Eveready Industries topline at Rs.420.18 Crores, pressure on margins

Financial Highlights of the quarter and half year ended September 30, 2006

Net Sales of the Company for the half year ended September 2006 was at Rs.420.18 crores - up by 11 % over the comparable period last year. Growth slowed down during Q2.

Fast rising input material costs continued to put pressure on the margins, despite aggressive pricing actions by the Company.

For the first time the pricing actions seemed to encounter consumer resistance - not only for the Company, but for the market as a whole. This resulted in volume declines both for the market as well as the Company.

PBDIT & PBT related to operations at the half year continued to show improvement over the corresponding period of the previous year.

Review of operations

Dry Cell Batteries
Revenue growth of dry cell batteries during Q2 was at 10 % over the corresponding quarter of the previous year. Higher prices realized by the Company accounted for this growth, despite reduction in volume by 8 % during the quarter over last year. Growth of revenue at the end of the first half of the current year stood at 18% over the corresponding period last year.

There was a slow down of volumes both for the market as well as the Company during the quarter. The steep price increases passed on to the consumers over the last several quarters seemed to finally have an adverse impact, as there were discernible signs of consumer resistance to such increases. This was quite acutely felt in the ‘D’ segment, which registered de-growth - though somewhat compensated by the growth in the ‘AA’ and ‘AAA’ segments. Eveready’s market share stood at 46.6 % in batteries.

Rechargeable batteries were higher in revenue by 15% backed by equivalent volume growth in the 1st half as compared to that of the previous year. This trend has been consistent over both Q1 and Q2.

Flashlights
The same phenomenon of consumer resistance leading to de-growth in volumes was more acutely seen in the flashlights segment. Revenue for flashlights dipped by 39 % during the quarter over last year’s same quarter, accounted for by lower sales volumes in the category - especially in the brass flashlights segment.

Sales revenue from flashlights stood at 85 % at the end of the 1st half of this year as compared to that of the previous year.

Packet Tea
The packet tea business of the Company continued to leverage the distribution network of the Company. The business had a revenue growth of 12 % in the quarter over last year’s corresponding quarter, backed by a volume growth of 8 %.

Packet tea revenue was higher by 14 % in the 1st half of the year as compared to that of the previous year supported by 10 % volume growth.

Mosquito Coils
The launch of Mosquito Coil was extended to 12 more states in the country. While the business is still at a nascent stage the initial response continues to be encouraging.

Comments on input material costs
The Company's margins have been under severe pressure both in the battery and flashlights segments over the last 24 months due to runaway prices of base metals used by the Company - mainly Zinc and to some extent Copper. The company was quite aggressive and took several pricing actions over the last several quarters in order to neutralize this pressure. During Q2, these pricing actions had neutralized the adverse impact of the raw material. The Company's competitors in these categories had also passed on similar price increases to the market.

As mentioned earlier the consumer has finally reacted to these pricing actions and there was a slow-down in both the product categories. However, such phenomenon is not uncommon in high-cost regimes and the market has to be given time to absorb.

Outlook
The current quarter’s performance has been somewhat modest. However, this has to be seen in the perspective of the very severe adverse impact faced by the product categories in terms of input material costs. Indian market being quite opposed to price increases did finally show resistance after patiently bearing the adverse impact over the last several quarters.

Such a phenomenon is not unusual and is faced by businesses from time to time. Under such circumstances, time is required to be given to the market to absorb impacts. In FMCG categories such period is known to be short in nature. The Company also believes that this phenomenon should be temporary in nature and there is no fundamental change in the underlying demand drivers.

Source : Equity Bulls

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