Eveready Industries: Candy crush

Think Eveready and the first thing that leaps into your mind is batteries. For more than 100 years, the brand has been synonymous with the ubiquitous red batteries you use in your torchlights, clocks and remote controls. But did you know Eveready Industries India makes much more than that? The Kolkata-based firm also sells household appliances such as fans and geysers, and LED bulbs and fluorescent tubes.

It might come as a surprise to many that Eveready isn’t just a battery brand. But it is hardly unusual for a company to diversify into other products. After all, diversification is a time-tested strategy that many corporate houses employ to offset risk and boost growth. And the third generation of the Khaitan family, which controls Eveready, understands that it is necessary to scout for future growth in uncharted waters if it wants to prevent the legacy business from fading into oblivion

Even so, Eveready’s latest foray seems a bit like a daring tread into completely new waters: In January, it announced it was launching a fruitbased jelly-textured candy called Jollies. Why on earth was a dry cell and appliances maker stepping into the confectionery market? “Certain initiatives of the company may confuse people,” says Amritanshu Khaitan, the 34-year-old managing director of Eveready Industries India, which rose to 121 on Fortune India’s Next 500 list from 137 last year. “On the one hand, Eveready got into appliances (household durables) and lighting. Then we have launched a confectionery product under the brand name Jollies. So people may wonder what this company is up to.”

Dig a bit deeper and you’ll see there’s a method in the madness. Though Eveready has a market share of over 50% in India’s dry cell battery market and a 70% share of the organised market for flashlights, Khaitan was quick to realise that these mature businesses, which are growing at a snail’s pace, won’t be enough to power the company’s future growth by themselves. Diversification was inevitable since Eveready’s legacy businesses of batteries and flashlights, though profitable with stable cash flows, have been growing at a modest rate of 5-7%. Moreover, it has also been dealing with problems such as dumping of cheap batteries and flashlights from China and reduced dependence on flashlights because of a rural electrification drive.

Analyst Manish Jain of brokerage firm Nomura wrote in a research report that Eveready’s growth had slowed down in the past couple of years due to factors such as demonetisation, GST, and a slump in rural consumption. “However, we believe all the above-mentioned issues are now behind the company and the core business growth trajectory is settling down… One of the key drivers of growth, in our view, will be the new businesses, namely LED lights, small appliances and candies.” Jain expects these new businesses to contribute as much as 40% to Eveready’s overall top line by FY20.

Though batteries have little in common with candies, they are unified by the distribution channel through which they are sold. Eveready’s distribution network reaches 3.5 million outlets and 4,000 distributors across the country. “The company’s biggest assets are its brand and distribution. The time has come to leverage them,” says Khaitan.

Khaitan explains that the biggest cost component of marketing candy is distribution. Since Eveready already has an established distribution network, it doesn’t need to incur additional expenditure in making Jollies, which sells for Re 1, available on the shelves. Jollies will eventually extend its product offerings to include hard-boiled candies as well, says Khaitan. In a confectionery market worth Rs 9,000 crore, Jollies will have tough competition from larger players such as ITC and Perfetti. But Khaitan is confident that Jollies can notch up sales of around Rs 100 crore by FY20.

While the confectionery business is fledgling, lighting and appliances are the other new businesses where Eveready’s efforts have begun paying off. It entered the LED lighting space in 2014, and posted a turnover of Rs 344 crore in the segment in FY18. Even though it is competing with established players such as Philips and Havells, its operating profit margin from the business expanded to 11% in FY18 from 2% in FY17. The company also intends to get into the institutional side of the lighting business by making and selling light fixtures for establishments such as offices and hotels. Khaitan says the lighting market is expected to touch Rs 20,000 crore by FY21. “Lighting can become a Rs 1,000 crore business for us over the next five years, with 60-70% of revenues coming from consumer lighting,” Khaitan says.

The appliances business, which the company entered in 2016, recorded a turnover of Rs 109 crore last fiscal year. It is still loss-making as Eveready continues to invest in building a separate distribution channel for this business. But Khaitan expects the vertical to clock sales to the tune of Rs 400 crore to Rs 500 crore over the next five years.

Eveready came into the Khaitan family’s fold after the patriarch of the Williamson Magor Group and Amritanshu’s grandfather, Brij Mohan Khaitan, acquired it from its American owners (the company was then known as Union Carbide) in 1994. The group’s other interests include tea plantations and engineering firms. He inherited the reins of the business from his father, Deepak Khaitan, in 2013 (who was ailing for a few years before passing away in 2015), and has since led Eveready on a path of rapid diversification.

The third generation Khaitan’s approach towards business and Eveready’s future is pragmatic. He wants his company, with its limited resources, to enter certain large markets (where existing synergies with the company’s brand and/or marketing channels exist) and ride the growth of these segments. He doesn’t want to disturb the apple cart and attain market leadership in these businesses yet, but corner enough of the pie to ensure a steady revenue stream. “My game plan is that Eveready should enter certain very large markets and ride the growth of those markets in such a way that the incumbents’ business isn’t affected much, but stable revenues come into Eveready,” he says.

Investments for these new businesses, including advertising spend and recruitment of seasoned professionals, have taken a short-term toll. But that is a price Khaitan is willing to pay. Despite 7% year-onyear growth in operating revenues in FY18, Eveready’s net profit fell 44% to Rs 53 crore in the same period.

But Khaitan is aiming to double Eveready’s revenues and treble its net profit in the next five years. Its revenue rose to Rs 1,456 crore in FY18 from Rs 1,418 crore a year ago. He expects around 40% of the turnover to come from batteries and flashlights in the next five years; another 40% from lighting and appliances; and the rest from the consumer goods business, which includes a joint venture with Indonesia’s packaged goods maker, Wings Group. Wings, with a 70% stake in the JV, will introduce its personal care and homecare brands in India through Eveready’s distribution network.

Khaitan has an eye on the future, but he also realises the importance of cutting costs. Hailing from a family that owns tea gardens (through group firm McLeod Russel, led by uncle Aditya Khaitan), Khaitan is well aware of the importance of pruning—be it of tea leaves to yield a better crop, or excess flab on the balance sheet. During his tenure in the corner office at Eveready’s Kolkata headquarters, he paid attention to improving the quality of the company’s books. The first thing he did was to write off a significant quantum of goodwill (which led to high depreciation) created after the demerger of the batteries and tea businesses into separate entities, Eveready and McLeod Russel. As a result, the company’s return on equity (RoE) and return on capital employed (RoCE), which were artificially depressed earlier, look more robust. Its RoCE improved to around 24% at the end of 2017-18, from around 7% in 2015-16, while its RoE rose to 16% from close to 8%.

Eveready also hired consulting firm Accenture to study how to cut costs and improve operational efficiencies, and to see what it can do with the packaged tea business where growth has been slow. Consequently, Eveready has decided to divest some real estate in cities such as Delhi, Kolkata, and Hyderabad. The valuations these land parcels are expected to fetch, along with cash flow from operations, will cover Eveready’s debt of around Rs 200 crore.

In April, the Competition Commission of India levied a Rs 172 crore fine on Eveready over alleged cartelisation in pricing of batteries. While the firm has contested the case and got a stay from the National Company Law Appellate Tribunal, funds from the sale of non-core assets will also provide a financial cushion if it has to eventually pay the fine.

Khaitan has also decided to hive off the packaged tea business— which he says was running purely on Eveready’s distribution strength— into a separate, equal joint venture with McLeod Russel. A board meeting in May decided that McLeod Russel would divest some of its tea gardens and channelise a portion of those funds into growing the packaged tea business.

Eveready’s share performance is evidence that investors believe in Khaitan’s theory and his ability to put it into practice. Its market value is up 13-fold over the last five years and stands at Rs 1,800 crore at present. The Nomura report estimates Eveready’s stock can double if its revenues rise by around 16% in FY19 and FY20. On the back of such value creation, Eveready has seen keen interest from institutional investors. One such marquee investor is DSP BlackRock, which has invested at regular intervals since December 2013. “The strategy we typically follow for our small-cap fund is to look at companies that have a strong focus on capital efficiency, which reflects through healthy return on capital and return on equity,” says Vinit Sambre, senior vice-president and head of equities at DSP BlackRock.

Clearly, Eveready still has a lot of juice for growth in it, and Khaitan is determined to extract it. Doesn’t matter whether it comes from batteries or candies.

(This was originally published in the June 15 - September 14 special issue)