I was reading about Buffett’s investments in Japan recently and came across some suggestions that the listed Japanese market as a whole had seen significant changes in their capital allocation policies in focusing on improving ROE and returning capital to shareholders.
Simultaneously, I was also looking for stocks in the consumer staples space that have been ignored as a part of the post Russia-Ukraine war run. This election’s surprising result might push the govt towards a more populist policy since their previous strategy didn’t work as well as they expected.
That’s how I landed upon this and I was excited to see the above description fit the co well.
Since COVID, the company seems to have taken various measures to shed the fat:
- moved out of the Flashlights business citing low margins and non-profitability of the business. The company move out of this segment after liquidation of their inventories. The procurement of models was stalled effective from January, 2021.
- The company has also stalled the production of R20 and R14 batteries post March 31, 2021 due to inadequate demand in the domestic market as well as very marginal profits from both these product lines.
- Consolidated Vadodara mfg plant into Pithampur and gave VRS to Vadodara employees.
- Employee count trends from FY17 to FY24(descending): 714(FY24), 717, 821, 809, 880, 848, 817, 827
Cut to FY24,
|Column 1 | EVEREADY(battery segment) | PANASONIC|
|— | — | —|
|Revenue | 865cr | 292cr|
|Volume growth | -3% | Double digits|
|Market Share | 53%(flat YoY) | 18.5%(up)|
|EBITDA margins | 15.5% | 6%|
|Projected EBITDA margins for Alkaline batteries | Upto 25% | -|
*Panasonic market share is derived from Eveready’s numbers.
Eveready claims that battery traditionally grows at around 4%, 5%. This year was an aberration due to the rural side of it.
Currently, the Panasonic product portfolio is around 87%(vs 89% for the market) Zinc Carbon batteries
and 5%(10%) alkaline batteries, 5%(1%) rechargeable batteries, and 3% Lithium coin batteries.
Amazon ranking/reviews seem to second this. Panasonic seems to lead in the Lithium coin segment and are only behind Duracell in the rechargeable segment with their eneloop range. Their alkaline batteries seem middling to good. Amazon sales numbers would be a poor proxy to Zinc-Carbon batteries since they’re mostly used in the rural market and sold offline through general trade.
India is due a shift from Zn-C batteries to alkaline batteries like everywhere else in the world and the terminal value of battery cos seem to be misunderstood since even mature markets like the US see companies enjoy significant pricing power.
Duracell is a Warren Buffett company, after all. He acquired it in the mid 2010s.
(WSJ article from 2016)
It also helps that the VP thread has been dead for around 3 years now.
Considering all the above, this does not seem as expensive if we assume that steady state margins of Panasonic will trend towards 70-80% of that of Eveready in Zn-C and alkaline. The stock price has not done much for almost 10 years now.
There could be some technical reasons to look at the stock now too.
Several surveillance restrictions like ESM, T2T etc apply to stocks under 500cr market capitalisation. The stock has actually been in T2T segment for a few months now. Crossing 500cr might improve the liquidity from traders and also bring in market participants averse to illiquid stocks due to their mandate(family offices, PMSs etc). This could help in quicker and better fair price discovery.
TL;DR:
A strong brand with a large and improving market share in an industry where there’s significant margin upside tied to the India growth story and the terminal value is possibly misunderstood. More importantly, the management did this post covid.
Would love to hear others’ thoughts, especially pushback.
Disclosure:
Invested, recent transactions, still evaluating and hence might do further transactions in the near term
| Subscribe To Our Free Newsletter |
