Burmans pick 8.8% stake in Eveready

Shares of Eveready Industries surged 10% on Tuesday after reports that promoters of FMCG giant picked a minority stake in the company via a block deal.
Shares of Eveready Industries gained 9.96% at Rs 88.90 on BSE.
Burman family is expected to infuse capital in personal capacity in Eveready while promoters may also put money in form of warrants. In lieu of the investment, Burmans will be offered 1-2 board seats as part of the arrangement.
The funds will be used to trim high levels of debt in the company. The company which is valued at around Rs 550 crore has debt of about Rs 400 crore. The company in a regulatory filing had said it availed moratorium on some of its repayments to tide over the cash flow shortfall on account of the lockdown.
However, it expects that once cash flows normalize, it will be able to service its debt obligations. The extension of moratorium will also help ease the cash flow situation.
Eveready Industries India, a flagship company of B M Khaitan Group, reported over three-fold jump in its net profit at Rs 179.57 crore for the financial year 2019-20, compared to Rs 47.26 crore in the last fiscal. For the January-March quarter of FY20, the net profit surged multi fold to Rs 63.73 crore as against Rs 4.04 crore in Q4 FY19.
The profitability was aided by rise in gross margin in the core segments of batteries and flashlights and improvement in operating margin due to additional cost savings measures. The discontinuance of the packaged tea business further helped the company in improving margins and releasing working capital.
The operating income of the battery maker, however, fell 17% to Rs 1,210.93 crore in FY20 from Rs 1,457.73 crore in the full financial year 2018-19. For January-March quarter of FY20, operating income declined 28% on year to Rs 224.20 crore.
EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) fell 1% YoY to Rs 121.13 crore in FY20, while it jumped 139 per cent YoY to Rs 28.67 crore in Q4 FY20. The EBITDA margin stood at 10% in FY20 versus 8.4% in FY19. For Q4 FY20, margin rose to 12.8% to 3.8% in Q4 FY19.
EIL has seen a large increase in its liab in the form of unsecured loans and ICDs given to group companies where payments are yet pending and are qualified by the Auditors in the FY19 Annual Report

These include ICDS & Corporate Guarantees given to promoter cos totaling Rs 540 crs as on Dec 2019. The unsecured loans and corporate gurantees have been given to the promoters closely held entities which operate in the real estate segment

EIL has a total debt burden of ave been 763 crs as on Sept 2019 out of which Rs 540 crs have been given to promoter entities which clearly means that the company is in a weak debt trap situation. The promoters maintain that this money is recoverable and hence no provisions have been made in the books which is a qualified item by the auditors as on Mar 2019 annual report and December 2019 quarterly results.

Additionally the CCI (Competition Commission of India) has recently imposed penalty (in Sou Moto case) on Eveready, Nippo (Indo-National) for colluding to fix prices of zinc-carbon dry cell batteries in India.

Total penalty imposed on EIL is Rs 172 crs which is being contested and is treated as a contingent liability on the books as on date. EIL has already paid 10% of the total amount as penalty upfront payment and the balance amount is yet being disputed.

But in case the company loses this case, this will be additional blow to the companys financials and already weak cash flows.

The Company concluded sale of its land situated in Chennai during the quarter for a consideration of Rs. 100 crores. It also concluded sale of its Hyderabad land in January 2020 for a consideration of Rs. 100 crores. The proceeds of these transactions have mostly been utilized for repayment of debt

Post covid19 manufacturing activities have commenced in a phased manner, subject to restrictions imposed by government (s)/authorities. However, all attempts are being made to ramp up production, current inventory level, demand and supply requirements, with due regard to safety norms

EIL has also approached all term lenders to extend moratorium as per RBI’s Covid19 regulatory package in relation to repayment of instalments falling due during the period of 1st March to 31st August 2020 and some of the requests for moratorium have been granted by the term lenders. This moratorium shall help ease out the cash flow situation in the Company

EIL is also engaged in discussions with lenders in relation to infusion of additional funds (fund and non-fund based) to bridge the Company’s working capital gap and ensure no impact on its operations

Due to restrictions on various parts of the supply chain, there have been certain obstacles initially in terms of availability of products.

While the demand for battery has been satisfactory in the months of April-May due to the essential nature of the category, demand for flashlights is expected to also be good primarily due to the cropping season in rural areas.

EIL expects strong demand for domestic batteries to continue due to BIS becoming mandatory resulting in reduction of imports of cheap Chinese batteries, This trend had begun in the pre COVID period and should now continue with the economy opening up.

Also with 79% of the 42% promoter shareholding is pledged while shareholders have witnessed a very poor dividend distribution track record from EIL.
Therefore despite the entry of a whiteknight in the form of Daburs coming on board with some infusion of funds, its still a long way ahead before one sees a strong improvement in the operational metrics for EIL.

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