On low charge

Recommendation

Eveready Industries: Sell

Indo National: Hold

Matsushita Lakhanpal: Hold

Anup Menon

THE dry-cell battery industry's performance over the last year has not been impressive.

This is reflected by the market valuation of the industry majors. The big question here is if there will be a turnaround. Given the industry's prospects, there might be a change in the trend, but this may not be substantial.

Share price performance

Among the dry-cell battery stocks that have been attracting market interest are Eveready Industries, Indo National and Matsushita Lahkanpal. These companies account for a chunk of the industry's revenues. BPL is a relatively new entrant and cannot be classified as a dry-cell battery company. With volumes running low, liquidity could be a problem.

The performance of the stocks over the last year has not been inspiring. All the three stocks posted negative returns. Thus, going by the criteria that the best performer posts the least losses, Matsushita Lakhanpal's scrip is the best performer; it recorded the lowest loss of 53 per cent. Next comes Indo National with a loss of 71 per cent. Eveready Industries posted a loss of 95 per cent. Even in relative terms, the losses are fairly significant.

Though returns may be a good indicator, the risks associated with investments should also be considered. An analysis of the volatility of daily returns of the three stocks indicates that Eveready Industries has the lowest volatility, at 4.19 per cent. Indo National is next (4.66 per cent), followed by Matsushita Lakhanpal (4.95 per cent).

In terms of returns per unit of risk, the best performer is Matsushita Lakhanpal which registered the lowest wealth erosion as a unit of risk. It is followed by Indo National and then Eveready.

Earnings performance

A key indicator of the industry's health would be the financial performance of the major constituents. The earnings performance of the battery majors has not been all that impressive in 2001.

For instance, in terms of sales growth, the divergence among the three players is fairly significant. Indo National registered the highest growth in sales at 25 per cent. Eveready was a distant second with 14 per cent, followed by Matsushita Lakhanpal with 9 per cent. However, even though all the players clocked positive topline growth rates, profits did not keep pace.

If one looks at the growth rates in operating profits, then the scene is lacklustre. Both Indo National and Matsushita Lakhanpal posted declines in operating profits of 30 per cent and 31 per cent respectively, while Eveready Industries posted a 15 per cent growth in operating profits.

However, in terms of the decline in operating margins, Indo National was the worst hit with margins declining by around seven percentage points. Matsushita Lakhanpal margins declined two percentage points. Eveready managed to keep its operating margins stable with a positive growth of 0.06 percentage points.

If one were to look at the post-tax earnings (before adjusting for extraordinary items), Indo National was the best performer since its post-tax earnings declined by around 42 per cent only compared to Matsushita Lakhanpal's 45 per cent. Both Indo National and Matsushita Lakhanpal managed to keep out of the red. However, Eveready Industries posted losses of around Rs 38 crore during the year.

Eveready Industries

Over the last year, the Eveready Industries stock has been on a decline. The stock declined from around Rs 55 in July 2000 to around Rs 17 now.

The company's performance in recent times has not been noteworthy. Eveready Industries is not purely a dry cell battery company. In 2001, dry cell batteries contributed only around 50 per cent of the company's total turnover. The other major business for the company is tea. However, the tea industry's future over the next few quarters is uncertain. The battery sector may see some improvement but this is not likely to have a major impact on the company's performance. Under the circumstances, a near-term recovery in the stock may not happen. Investors could consider selling the stock at current levels.

Indo National

As with the other stocks in the industry, Indo National's has also been on decline over the last year. The stock trades at around Rs 140, down from around the Rs 350 levels in July 2000.

Unlike Eveready, the company's revenue streams are not diversified and batteries contribute almost the total turnover. Though there are signs of improvement in the industry, the possibility of major improvements in valuation in the near-term appears dim. Volumes in the stock are fairly low and liquidity is a problem. Apart from this, there is very little market interest in the stock. In this backdrop, investors can stay invested. Fresh investments need not be considered at current levels.

Matsushita Lakhanpal

The Matsushita Lakhanpal scrip trades at around Rs 20, down from Rs 42 in July 2000.

As with Indo National, the company derives virtually all its income from the batteries segment. As there is little to differentiate among the different players, changes in industry characteristics may have an even effect all over. In this backdrop, investors can consider holding the stock and liquidating on an uptrend.