Eveready Rallies 400% Amid Modi's Conservation DriveBloomberg, February 18, 2015

India's biggest maker of flashlights and dry cell batteries, whose shares have surged fivefold in the past year, is counting on energy-saving LED bulbs to drive growth as it seeks to wipe out debt in two years.

Eveready Industries India Ltd., the owner of the 109-year-old brand, is pricing its bulbs cheaper than the competition to gain in a market worth $1.6 billion, Managing Director Amritanshu Khaitan said. The products, imported from China, may account for as much as 7 percent of the company's sales next year, quadrupling from last year, he said.

A government drive to use light-emitting diode bulbs to conserve energy in a country prone to blackouts is benefiting Eveready while hurting makers of compact fluorescent lamps such as Koninklijke Philips NV, Bajaj Electricals Ltd. and Havells India Ltd. Earnings at the Kolkata-based company are rebounding from a loss two years ago, adding to the stock's allure.

"It is an opportunity because we can try to cannibalize the CFL market by pricing our LEDs aggressively," Khaitan said in an interview at his office in Kolkata, formerly Calcutta. "The company is generating very strong free-cash flows. In another two years, we should become debt-free because of the current profitability improvement."

'Comfortable' Margins

Sourcing products from local and Chinese vendors is proving to be one of Eveready's strengths as rivals with factories and overhead costs struggle to match prices. Having four million outlets across the country also gives the brand its reach, according to Khaitan. A Philips 7-watt LED bulb on Amazon.com. Inc's Indian site sold for 447 rupees ($7.20) compared with Eveready's 345 rupees yesterday. "We have kept our maximum retail price up to 30 percent lower than other players because we want conversion from CFL to happen quicker," Khaitan said. "We are comfortable with our margin structure." Prime Minister Narendra Modi, while inaugurating a government program to promote efficient home and street lighting at an event in New Delhi on Jan. 5, described the LED bulb as the "way to light." The bulbs, which contain no mercury, last longer and are 50 percent more energy efficient than CFLs, may help the country grapple with frequent blackouts that in some parts last as long as 10 hours, especially during summer's peak demand. In a statement dated Oct. 8, the government said an increase in domestic demand will reduce the cost of LED lights.

Fivefold Gain

The bulbs are still almost double the price of CFLs and demand will be seen only in the upper-income segment, which may help them gain 10 percent of the market in a year or two, said Bhargav Buddhadev, an analyst at Mumbai-based brokerage Ambit Capital Pvt. "The transition from CFL to LED won't happen overnight, and it is a process that will take at least six to seven years," he said. Eveready shares traded at 202.90 rupees as of 10:34 a.m. in Mumbai, up almost 400 percent in the past 12 months, while those of Bajaj Electricals slipped 2.8 percent in the same period. Havells India, the nation's biggest maker of electrical products by market value, has gained 78 percent, while Crompton Greaves Ltd. has climbed 46 percent. Bajaj, Philips and Havells India said in separate e-mailed statements that LED bulbs are catching on, and they all are fully geared to take advantage of the shift.

Local Assembly

Bajaj Electricals, in its earnings statement on Feb. 12, said revenue from its lighting business declined 4.4 percent in the nine months to Dec. 31 from a year earlier to 6.3 billion rupees. "Some brands are using the maximum retail price route," Krishna Raman, head of lighting at Bajaj, said in the statement. Sunil Sikka, Havells India's president, said with "the initiative from the government, the impact would be seen in the next few months." Eveready is considering local assembly of LED lights from Chinese parts either by itself or through a third party in India by the end of this year, with the goal of making one million bulbs a month initially, Khaitan said. Local manufacturing will help the company bid for government contracts, he said. "One, it cuts our working capital cycle," Khaitan said. "Second, once we have economies of scale, the cost of manufacturing will come down. The components will still come from China."

Earnings Forecasts

Ambit's Buddhadev said state contracts give companies volume, but without much profit. "There won't be all out bidding from all the companies for the government orders," he said. Revenue from LED bulbs for Eveready is set to surge fivefold to 1 billion rupees by March 2016, accounting for about 7 percent of total sales, Khaitan said. The company will also pay back about 2 billion rupees of debt by March 2017, he said. Eveready forecasts about an 11 percent increase in total sales to 12.75 billion rupees in the current financial year ending March 31, and profit more than tripling to 500 million rupees with an Ebitda margin of 10 percent, he said. "This category of LEDs is going to be something that will shake the foundation of the established, entrenched lighting players," Khaitan said. "We are focusing on our lighting business and scaling that up organically. We have a very large distribution network, which is still not as leveraged as it should be."