Eveready Industries ERDY.NS EVRIN INbreport.myiris.com/NFASIPL/EVEINDIA_20150601.pdf · Eveready Industries in the market leader in the dry cell battery segment in India with a 50%+

Rating Starts at BuyTarget price Starts at INR 410

Closing price 28 May 2015 INR 285

Potential upside +43.6%

Anchor themesEveready Industries in the market leader in the dry cell battery segment in India with a 50%+ market share. Over FY15-17F, we expect company to deliver 53% EPS CAGR led by improving profitability and reduction in financial leverage.

Nomura vs consensusWe are the only brokers to cover this stock.

Research analysts

India Consumer Related

Manish Jain - NFASL [email protected] +91 22 4037 4186

Anup Sudhendranath - NFASL [email protected] +91 22 4037 5406

Key company data: See page 2 for company data and detailed price/index chart

Eveready Industries ERDY.NS EVRIN IN

EQUITY: CONSUMER RELATED

Initiate with a BUY and 44% potential upside

Strong topline growth & reducing financial leverage drives 53%+ EPS CAGR; Key small cap idea Action: Initiate with a BUY and 50% potential upside; Market leader in the battery segment and large upcoming opportunity in the LED segment EVRIN is the market leader in batteries in India with a 50%+ market share. We believe its strong brand recognition, increasing distribution strength and strong management capabilities will combine to deliver strong 53% EPS CAGR in the FY15-17F period. The company’s battery segment we expect to continue to be the largest contributor to revenue and profits for the next five years, but the new LED business (2015) should provide additional growth over the long term. Management’s proven ability to build new businesses such as flashlights leveraging the Eveready brand gives us confidence that LED business will contribute a substantial part of revenue and profits over the next five years. We initiate with a Buy rating and TP of INR 410 – 44% potential upside.

Catalysts: Performance in LED business will be key near-term catalyst; Stable zinc prices to be another catalyst We believe LED business growth could exceed our estimates which would be a key positive catalyst over the next two to three quarters. Performance over the last three months of the LED business has been much better than the company expected and an improvement in growth trajectory vs. our expectations remains possible. Stable input prices are another catalyst which would help drive margin improvement from current levels.

Valuation: EVRIN trades at 17.4x FY17F vs. sector average of 30.8x EVRIN trades at 17.4x FY17F (EPS INR16.4) vs. a sector average of 31x. The company will deliver one the strongest EPS CAGR in the sector over the next two years with RoE improving from 8.1% in FY15 to 16.6% in FY17F and trades at a significant discount to mid-cap consumer companies. We also believe as the market leader in its largest segment, with strong brand equity, EVRIN should over time trade at FMCG type multiples.

Year-end 31 Mar FY15 FY16F FY17F FY18F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 12,778 N/A 14,963 N/A 17,955 N/A 21,546

Reported net profit (mn) 489 N/A 766 N/A 1,192 N/A 1,666

Normalised net profit (mn) 506 N/A 766 N/A 1,192 N/A 1,666

FD normalised EPS 6.96 N/A 10.54 N/A 16.39 N/A 22.92

FD norm. EPS growth (%) 575.0 N/A 51.3 N/A 55.6 N/A 39.8

FD normalised P/E (x) 41.0 N/A 27.1 N/A 17.4 N/A 12.5

EV/EBITDA (x) 18.4 N/A 14.5 N/A 10.5 N/A 8.1

Price/book (x) 3.4 N/A 3.1 N/A 2.7 N/A 2.4

Dividend yield (%) 0.7 N/A 0.7 N/A 1.1 N/A 3.2

ROE (%) 8.1 N/A 12.0 N/A 16.6 N/A 20.5

Net debt/equity (%) 30.8 N/A 18.3 N/A 3.2 N/A net cash

Source: Company data, Nomura estimates

Global Markets Research 1 June 2015

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Eveready Industries 1 June 2015

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Key data on Eveready Industries Relative performance chart

Source: Thomson Reuters, Nomura research

Notes:

Performance (%) 1M 3M 12MAbsolute (INR) 1.4 36.2 361.5 M cap (USDmn) 325.0Absolute (USD) 0.3 31.8 325.8 Free float (%) 56.3Rel to MSCI India -1.8 37.1 347.2 3-mth ADT (USDmn) 2.1 Income statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18FRevenue 11,534 12,778 14,963 17,955 21,546Cost of goods sold -7,670 -8,064 -9,513 -11,388 -13,632Gross profit 3,864 4,713 5,450 6,567 7,914SG&A -2,362 -2,668 -3,003 -3,403 -3,924Employee share expense -999 -1,134 -1,272 -1,526 -1,831Operating profit 502 911 1,175 1,638 2,158EBITDA 920 1,231 1,515 1,998 2,538Depreciation -418 -320 -340 -360 -380Amortisation 0 0 0 0 0EBIT 502 911 1,175 1,638 2,158Net interest expense -411 -325 -220 -100 0Associates & JCEs

Other income 13 51 40 51 63Earnings before tax 104 636 995 1,589 2,221Income tax -29 -130 -229 -397 -555Net profit after tax 75 506 766 1,192 1,666Minority interests 0 0 0 0 0Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 75 506 766 1,192 1,666Extraordinary items 61 -17 0 0 0Reported NPAT 136 489 766 1,192 1,666Dividends -42 -150 -153 -238 -666Transfer to reserves 94 339 613 953 1,000Valuations and ratios

Reported P/E (x) 152.7 42.4 27.1 17.4 12.5Normalised P/E (x) 276.7 41.0 27.1 17.4 12.5FD normalised P/E (x) 276.7 41.0 27.1 17.4 12.5Dividend yield (%) 0.2 0.7 0.7 1.1 3.2Price/cashflow (x) 53.4 141.8 23.3 15.6 12.0Price/book (x) 3.5 3.4 3.1 2.7 2.4EV/EBITDA (x) 24.6 18.4 14.5 10.5 8.1EV/EBIT (x) 45.0 24.8 18.7 12.8 9.5Gross margin (%) 33.5 36.9 36.4 36.6 36.7EBITDA margin (%) 8.0 9.6 10.1 11.1 11.8EBIT margin (%) 4.4 7.1 7.9 9.1 10.0Net margin (%) 1.2 3.8 5.1 6.6 7.7Effective tax rate (%) 27.8 20.4 23.0 25.0 25.0Dividend payout (%) 31.1 30.7 20.0 20.0 40.0ROE (%) 2.3 8.1 12.0 16.6 20.5ROA (pretax %) 4.6 8.3 10.5 14.0 17.0Growth (%)

Revenue 11.4 10.8 17.1 20.0 20.0EBITDA 33.0 33.7 23.1 31.9 27.0Normalised EPS -16.0 575.0 51.3 55.6 39.8Normalised FDEPS -16.0 575.0 51.3 55.6 39.8Source: Company data, Nomura estimates

Cashflow statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18FEBITDA 920 1,231 1,515 1,998 2,538Change in working capital -165 -466 -216 -221 -315Other operating cashflow -367 -618 -409 -446 -492Cashflow from operations 388 146 890 1,330 1,731Capital expenditure -140 -115 -200 -200 -200Free cashflow 249 31 690 1,130 1,531Reduction in investments 0 0 0 0 -500Net acquisitions Dec in other LT assets 0 0 0 0 0Inc in other LT liabilities 72 107 105 90 108Adjustments 0 0 0 0 0CF after investing acts 321 138 795 1,220 1,139Cash dividends -42 -150 -153 -238 -666Equity issue 0 0 0 0 0Debt issue -313 71 -600 -962 -378Convertible debt issue 0 0 0 0 0Others CF from financial acts -355 -79 -753 -1,200 -1,044Net cashflow -35 59 42 20 94Beginning cash 46 11 70 112 132Ending cash 11 70 112 132 227Ending net debt 1,857 1,869 1,228 246 -227 Balance sheet (INRmn) As at 31 Mar FY14 FY15 FY16F FY17F FY18FCash & equivalents 11 70 112 132 227Marketable securities 0 0 0 0 500Accounts receivable 659 700 820 935 1,122Inventories 2,569 2,595 3,075 3,689 4,427Other current assets 390 349 410 492 590Total current assets 3,630 3,714 4,417 5,248 6,866LT investments 0 0 0 0 0Fixed assets 7,447 7,242 7,102 6,942 6,762Goodwill 0 0 0 0 0Other intangible assets 0 0 0 0 0Other LT assets Total assets 11,076 10,956 11,519 12,190 13,628Short-term debt 1,408 1,412 812 0 0Accounts payable 2,948 2,507 2,952 3,542 4,250Other current liabilities 0 0 0 0 0Total current liabilities 4,356 3,919 3,763 3,542 4,250Long-term debt 460 528 528 378 0Convertible debt 0 0 0 0 0Other LT liabilities 326 433 538 627 735Total liabilities 5,142 4,879 4,829 4,547 4,985Minority interest 0 0 0 0 0Preferred stock 0 0 0 0 0Common stock 363 363 363 363 363Retained earnings 5,571 5,714 6,326 7,280 8,279Proposed dividends Other equity and reserves Total shareholders' equity 5,935 6,077 6,690 7,643 8,643Total equity & liabilities 11,076 10,956 11,519 12,190 13,628

Liquidity (x)Current ratio 0.83 0.95 1.17 1.48 1.62Interest cover 1.2 2.8 5.3 16.4 naLeverageNet debt/EBITDA (x) 2.02 1.52 0.81 0.12 net cashNet debt/equity (%) 31.3 30.8 18.3 3.2 net cash

Per shareReported EPS (INR) 1.87 6.73 10.54 16.39 22.92Norm EPS (INR) 1.03 6.96 10.54 16.39 22.92FD norm EPS (INR) 1.03 6.96 10.54 16.39 22.92BVPS (INR) 81.65 83.61 92.04 105.15 118.90DPS (INR) 0.58 2.07 2.11 3.28 9.17Activity (days)Days receivable 20.3 19.4 18.6 17.8 17.4Days inventory 113.7 116.9 109.1 108.4 108.7Days payable 136.0 123.4 105.0 104.1 104.3Cash cycle -1.9 12.8 22.7 22.2 21.8Source: Company data, Nomura estimates


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Executive summary

Market leader in the dry cell battery segment in India

Eveready Industries is the market leader in the dry cell batteries segment in India with a 50%+ market share. The company has been able to leverage on the strong brand strength of the ‘Eveready’ brand and also build businesses in other areas such as flashlights and electrical lightings. The company has recently entered the LED business with the same brand which we believe will be a key driver of revenue and profit growth over the next five years. Currently the electrical products segment contributes 12% to profits of the company which we believe will double to 24% by FY17F as the company will see this segment grow topline by an average 70% in the FY15-17F period.

Fig. 1: Market share in the dry cell battery segment in India

Source: Company data

Diversification into other categories to de-risk the business model

The dry cell battery segment will continue to be the key contributor to revenue and profits, but will be a stable business delivering double digit revenue growth over the next three years. Market growth in this segment will continue to be led by increasing use of electronic appliances and gadgets that require use of dry cell batteries. Market structure in this segment is very simple with three large companies that between them have more than 80% market share by value and a long number of regional names that lack the scale or capability to take their products national. We believe brand strength and distribution are key advantages and Eveready is clearly ahead of the competition we expect this to continue over the long term.

The company has over the past decade built a strong electrical product business which has grown by a CAGR of 10% (FY02-14). We believe this segment will see a sharp pick-up in growth in the next three years (we estimate 70%) as it enters the fast growing LED business. The market for LED bulbs in India is currently worth USD160m which we estimate is likely to grow to USD 1.6bn (10x) by 2020. As an early entrant in this category Eveready will have a strong advantage and will be able to participate in the robust market growth via its key brand ‘Eveready’. We are building in an average 70% topline growth in this segment over FY16/17F.

Eveready , 51%

Nippon, 25%

Panasonic, 20%

Others, 4%


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Fig. 2: Revenue split FY15

Source: Company data, Nomura Research

Fig. 3: Revenue split FY17F


Strong and demonstrated pricing power

As a market leader in the battery segment with pricing power – as recently demonstrated by a number of price hikes taken over the past three years – EVRIN in our view should over time trade at FMCG type multiples that market leaders in other segments such as paints (APNT IN) and adhesives (PIDI IN) trade at. As the company continues to grow scale in the business, we believe there is upside room for the multiples to expand beyond the 25x we assign to it at this time. As investors gain further confidence in the management, valuation multiples could see an expansion over the long term, in our view.

Profitability has seen a marked improvement

Strong pricing power has meant the company has been able to grow revenues ahead of costs which have translated into improvement in operating margins. In 2012, the company reported EBITDA margins of 4.9% and since then has seen a steady improvement to 9.7% in FY15. Management believes there is further scope for improving operating margins from current levels including gains from the LED business profitability which will come through over the next two years. We are building in an EBITDA margin improvement of 160bps over FY15-17F.

Fig. 4: EBITDA margins to continue to show an improvement


Batteries, 61%

Flashlights, 21%

Electrical Products,

12%

Packet Tea, 6%

Batteries, 50%

Flashlights, 16%


29%

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2012 2013 2014 2015 2016F 2017F 2018F


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Financial leverage to come down

As profitability has improved over the past three years, the company has also been able to generate free cash flow which it has used to pay down the debt on the balance sheet. We believe this process will accelerate over the next three years and the company will have net cash balance sheet by the end of FY18F. Post that we see scope for a larger dividend pay-out or a potential value accretive acquisition as way of delivering value to shareholders.

Fig. 5: Financial leverage has come down and will continue to move lower (INR mn)


50%+ EPS CAGR + improvement in RoE FY15-17F

Over the FY15-17F period, we expect the company to deliver 53% EPS CAGR led by improving revenue growth trajectory (on account of LED business), improvement in operating margins as well as reduction of financial leverage. We believe the company is entering a phase of high growth and falling financial leverage over the next couple of years, there could be also be inorganic growth opportunities which management has said they are open to look at. The company has already transformed from loss making to profits over the past three years, and we expect the profitability to continue to improve over the next couple of years. RoE has already improved from 1.6% in 2013 to 8.1% in FY15 and should further improve to 16.6% by FY17F in our view. Fig. 6: 53% EPS CAGR over FY15-17F


Fig. 7: RoE (%) will move higher over FY15-17F


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A company with a strong and well diversified portfolio Eveready is a company which has a well-diversified product portfolio spanning four products with strong leadership in two key product segments i.e. Batteries & Flashlights.

Fig. 8: Eveready – a company with strong revenue profile

Segment FY14 Revenue

(INRmn) Share (%) FY02-14

CAGR (%)Market

share (%) Key brands

Batteries

7,407 61 4.2% 52%

Eveready Ultima (Premium), Eveready (mid-priced), Shakti & power cell (mass market)

Flashlights

2,514 19.3 10.0% 75% Eveready & powercell

Electrical products

1,935 14.7 N.A N.A Eveready

Packaged Tea

807 6.1 6.5% 1%

Eveready Premium & Tez Premium (Premium segment), Tez red (mid-priced) & Jaago (mass market)

Source: Company, Nomura Research

A brief history of the company

Mr. Amritanshu Khaitan is a third generation promoter who is now leading Eveready Industries in his capacity as the Managing Director.

The Williamson Magor group came into being in 1869, when Captain J.H. Williamson and Richard Boycott Magor, two Englishmen based in Calcutta, formed a partnership firm, Williamson Magor & Company, to service the requirements of tea estates in Assam.

Brij Mohan Khaitan, (who had a long standing relationship with the company by virtue of being the principal supplier of Packaging Materials and Fertilizers, was invited to join the Board of Directors in 1963) eventually became the Managing Director in 1964.

In 1987, the UK family sold their shareholding in the McLeod Russel group which included the Makum and Namdang Tea Companies, to the Khaitan family, making the Macneill and Magor Group the single largest producer of Assam tea.

In 1994 the Williamson Magor Group through McLeod Russel (India) Limited bought 51% of the Equity Share holdings of Union Carbide India Limited. The Company was renamed Eveready Industries India Limited.

Subsequently, McLeod Russel India Limited was merged with Eveready Industries India Limited to form a new Company with two Divisions - the Bulk Tea Division which managed the tea estates of McLeod Russel and the Battery Division which produced and marketed the popular Eveready batteries and flashlights.

In April 2004 Eveready Industries de-merged the two divisions into two separate companies, McLeod Russel India Limited and Eveready Industries India Limited.

Batteries segment has undergone some turbulence

The battery industry went through a period of turbulence in 2010-2013 due to a structural change in the industry. The bigger and bulkier “D” sized batteries, which were long used in old metal flashlights and toys demand started to decline at a steady 15-16% pace due to: a) aggressive price increases by the industry to off-set the rising material costs took their toll on growth in a sluggish economic scenario, and b) more importantly, with advancing technology the industry also moved towards AAA” segment, the smallest batteries which are today used in remotes etc. et el.

This transition was painful for the company and the industry in general and resulted in growth rates falling significantly during the period. Eveready’s battery business revenues declined from INR7.3bn to INR6.5bn during the said time even as it was able to maintain their market share of 51%.


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Management a key catalyst for change

Managing Director Mr. Amritanshu Khaitan a third generation entrepreneur has been instrumental in the company’s turnaround over the past three years. In 2012 revenue grew by just 2.4% and EBITDA margins were 4.9%. Since then the topline and operating margins have turned around.

One of his key achievements has been to turn the company’s growth trajectory around, which was stagnant for some time, through increased focus on the AA & AAA battery segments through quicker innovation, faster new product launches, and focused advertising strategy. This resulted in a quick turnaround with the AA & AAA segments registering 6-7% and 13-15% growth for the company, respectively in FY14.

On the cost front as well, the company was able to slowly grow its operating margins from 4.9% in 2012 to 8.1% in FY14, through tight cost controls which saw other employee costs coming down from 11% of sales in FY11 to 9% in FY14. Similarly, a two percentage point cost savings was visible on the other expenses side for the same period. We expect operating margins to further improve to 10.3% at the end of FY16. We believe while the rate of improvement in margins will steady from current levels (as compared to FY11-15 history), there remains scope for profitability to see an upswing in the medium to long term as the new LED business ramps up which can command a higher margin than the company average (our estimate of 13-14% by FY17F).

The company’s debt fell from INR 3.4bn in 2010 to INR 1.87bn in FY14 as a result of strong FCF generation in the interim period.

Mr. Khaitan’s long-term vision for the company is highlighted below:

• To extend products in the lighting and power areas.

• Parallel distribution network for lighting to get at least 100,000 outlets to sell electrical goods.

Management has already demonstrated that their commitment to achieving these goals by their recent foray into the LED lights business, which has been a success so far with each month being a stock out (although these are early days with just seven months of history). We believe that the company will be able to extend their iconic mother brand “Eveready” successfully into the LED lights segment as they have done with the flashlight business.

We believe that the LED lights industry has tremendous growth potential given the diminishing price differential compared to the CFL’s and the significant cost savings. We believe the market can increase to 10x its current size of USD150mn over the next four to five years (industry estimates).

We believe strong and stable management team will be one of the key positives for the company in the long term. Management has a clear strategy in place of how they would like to grow the company over the medium term, including which segments to be in, what growth rate they will deliver, where long term profitability can go to etc. This gives us confidence that the improvements seen in the past couple of years are sustainable.

Ability to grow businesses over time

While the company has always had a strong advantage in the battery segment given the strong brand recognition and distribution network, we believe management has been able to also build other businesses while leveraging the strength of the Eveready brand. This is clear from what has happened to the flashlights business where they have been able to grow from a very low base in the early 2000’s at a 10% CAGR over the past 12 years. It is worth noting that this is a market which is growing very slowly, so to deliver 10% CAGR in this segment has been very creditable performance.

Additionally it gives us confidence that going forward management will be able to leverage on the Eveready brand again and deliver even better performance in the LED business which is a much faster growing market.


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Fig. 9: Flashlights business has grown by 10% CAGR over FY02-14


Promoters are increasing their stake

Over the past five years, promoters have increased their stake in the company at a steady pace from 40.2% in March 2009 to the current 43.9%. In fact over the past five quarters, promoters have incrementally increased their stake in the company in each quarter. This also gives us confidence that promoters are confident in the long-term growth of the company.

Fig. 10: Promoter holding in the company has seen an increasing trend

Source: Bombay stock exchange

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Battery segment – Steady growth path Battery is the largest segment for the company and currently accounts for more than 60% of the revenues. Eveready specializes and produces smaller batteries used in toys, remotes etc. and not in the conventional car, two-wheeler or inverter batteries.

In the segment, Eveready is by far the biggest name in the organised dry cell market with ~52% share; almost double that of the nearest competitor Nippo (INNA IN, Uncovered). Panasonic (PANA IN, Uncovered) which is the other major competitors having share of ~18%.

In fact Eveready has been increasing its leadership and gaining share for a long time now. Their market share has increased by almost nine percentage points in the last 11 years even from a high base of 43% and is a testimony to its brand strength.

Fig. 11: Eveready is the market leader in the dry cell battery segment in India


The un-organised segment, primarily cheap Chinese imports, has been rising for the last two years after the removal of the long standing anti-dumping duty and now account for almost 7% of the industry volumes. These batteries are currently priced at a fraction of the entry level organised batteries (priced at INR1-2/piece as compared to INR12 for the Eveready brand). These batteries are of fairly poor quality and are used primarily for cheap toys, testing or in rural areas.

The battery industry can be divided into three main parts i.e. “D” segment (the big bulky batteries which were earlier used for metal flashlights), the “AA” segment (the most popularly used batteries also called “pencil batteries” popular parlance) and then “ AAA” (which is similar to AA but smaller in size).

Within the battery segment, the ‘AA’ sized makes up the bulk of revenues and currently accounts for more than 70% of the industry volumes with ‘AAA’ accounting for another 13% of the volumes. Each of these segments have registered on average 6-7% & 13-15% growth in the last couple of years, respectively.

However, overall growth for the industry has been much lower as the market for battery cells has undergone a significant change over the past few years. The technology shift away from ‘D’ sized batteries to ‘AA’ and ‘AAA’ segments meant that the largest segment de-grew. While D sized battery continues to de grow at the industry level, the focus is on ‘AA’ and ‘AAA’ sized ones which continue to grow in volume terms.

This technology shift which started a few years back is now nearly complete and one the key reasons why revenue growth trajectory was stagnant to declining for FY10-13 for the company. D sized segment now contributes only 10% of revenues for Eveready in the battery business with AA being the largest contributor and which is growing at a fairly healthy pace of 13-14%. The AAA segment which is ~17% of revenues is growing at a faster clip owing to the lower base and will continue to do so in the near term.

52%

28%

18%

2%

Eveready Nippo Panasonic Others


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Fig. 12: Segmentation in the battery market


Fig. 13: volume growth in the battery segment


Macro drivers continue to be positive India has low per capita battery consumption (two per capita per annum) compared to China (five or six), indicating substantial growth potential.

Rising income levels, increasing urbanization, changing lifestyle and enhanced need for convenience will continue to drive battery-run gadgets demand (remote controls, torches, toys, cameras, radio sets and portable music systems, in our view.

Digitization is also a positive driver for volume growth over the next few years as every household will add at least one remote control unit. These factors will continue to help keep the current volume growth momentum steady in the medium term.

Fig. 14: Subscriber increase will be significant both on Digital and DTH platforms

FY15F FY16F FY17F FY18F FY19F Addition

Digital Cable 27 50 72 78 80 53

DTH 54 64 76 80 83 29

Total 81 114 148 158 163 82

Source: Nomura media team

Rollback of anti-dumping duties another trigger Post the expiry of the anti-dumping policy last year, cheaper imports from China have taken a significant 6-7% share in the market. This has meant some market share loss to EVRIN as well with growth rate for FY15 being lower than the number seen in FY14. However, EVRIN and others in the industry have already made a representation to the government to reverse the relaxation of the anti-dumping policy. If this comes through in the next few months, it will provide boost for the growth rate for domestic battery manufacturers which would be a positive catalyst for the topline growth in FY16F.

Battery segment to continue to deliver double-digit growth We believe the dry cell battery segment will continue to deliver steady revenue growth for Eveready for the next two to three years with volume growth of 3-5% and pricing increase of 4-5%. We do not anticipate or build in any market share gains for the company, but do believe that EVRIN will continue to grow in line with the market. The upside risks to our assumptions would arise from reinstatement of anti-dumping duty on Chinese imports which will boost growth for organised players and is not factored into our estimates.

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Fig. 15: Battery segment to deliver steady growth


Flashlights – a steady business

Flashlight is the second biggest segment for Eveready and currently accounts for ~21% of the company’s consolidated revenues. Like Batteries, here too Eveready is one of the oldest and most trusted names in the segment and commands a market share of around 75% of the organised industry.

The company has a wide product portfolio in the segment catering to almost all price points and market segments. The company sells aluminum and brass torches which cater to the mass and rural markets and Ultra LED and Digi LED torches which are targeted more at the urban markets.

Another key advantage that Eveready enjoys is that it has been an early innovator and first mover in several key products. The company was an early mover in the LED torch segment, and recently introduced Digi LED technology into torches.

Some key growth drivers for the business are going to be as follows:

• Huge dormant population (~45mn rural households) of non-users, which essentially represents a huge market opportunity and can be a steady long-term growth driver.

• The industry growth will also remain steady as long as the country’s power generation and distribution remains deficient in the country especially in the rural areas.

• Consumer up trading will likely happen through innovation with the company’s entry into LED torches and Digi LED torches segment.

Fig. 16: Flashlights – a steady business (revenue growth in %)


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Lighting and Electricals – Strong growth driven by LED

The third business vertical for Eveready is its Electricals business where it is present in a number of product categories like Incandescent lighting, compact fluorescent lamp (CFL), LED lamps, indoor luminaries and rechargeable fans. The industry size currently stands at INR50bn and is poised to register a steady 15-20% growth in the next three years, in our view.

This is a business which accounts for ~12% of the company’s revenues currently. It is in a relatively strong number four position in the GLS category and commands a 2% market share in the CFL category.

We expect the business to register steady double digit growth in the next couple of years largely on the back of:

• Steady growth in the lighting and electrical solutions vertical in the rural markets and urban mass market driven by value for money products like rechargeable fans, Digi LED battery operated and solar lanterns, GLS bulbs etc. given the power situation in India, we believe that this business has strong growth potential in the medium term.

• While, the overall CFL category is likely to decline sharply in the coming years as consumers shift to LED bulbs, we believe that Eveready as a brand is likely to remain stable given its relatively small base. Also, the company is in the process of building up its distribution network in the electrical outlets channel and this would give it an opportunity to gain market share.

LED lights: The next big opportunity

The next big opportunity, in our view, for Eveready is likely to be LED lighting and will likely be the growth driver for the company over the next few years. The company already has a strong presence in the General Lighting System (GLS) industry and is also present in the CFL category. Leveraging on these synergies and experience, Eveready a few months back entered the LED business with an eye on the future.

Currently the LED industry is still in its infancy and accounts for just 3-5% of the overall lighting category and the industry size is estimated to be around ~USD160mn with key names in the segment being Philips, Havells. Osram, Crompton, WIPRO etc. Eveready has been a relatively new entrant into the business and entered the space in H2CY14 with direct imports from China.

One of key growth drivers for the industry is likely to be move away from highly inefficient incandescent bulbs and relatively more energy efficient CFL’s to LED’s which are significantly superior in terms of technology, more energy efficient and cut energy bills significantly. As awareness spreads, urban consumers become more aware and electricity costs mount, consumers will move towards superior technology which incidentally is more cost effective.

Moreover, the Government of India has identified LED as the key technology and has developed several policies to stimulate adoption of LED lighting in the country, and is funding a number of pilot LED street-lighting projects. In addition, several states like West Bengal and Tamil Nadu have also adapted the LED technology and are working towards a steady and smooth migration from CFL’s to LED’s.

According to the company, the LED market could potentially grow to US$1.6bn by 2020 driven by government initiatives and rising consumer awareness.

Why will company succeed in LED business?

While the opportunity size in the LED business is large over the next five years, we believe there are some key advantages which Eveready has which will allow it to benefit from this opportunity. We have identified some of the key advantages that the company has below. Additionally as we mentioned above, company’s proven ability to build a separate line of business also gives us confidence it will be able to replicate this success in the LED category.


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Strong product/price proposition Eveready is amongst the best quality product in the market at the most in-expensive pricing which has also been well captured in its advertising communication and this will give the company an edge over the competitors.

Building up distribution network Company has been fairly pro-active in terms of building up the distribution network for the business and has been working hard to establish a pan-India presence in the electrical outlet channel in the coming years. It has already established a direct reach of 30,000 outlets and aims to cover the entire universe of 90,000 outlets soon. This will enable the company to reach out to more consumers, give the brand more visibility and help boost growth.

Leveraging the Eveready brand: Company’s marketing strategy is targeted towards leveraging the mega brand “Eveready” which already has a strong consumer connect in the lighting, flashlights and batteries space and will provide the company an advantage over its competitors.

Fig. 17: Eveready – one of the best and most cost effective (all comparisons for a 7-watt bulb)

Brand Lumens per Watt Price

Eveready 100 449

Phillips 86 599

Syska 93 599

Bajaj 86 485

Halonix 86 550

Surya 80 600

Havells 74 600


Manufacturing footprint at a later stage Moreover, the company is now working towards establishing its own manufacturing footprint in the country. This will enable it to have a tighter control over the costs and product quality and enable the company to save substantially on logistics.

Strong growth likely over the next two years

The LED business has met with phenomenal success so far, the company’s strategy of combining superior quality with inexpensive pricing along with aggressive marketing has meant that all imports so far have been completely sold out.

We believe the business will ramp up to excess of INR2bn in revenues in the next couple of years based on the initial success, aggressive plans and intended domestic foot print.


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Fig. 18: LED business revenues in INR mn – to grow exponentially in the next 3 years

Source: Nomura estimates

Contribution from Electrical products to double

As the growth picks up in the LED business over the next two to three years, profit contribution from the segment is also likely to see an improvement vs. current levels. While batteries will continue to be the key segment in terms of profits, electrical products segment (led by the LED business) will increase its contribution to profits to nearly 24% based on our estimates. This will make the electrical products segment the second largest in terms of contribution to profits for the company.

Fig. 19: EBITDA split FY15


Fig. 20: EBITDA split FY17F


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Financials – LED business to provide upside surprise Revenue growth will be combination of existing business growing at a steady clip (~15%) while the new LED business driving strong 100% growth over the next two years. The company has already seen very strong momentum over the last quarter since the official launch of the LED business with volumes having seen a 4x increase in the last four months. Although the price for the LED bulbs have fallen sharply, volume growth has seen a sharp increase and with the company also investing in increasing its distribution reach, revenues from this segment will have a large impact on overall revenue growth.

Fig. 21: Revenue growth to remain at high teens levels over FY15-17F


Revenue split to undergo a change In FY15, ~60% of revenues came from the battery segment. However with the launch of the LED business, we see a significant shift in the revenue split for the company over the next 2 years. The LED business which generated sales of ~INR200mn in FY15 (only two month worth of sales) this is the new driver of revenue growth for the company over the medium term. We expect it to increase this revenue to INR ~INR2.1bn in FY17F.

This means that out of the incremental revenue over FY15-17F, nearly a quarter of that will come from the LED business. The company is very optimistic about this business in the medium term with current market of USD160bn which is expected to reach USD 1.6bn by 2020. This is a very fragmented market with no large players and there is an opportunity for new entrants to gain share. With Eveready being a household brand, the company will not need to invest too much behind growing the brand and all the money can be invested into increasing distribution which can help gain market share quickly. We believe this will be a key growth driver for the company over the medium term.

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Fig. 22: Revenue split in FY14


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EBITDA margins set to improve We believe there remains key margin driver for the company to leverage over the medium term. This is across cost lines, such as manufacturing costs (freight, distribution rent etc.) as well as employee costs (on account of operating leverage) which can combine to deliver improvement in operating margins over the next two years.

In our model we do not build in any gross margin improvement as we believe newer business will continue to operate under similar profitability levels at the gross margin level in the short term. There could be upside risks to this number, but we are not building in any improvement into our model. Over the past couple of years gross margins have remained largely stable around the 34-35% range and we are continuing to build in that range over the next two years.

However as the company continues to deliver higher revenue growth trajectory (17/20% for FY16/17F), it will benefit from operating leverage with line items such as some manufacturing expenses and employee costs growing at a much slower clip. This will translate into an improvement in EBITDA margins in our view. Additionally the LED business which has just started operations is at breakeven levels, but over the next couple of years management expects to make this profitable as expenses related to launch of new business is absorbed and revenues grow much faster than costs such as advertising etc. Management has indicated that over the next few quarters there will be some A&P support to help grow the LED business, but with consumers already aware of the Eveready brand (across multiple categories), this spend will be limited and profitability in this segment will likely see a sharp improvement starting 2HFY16.

While the company will need to invest some money into growing the distribution network, we believe the additional costs will not be very high and some level of improvement in operating margins is likely to come through. We are building in a 160bps improvement from FY15-17F. The improvement in EBITDA margins will mean company will deliver 28% EBITDA CAGR over FY15-17F.

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Fig. 24: EBITDA margins likely to continue to see an improvement FY15-17F


Financial leverage to come down significantly While operating margins will likely see an improvement, the key factor driving the strong net income growth will be led by sharp drop in financial leverage for the company. Over the past couple of years, the company has been able to pay down its debt with net debt down from INR3.1bn in FY12 to INR1.87 in FY15 and which we believe will end around INR 1.23bn in the current financial year. We believe this will fall further in FY17F with company becoming nearly net cash company by the end of FY17F. We are assuming a large increase in dividend payout in FY18F and company may well decide to invest the money back into the business.

Fig. 25: EVRIN Balance sheet to see a strong improvement over the next two years


Net Income to grow by 53% CAGR over FY15-17F As a result of improvement in EBITDA margins as well as reduction in financial leverage, we estimate net income will see a 53% CAGR over FY15-FY17F. The company ended FY15 with net income of INR 506mn which we believe will increase to INR 1.19bn by FY17F. This pace of growth in profits will be among the highest in our coverage universe across the consumer space. Sector net income growth is more likely to be ~17-18% over the same time period.

Strong improvement in RoE As the company’s profitability improves over the next couple of years, we believe there will be a significant improvement in the return on equity. This is also a reflection of how well the company has been able to manage its resources over the past few years. As company’s incremental investment requirements have been very low in the past few years, the return ratios have seen an improvement. We expect this trend to continue over the next two years as no large capacity additions are planned. While FY17F should

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see a mid-teens RoE, we believe given the relatively low level of investment required in the business in the medium term, return ratios can continue to improve over the medium term.

Fig. 26: Return on Equity (RoE) to see a sharp improvement


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Valuations

Strong brands can get high valuations

As we look across the consumer names, we see one common factor. Companies which have a strong brand in their portfolio tend to get higher multiples compared to ones which are not market leaders. This is true across some of the categories where brand makes a big difference such as Hindustan Unilever, Nestle, Colgate and United Spirits. These companies are market leaders in the key segments in which they operate and that allows them to command significantly higher valuations than other companies in the sector.

Fig. 27: Market leadership does translate into higher multiples than the sector

Company Market leader 5 year P/E

Nestle India Baby Food 37.2x

Hindustan Unilever Soaps & Detergents 30.1x

Colgate Oral Care 33.3x

United Spirits Spirits 51.9x

Consumer Sector 27.2x

Source: Bloomberg, Nomura Research

While it is true for companies in the packaged food, beverages and HPC space, we believe the same is also true for companies in the commodity business. Companies like Asian Paints and Pidilite largely have a commodity business (paints, white glue being the main products), but as these companies have been able to build large recognizable brands over a long time, investors have rewarded them with high multiples. Consumers recognize these brands despite the fact that they have a commodity as the key revenue driver. Additionally, consumers are willing to pay a higher price as these brands have created a trust factor.

We believe company can trade at FMCG multiple

EVRIN has been able to build a strong brand over a long period which is clearly visible in the pricing power that the company has. Given this, we believe over the medium term EVRIN will trade closer to FMCG multiples rather than capital goods companies such as Havells. EVRIN will be able to deliver consistent mid-teens revenue growth over the medium term with possibility of driving some margin improvement as well. This will mean that the company’s earnings growth is more likely to be closer to the FMCG sector (mid to high-teens earnings growth over the medium term) which is another factor which will mean the trading multiples will eventually be closer to the FMCG average.


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Valuations have already seen a revision

Since 2012, company has traded at one year forward valuations of 14x. However over the past year, there has been a significant re rating of P/E multiple. This was due to several reasons.

• Revenue growth trajectory which had been flat for a couple of years started to see a rebound with pricing growth coming back into the battery segment for the company. This was a significant change with management confident that the growth trajectory going forward will be double digit for the medium term.

• EBITDA margins which fell to 4.9% in 2012, started to see a rebound and with pricing coming back into the battery segment the outlook for operating margins started to improve with potential to drive it higher over the medium term. This has continued to be the case into FY15 when company will most likely end the year with EBITDA margins of ~9.7%.

• Over the last year, the company has entered the market for LED based lighting which is a large market and is growing rapidly. EVRIN has only just entered the market and expects to get to 5% share of the market over the next five years. This will add another leg to the long term topline growth trajectory of EVRIN which has given investors more confidence.

• As operating margins improved, cash flows also saw a significant increase which meant debt on the balance sheet came down and continues to do so. We believe company will be net cash by the end of FY17F.

These factors have meant a significant re rating of the stock in the last year. EVRIN now trades at 23.8x one year forward. This is higher than the average for the last three years, but stock has traded at 25x+ one year forward P/E before. We believe as operational performance improves, and company’s topline continues to deliver stable mid to high teens growth, we believe valuations multiples are likely to remain at current levels over the medium term.

Fig. 28: EVRIN one year forward valuations

Source: Bloomberg, Nomura Research

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Initiate with a BUY and TP of INR 410 We initiate coverage on Eveready Industries (EVRIN IN) with a BUY rating and a TP of INR 410 which offers 50% potential upside form current levels. We believe company will deliver~19% revenue CAGR over FY15-17F with EBITDA growth being much higher at 28% in the same period as margins improve from ~9.7% in FY15 to 11.3% (+160bps) in FY17F. The financial leverage coming down will be the key in delivering 53% EPS CAGR over the same period. We value the company at 25x one year forward earnings on FY17F EPS of INR 16.4 which translates to a TP of INR 410.

Land, Tea business to provide upside

The company is also involved in the packaged tea business under the brand “Tez” with extensive presence in North, Central and Eastern parts of India. They currently generate ~INR800mn worth of revenues from the business.

We believe that this is one business which the company can potentially look to exit/divest stake at some point in the medium term. We believe that this can unlock value for investors and help the company accelerate the deleveraging process.

Moreover, the company has significant tracks of land (details below) which are likely to be monetized at some point. Amongst the most prominent is a 25 acres land parcel in Hyderabad which can conservatively be valued at INR1-2bn. The company is going to look at avenues to monetize this asset in the near future and that too should unlock value for the investors.

Consumer Sector valuations Fig. 29: Consumer sector valuations

Company Ticker Rating Price INR TP INR Upside/

Downside

EPS growth (%) P/E (x) PEG (x)

FY16F FY17F FY16F FY17F FY16F FY17F

Nestle * NEST IN Buy 7,058 7,400 4.9% 17% 11% 44.4x 40.0x 2.6x 3.6x

GSK Consumer SKB IN Neutral 6,377 6,150 -3.6% 17% 20% 35.5x 29.6x 2.0x 1.5x

Jubilant Foodworks JUBI IN Reduce 1,757 1,120 -36.3% 26% 29% 70.7x 55.0x 2.7x 1.9x

United Spirits UNSP IN Buy 3,427 4,050 18.2% -623% 62% 83.3x 51.3x -0.1x 0.8x

Britannia BRIT IN Buy 2,675 2,560 -4.3% 29% 28% 46.8x 36.6x 1.6x 1.3x

F&B Average 54.7x 41.6x

Colgate Palmolive CLGT IN Reduce 1,994 1,526 -23.5% 14% 18% 44.1x 37.4x 3.1x 2.1x

Dabur DABUR IN Buy 272 296 8.9% 25% 20% 35.3x 29.4x 1.4x 1.5x

Godrej Consumer GCPL IN Buy 1,096 1,335 21.8% 25% 21% 31.0x 25.7x 1.2x 1.2x

Hindustan Unilever HUVR IN Reduce 846 785 -7.2% 14% 15% 40.0x 34.7x 2.8x 2.3x

Marico MRCO IN Buy 410 425 3.7% 19% 24% 37.1x 29.9x 1.9x 1.3x

Emami HMN IN Buy 1,104 1,010 -8.5% 19% 23% 45.2x 36.8x 2.4x 1.6x

HPC Average 38.9x 33.0x

ITC ITC IN Neutral 321 372 15.7% 15% 13% 22.6x 20.0x 1.5x 1.6x

Asian Paints APNT IN BUY 767 870 13.4% 33% 30% 35.0x 26.9x 1.1x 0.9x

Pidilite Industries PIDI IN Buy 551 328 -40.5% 17% 16% 40.5x 35.0x 2.4x 2.2x

Titan Industries TTAN IN Reduce 380 337 -11.4% 17% 15% 35.1x 30.5x 2.1x 2.0x

Bata India * BATA IN Buy 1,053 1,320 25.3% 21% 21% 24.7x 20.4x 1.2x 1.0x

Retail Average 33.4x 28.8x

Source: Bloomberg, Nomura Research, Note: * denotes calendar year based valuation, Pricing as on May 28, 2015


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About the company

Eveready is the part of the Williamson Magor group which was founded in 1869 and pioneered the tea business in India and has today become the world’s largest tea producer and has subsequently diversified into consumer goods, engineering and construction, emerging as a multi-business enterprise. The business/group continues to be headquartered out of Kolkata, West Bengal.

Some of the other group companies include:

• McLeod Russell which is the world’s largest producer and exporter of tea with operations in India, Africa and Vietnam.

• McNally Bharat: an engineering company engaged in providing turnkey solutions to various sector including Steel, Cement, Power etc.

• Kilburn Engineering: is engaged in designing, manufacturing and commissioning of critical customised heat and transfer equipment for several industries.

About Eveready: • Eveready started marketing its products in India more than a hundred year ago in1905.

• Enjoys 52% share in the 2.7bn pieces Indian battery market

• Enjoys 75%+ share of the 35mn pieces Indian organised flashlights markets.

• Eveready currently has six manufacturing plants across India with 15 sales offices. Distribution footprint includes 4,000+distribution pints and a reach of 3.2mn outlets.

• The board of directors include:

Chairman (Non-Executive) - Mr. Brij Mohan Khaitan

Managing Director - Mr. Amritanshu Khaitan

Wholetime Director - Mr. Suvamoy Saha

Non-Executive Director - Mr. Aditya Khaitan

– Independent Directors

Mr. Sanjiv Goenka

Mr. Subir Ranjan Dasgupta

Mr. Sudipto Sarkar

Mrs. Ramni Nirula


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Appendix A-1

Analyst Certification

We, Manish Jain and Anup Sudhendranath, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Eveready Industries EVRIN IN INR 277 06-Apr-2015 Buy N/A

Eveready Industries (EVRIN IN) INR 277 (06-Apr-2015)

Buy (Sector rating: N/A) Chart Not Available

Valuation Methodology We value EVRIN at 25x FY17F EPS of INR 16.3 to arrive at our TP of INR 410. It is at a premium to stock's own long term average but a large discount to consumer average. Benchmark for the stock is MSCI India index. Risks that may impede the achievement of the target price Risks for EVRIN include a deceleration in growth of the battery segment in India and slower than expected progress in the LED business over the next two years.

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 43% of companies with this rating are investment banking clients of the Nomura Group*. 44% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies with this rating are investment banking clients of the Nomura Group*. 8% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 25% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2015. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow

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24

analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are also specified on page 1 or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. 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