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High debt, rating downgrade risk make Eveready look at stake sale

The AA- rating with negative outlook given to Eveready is conditional upon successful asset sale as well as repayment of inter-corporate deposits by March-end

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Mounting debt, compulsion to support struggling group outfit and stagnant sales in the core business of batteries have forced the B M Khaitan-led Williamson Magor Group, to look for some emergency fundraising. The promoters are looking at asset and stake sale to prevent rating downgrade of group flagship company Eveready Industries India Ltd (EIIL).

"Any delay in the company's ability to monetise surplus plant/land parcels and/or further extension of support to group companies would result in further deterioration of the credit profile and this would be negative for the ratings," India Ratings warned in the December update on its rating.

The AA- rating with negative outlook given to Eveready is conditional upon successful asset sale as well as repayment of inter-corporate deposits by March-end.

The dry cell battery makers' net leverage (net debt to earnings before interest depreciation and amortisation) has gone up to 2.6 times in the first half of this financial year (FY) from FY17's level of 1.6 times, India Ratings pointed out.

"The negative outlook reflects EIIL's continued high net leverage of 2.6x in 1HFY19, as the company had taken additional debts of Rs 1,500 million (Rs 150 crore), of which Rs 1,000 million (Rs 100 crore) was extended as loans to group companies. This is in contrast to Ind-Ra's expectation of a reduction in debt as well as inter-corporate loans during FY19 to reduce leverage," the rating firm pointed out.

Interest expenses have also increased considerably owing increased working capital requirements for increased stocking of products for lightening and appliances as well as the term debt, India Ratings added.

During FY18, maximum amount outstanding from group firm McNally Bharat and investment company Babcock Borsig touched Rs 109.18 crore and Rs 39.10 crore, respectively.

To pare debt, the Khaitans have been selling land and are now looking at selling part of the group's 44% stake in Eveready to a strategic or financial partner, which may reportedly bring in about Rs 3,000 crore for the standalone battery business.

In December, Eveready inked a deal with Olympia Group to sell land at Triuvottiyur Road in Chennai for Rs 100 crore, with the deal expected to be completed in four to ten months.

Next in the line is a property in Hyderabad, the company has assured India Ratings.

According to the management, these two asset sales are likely to fetch around Rs 225 crore, of which around Rs 200 crore will be available for debt reduction.

Another financial outgo risk is the Rs 171 crore penalty imposed by Competition Commission of India (CCI) for alleged unfair cartelisation. The fine was stayed by National Company Law Tribunal in May.

"Company might also apportion a part of this sum (proceeds from monetising land) to provide against any contingent obligation that might arise due to ongoing CCI suit," Kotak Securities said in a December report.

DRAINING FAST

  • The dry cell battery makers' net leverage has gone up to 2.6 times in the first half of this fiscal from FY17's level of 1.6 times
     
  • Interest expenses have increased owing increased working capital requirements for increased stocking of products for lightening and appliances as well as the term debt
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