings in branded tea, lighting and electrical segments.

The Company believes that the Eveready brand is a natural fit to the lighting and electrical category. EIIL, thus, plans to persist in its efforts to be a significant player in these product segments. Some additional efforts will be required to align distribution to the needs of this trade, work on which is already underway.

The platform of the Company today is to provide portable power and lighting -and the products as mentioned above are aligned to that platform.

The Company has been in the packet tea business historically. Although its share of the packet tea market is limited, the product has traditionally played an important role to sustain distribution in certain areas. This product will continue to provide a sustainable turnover, thereby adding scale to the Company's operations and profitability.

The Company has also just forayed into the Small Home Appliance segment to leverage its brand and distribution network. This category having a low level of penetration, highly fragmented segmentation coupled with a large size offers a good potential for the Company to augment its turnover substantially in the coming periods.

This makes for a robust product portfolio. EIIL expects to strengthen its brsence across these products through increasing value and volumes in the future.

BATTERIES

Industry size and structure

The Indian market for dry cell batteries is now estimated to be worth over Rs. 1,500 Crores by value and 2.7 billion pieces by volume. The battery market has few players, out of which EIIL has a market share of 50% between its Eveready and Powercell brands. The next player lags by more than 20 percentage points.

The battery market grew at a healthy pace, estimated at 10%. However, the organised players could not register growth, due to the market being disturbed by poor quality products imported from China at dumped prices. As a result, the Company's volume and value both registered a marginal de-growth during the year.

The market segment pattern underwent changes during the recent past as consumers shifted from the more expensive 'D' size batteries to 'AA' sized ones. The shares of the principal battery categories for the last three years are as per the table below:

Percentage of Market

The split of technology within the dry batteries market remained constant with the zinc carbon battery segment virtually dominating the entire market with 97% share. The alkaline battery segment has minimal share of the market at less than 2%. The rechargeable battery segment, which accounts for the balance 1% market share, has remained stagnant, despite having a loyal customer base.

The consumption of batteries is driven by growth in the off-take of its applications. A growing need for portable power and the advent of a number of battery-operated gadgets like remotes, toys, clocks, and torches have catalysed consumption. Since these gadgets are used on an everyday basis, batteries have enjoyed a non-cyclical demand.

Performance review

During 2015-16, the category turnover was at Rs. 760.19 Crores, 1.3% lower over the brvious year. Volumes also registered a de-growth of 1.2%. While AA volumes remained flat, AAA registered growth. EIIL's market share was at 50% and the product mix also remained quite similar to that of the market.

Marketing and distribution

The Company continued to emphasise on strengthening its distribution network. Out of the total FMCG universe of about 8.5 million outlets, penetration of batteries stocking universe stood at 53%. Eveready batteries were stocked in 70% of such outlets, higher than any other battery brand by a wide margin.

The Company's brand campaign featuring batteries and flashlights continued to add positive qualities to its brand value. EIIL will persist with these efforts to further strengthen its brand salience.

Opportunities and threats

India has a low per capita consumption across a number of product groups, batteries included, indicating an inherent potential for growth. Since dry cell batteries rebrsent the cheapest source of portable power, consumption is expected to increase over time. Besides, growing income levels, changing lifestyles and an increased need for convenience have resulted in proliferation of gadgets run by batteries. These include remote controls, torches, toys, cameras, FM radio sets and portable music systems, among others.

Batteries do not face any serious threat because these are items of recurring use, providing portable energy at an affordable cost. EIIL has an inherent advantage over competition due to its enduring brand equity, tangible quality and ease of availability due to its widesbrad distribution network.

Cheap imports continue to be a threat as with the removal of anti dumping duty, there has been a surge in these imports. However, measures have been taken to arrest this phenomenon.

Alkaline batteries, although popular in the West, do not as yet comprise a serious alternative to carbon zinc batteries. This is due to the price-sensitive nature of the Indian consumer. That has led to a mere 2% market share for such batteries, despite they being brsent for over 15 years. In any case, EIIL does have a brsence in this segment and will be able to participate if the market provides any indication of an opportunity.

Given the overall positive scenario, a tangible threat to battery consumption lies in lower usage of battery consuming equipment.

Risks and concerns

The upward volatility of the rupee and commodity prices would put brssure on operating margins which would need to be passed on to the market. These rebrsent areas of concern.

The anti-dumping duty on AA batteries has now expired. While the domestic producers have applied for imposition of antidumping duty on both AA and AAA, the outcome is still uncertain.

FLASHLIGHTS

The flashlight market is shaped by EIIL because of its dominant market share position at about 75% of the organised segment. At the same time, there is also a vast unorganised segment that is estimated to be almost equivalent to the size of the organised one. Taking that into account, EIIL has a market share of around 35%.

Performance review

During 2015-16, the category turnover was at Rs. 206.65 Crores, rebrsenting a de-growth of 14.5% over the brvious year. Volumes de-grew by around 18% due to a somewhat erratic monsoon coupled with reduction in rural spending and proliferation of cheap flashlights of poor quality by the unorganised and gray market players. The category however continued to be profitable.

Opportunities and threats

A vast dormant population (almost 45 million households) of non-users rebrsents a large opportunity for the flashlights market. This will continue to be tapped by EIIL in the years to come.

The urban areas, where flashlights are seldom owned, comprise another specific area of opportunity. Vast sections of urban areas now face periodic power cuts and flashlights provide a viable alternative solution during those times.

The category however, faces a continued threat in the form of gray market operations launching lookalike models, usually without payment of taxes and duties. The only way to sidestep this problem is to continue launching new and innovative models.

Risks and concerns

As already mentioned, there is a vast potential of tapping in to convert users to non-users. The risk is that such first time users can take to the gray market lookalike products owing to the cheaper prices. That will result in organised players losing out on this growth opportunity. This problem needs to be tackled through appropriate product offerings and innovative marketing initiatives.

PACKET TEA

EIIL is leveraging its distribution network to market packet tea and derive additional revenues at virtually no extra costs. The Company has not really invested any money in advertising for the brands Tez, Jaago, and Premium Gold that are targeted at different consumer segments. Yet, these brands have gradually been increasingly accepted due to their superior quality, which has been a hallmark of EIIL's packet tea branding strategy.

The Company's existing share of the packet tea market is limited. However, this product category provides a sustainable turnover, thereby adding scale and profitability to its operations.

Performance review

During 2015-16, the category turnover was at Rs. 72.16 Crores, rebrsenting a de-growth of 5% over the brvious year. Efforts were concentrated to scale up turnover in a few focused markets through extensive branding strategies and enhanced distribution drive.

Opportunities and threats

With loose tea prices remaining firm over the last few years, the threats from unorganised players remain limited because of their limited pricing power. This provides an opportunity for organised players like EIIL to expand.

Risks and concerns

The risk associated with the category is one of low growth which limits the ability of this business to become very profitable. Also, should loose tea prices fall, it will further impact the profitability adversely. The problem needs to be tackled through a mix of branding efforts, good blends and competitive pricing to catch on to the consumer taste.

LIGHTING AND ELECTRICAL PRODUCTS

As mentioned earlier, the brand Eveready is a natural fit to the lighting and electrical category. The Company's distribution network in general trade and modern retail has also provided a good platform to enter this category. However, further expansion is underway to tap the exclusive electrical trade. In order to make a meaningful range offering to the market, more electrical products have been added in the last few months. These include LED panels, battens, tubelights apart from the existing portfolio of LED bulbs, luminaires and electrical appliances.

Performance review.

During 2015-16, the category turnover was at Rs. 276.42 Crores, rebrsenting a growth of 46% over the brvious year. The category is expected to grow similarly in the coming years with expansion of distribution and product range.

Opportunities and threats

In an emerging economy like India, the volume of lighting products will continue to have high growth, due to increased housing and commercial development. Newer lighting technologies mainly LED bulbs will become more popular as these will be more environmentally-friendly and also provide higher value to consumers over time. The Government of India's countrywide campaign of providing LED bulbs at affordable prices will add fillip to the category. EIIL will have to be a part of all such technology changes. This provides a good opportunity for the Company to entrench itself in the category given its brand fit and distribution network. EIIL will however continue to be brsent in all other ranges in the category to cater to all kinds of consumer needs.

The category however faces the threat of fragmented competition, dynamic market prices and low entry barriers. The Company will have to continue its focus on maintaining its brand salience alongwith enhanced distribution to reach the desired scale.

Risks and concerns

The only foreseeable risk in this category seems to be the ability to cope up with the dynamics of an evolving market and get the first mover advantage. This needs to be tackled through a range of quality product offerings at competitive prices.

SMALL HOME APPLIANCES

The Company has just forayed into this segment by leveraging on its existing pan-India distribution network in batteries and flashlights and adding new appliance selling outlets to supplement the vertical. It also plans to leverage its brsence in all modern format stores and E-commerce platforms. This category having a low level of penetration, highly fragmented segmentation coupled with a large size offers a good potential for the Company to augment its turnover substantially in the coming periods.

INFORMATION TECHNOLOGY

EIIL has traditionally invested in information technology (IT) to provide effective business solutions amenable to informed decision making.

The overall IT environment continues to be steady. The processes are sound and are well internalised within the organisation.

INTERNAL CONTROL AND SYSTEMS

The Company has adequate internal control procedures commensurate with its size and nature of business. Their objective is to ensure efficient usage and protection of the Company's resources, accuracy in financial reporting and due compliance of statutes and procedures.

The existing system provides for structured work instructions and clearly laid-down procedures for authorisation and approval for the purchase and sale of goods and services. It also provides for reserved responsibility of custodial control with identified personnel, and use of computerised systems to ensure controls at source.

The Company has a full-fledged in-house Internal Audit Department manned by trained professionals. The br-audit and post-audit checks and reviews are carried out to ensure follow up on the observations made by the Audit teams. The Audit Committee of the Board, in its periodic meetings, reviews the Internal Audit reports, the progress in implementation of their recommendations and the adequacy of internal control systems.

The Company has a well-documented Risk Management System, which is reviewed by an active Steering Committee appointed by the Board of Directors. The risk registrar does identify a few risks, which are routine in nature and none of which brsent any significant impact. There is a mitigation system in place which addresses these risks as part of the routine management process.

HUMAN RESOURCES

People power is one of the pillars of success at EIIL. The Company employs more than 2,500 individuals across its various plants and branch locations, who share a passion for excellence. The key attributes of human capital at EIIL are a rich knowledge base, expertise and experience.

The employee-management relations remained cordial throughout 2015-16. The human resource management system at EIIL puts emphasis on rewarding merit-based performance and raising the skill level of employees.

OUTLOOK

Battery market is enjoying healthy market growth. Currently some disturbance is being experienced on account of poor quality imports at dumped prices. However, steps have been initiated to stem this within a reasonable time frame. Irrespective of that, the Company is also confident that it will be able to capture growth in the market riding on its obvious strength of brmium quality offering, brand and distribution. The outlook on batteries thus remain positive.

Flashlights went through a somewhat modest year due to erratic monsoon. However, it is expected that the market will revert to its usual growth and EIIL will be able to take advantage of the same.

Prospects are promising in the Lighting and Electrical products category. This business has become a key focus area for the Company and an avenue for growth. The Company has been one of the first to offer LED bulbs of high quality to the Indian consumers at affordable prices. This range of new generation bulbs has been very well accepted by the market and will enhance the Company's efforts towards a fruitful diversification in this area. The outlook is thus upbeat - with potential for both growth and profitability.

The packet tea business will continue to remain stable. The small home appliance business will augment turnover.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis Report in regard to projections, estimates and expectations have been made in good faith. Many unforeseen factors may come into play and affect the actual results, which could be different from what the Directors envisage in terms of future performance and outlook. Market data and product information contained in this Report, have been based on information gathered from various published and unpublished reports, and their accuracy, reliability and completeness cannot be assured.

For and on behalf of the Board

B. M. Khaitan

Chairman

Kolkata

May 06, 2016

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