TITLE OF THE PROJECT

Leverage Analysis: A Study on Eveready Industries India Ltd.

SUBMITTED BY

Name of the Candidate: PRATIK KUMAR SINGH

CU Registration No.: 017-1111-3193-20

CU Roll No.: 017-BBAS-20-2-0054

Name of the College: The Bhawanipur Education Society College

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1. INTRODUCTION

1.1 BACKGROUND

Eveready Industries India Ltd. (EIIL) is an Indian company that manufactures and

markets batteries and lighting products. The Eveready brand has been present in India
since 1905. It also manufactures photogravure plates, castings, carbon electrodes and
related products. The Group's operating facilities are located
at Kolkata, Bengaluru, Noida, Haridwar, Lucknow and Matia (Assam).

EIIL is the world's third largest producer of carbon zinc batteries, selling more than
a billion units a year. EIIL is India's largest selling brand of dry cell batteries and
flashlights (torches), with dominant market shares of about 46% and 85% respectively. In
February 2022, the Burman group made an open offer to acquire 1.89 crore shares (around
26%) of the company at Rs. 320 per share for an amount of Rs. 604.76 crore. Following
this, Chairman Aditya Khaitan and Managing Director Amritanshu Khaitan accepted the
offer and resigned from the company.

EIIL started its operation in India in 1905. The first dry cell batteries were imported from
the US and sold in the major cities of the country. These batteries were primarily used in
imported torches.

In 1939, the company set up its first battery plant in Kolkata. This was followed by
another battery manufacturing plant in Chennai in the year 1952. A torch manufacturing
plant was set up at Lucknow in 1958. Today it is one of the largest torch manufacturing
plants in South East Asia. The plant manufactures a wide range of brass, aluminum, and
plastic torches.

In 1969, the now infamous factory in Bhopal was opened.

By the time of the Bhopal Disaster in 1984, the company was ranked twenty-first in size
among companies operating in India. It had revenues of Rs. 2 billion (then equivalent to
US $170 million). Fifty-one percent of the company (known at the time as UCIL) was
owned by Union Carbide Corporation; remaining shares were held by 24,000
stockholders. Ten thousand people were employed in five operating divisions that
manufactured batteries, carbon products, welding equipment, plastics, industrial
chemicals, pesticides, and marine products. EIIL became part of the Williamson Magor

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Group through McLeod Russel Ltd. in the latter half of 1994 following the sale of Union
Carbide Corporation's stake in UCIL. UCIL is primarily a dry-cell battery manufacturer at
the time, but as part of the Williamson Magor Group EIIL launched three brands of packet
tea under the Greendale Brand umbrella – Tez, Jaago and Premium Gold. Coupled with
EIIL's brands of packet tea are now easily available in most states in India. In 1997, the
Eveready brand was extended to its packet tea business. McLeod Russel Ltd. eventually
merged with Eveready Industries.

EIIL has the licence for the Eveready brand only in India, Bhutan and Nepal
from Energizer Holdings, so it had to create a new brand for export to other markets where
Energizer Holdings still has the rights to the Eveready brand. The brand LAVA was
launched in 1999. LAVA batteries and flashlights have been sold
in Dubai, Bahrain, Jordan, Sudan, Egypt, Bangladesh, Mauritius, Sri
Lanka, Azerbaijan, Mexico, US, Lebanon, Saudi Arabia, Ethiopia and Nigeria.

During the fiscal year 2002, the group sold its wholly owned subsidiaries Dufflaghur
Investments Limited and Natex Investment and Marketing Limited.

In 2005, EIIL celebrated its 100 anniversary in India. That same year, EIIL separated its
bulk tea business and de-merged as McLeod Russel. EIIL also acquired BPL Soft Energy
System in 2005.

In 1992, Rediffusion Y&R, the agency on record, released the ‘Give me Red’ tagline that
Eveready Industry continues to use. In 2004, Amitabh Bachchan was appointed as brand
ambassador for two years, during which the agency came up with another ‘Give me Red’
campaign. In 2009 Eveready released an ad titled ‘Boxing’.

Eveready Industries has launched an advertising campaign for Eveready Ultima Batteries.
The animation team created controlled trails of light derived from light painting.
Recognizable shapes were made with a torch and captured on a digital still camera. The
film comprises over 3000 such photographs, played back quickly, one after the other, like
in a flicker book.

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1.2 LITERATURE REVIEW

1. Scholars in varied industries have extensively researched Leverage and

profitability. These have motivated the corporate to identify and improvise upon
their financial performance. In February, 2014, Bindiya Soni and Jigna Trivedi,
in a research paper titled, “A Study on Leverage Analysis and Profitability for
Selected Paint Companies in India” analyse the impact of both financial
leverage as well as operating leverage on the profitability (measured through
Earning Per Share “EPS”) of the selected paint companies of India. Five listed
paint companies of India were selected based upon the market capitalization for
the research purpose. The study investigates the impact of degree of financial
leverage and degree of operating leverage on EPS with the help of correlation
analysis. Along with this analysis, the paper also investigates the impact of debt-
equity ratio on the EPS of the said firms to see the impact of debt on the wealth of
the firms. The findings suggest that financial leverage had no significant
relationship on profitability while operating leverage had significant relationship
on profitability with the exceptions of few.

2. Kumar Ramana, in a paper titled, “An Empirical Study on Relationship

between Leverage and Profitability in Bata India Limited”, elaborates on
leverage and its relationship between profitability in Bata India Limited. This
research paper analyses the performance of Bata India Limited. The exploratory
research design is adopted in this study which employs secondary data. The
financial statements of Bata India Limited have been collected over a period of 7
years (2005-06 to 2012- 13). The data collected is analysed by the percentages,
averages, ratios and Correlation analysis tools reveals that the research evidence
of the study indicates that the degree of operating leverage has statistically
significant positive correlation with the ROI. It is observed that degree of financial
leverage is positively correlated with the ROI. It means that degree of financial
leverage of Bata India was not at optimum level. It is suggested to Bata to revise
its capital structure which should include the optimum blend of equity and
borrowed funds so that it has positive impact on Return on Investment. More over
degree of combined leverage is positively correlated with ROI of Bata India. The
financial performance of the Bata India is satisfactory. The Bata India is

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 employing less debt funds so it can’t get the financial leverage benefits. Therefore
the Bata India has to revise its capital structure so that financial leverage will help
to maximize the shareholders wealth.

3. Sanjay J. Bhayani and Butalal Ajmera in a research paper titled, “An

Empirical Analysis Of Financial Leverage, Earnings And Dividend: A Case
Study Of Maruti Suzuki India Ltd.”, have studied the theoretical approaches
and practical application of financial leverage, earnings per share and dividend per
share of Maruti Udyog Ltd. with data for the period of 2001-02 to 2008-09. For
the purpose of analysis, researchers have used ratio techniques and to test
hypothesis, correlation-co-efficient has been used. The result of the study
indicates that there is a correlation between DFL and EPS and the difference is
insignificant whereas result of correlation coefficient at 5% level of significance
showed that the diffidence is significant between DFL and DPS and EPS and
DPS.

4. Priyanka Sharma, Ankit Saxena and Karishma Choudhary, in a research

paper titled, “Leverage Analysis Of Amul –Anand Milk Union Limited”,
Ahmedabad, in February 2014, have conducted a comparative study and analysis
of firm’s financial leverage, operating leverage and combined leverage has been
done of five years i.e. from 2007-08 to 2011-12.

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1.3 OBJECTIVES OF THE STUDY

● To measure the leverage ratios of the company, i.e., Degree of Operating Leverage
(DOL), Degree of Financial Leverage (DFL) and Degree of Combined Leverage
(DCL).

● To analyse the financial performance of the firm with respect to the leverage ratios.

● To study the relationship between leverage and profitability of the firm.

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1.4 RESEARCH METHODOLOGY

1.4.1. SOURCES OF DATA

The source of data is secondary as it is collected from the financial statements

of Eveready Industries India. The study uses quantitative data for its
evaluation.

1.4.2. PERIOD OF STUDY

The study includes data from 2018-2022, i.e., for a period of five years.

1.4.3. TOOLS FOR ANALYSIS

The financial statements of Eveready Industries India Ltd. Have been analysed
using leverage analysis.

To analyse the impact of leverage on profitability of Eveready Industries India

Ltd, ratio analysis and correlation have been used for the study.

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1.5 LIMITATIONS OF THE STUDY

● This study does not include primary data.

● The main focus of this study is on quantitative data, so qualitative data is not given
preference.
● This study suffers with the lack of proper and extensive literature, i.e., insufficient
existing literature.

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2. CONCEPTUAL FRAMEWORK

Leverage in finance refers to the use of borrowed funds for investment or acquisition of
assets with the hope that the return from that investment will surpass the amount
borrowed. So, basically it is a strategy of using borrowed money to increase the potential
return of an investment. It can also refer to the amount of debt a firm uses to finance
assets.

The potential risk of using leverage is in case the investment does not prove fruitful to the
firm. If such case arises then the firm will have a huge debt to pay off and it may not be
possible for it to do so.

The term leverage here is taken from physics in which a device called lever is used which
takes a small input force and turns it into a large output force.

Leveraging enables gains to be multiplied but on the other hand, losses are also multiplied
as there is a risk that leveraging may result in a loss if financing costs exceed the income
from the asset or the value of the asset falls.

In finance there are three types of leverages namely Operating Leverage, Financial
Leverage and Combined Leverage.

Operating Leverage

Operating Leverage refers to the use of fixed cost in the operations of the firm. A firm has
to bear the fixed cost expenses irrespective of output. Even if there is zero sales, the firm
has to incur those expenses. The firm can use higher amount of operating Leverage i.e.
using of higher amount of fixed cost when compared to variable cost only when the sales
are rising because even a small change in sales will bring a proportionate change in
operating profit.

Financial Leverage

Financial Leverage refers to using fixed-cost sources of financing (debt, preferred stock)
rather than variable-cost sources (common stock). Financial Leverage can be favourable as
well as unfavourable. If a company is able to earn more return than the cost of borrowing,
then the Leverage is said to be favourable. On the other hand, if the company earns a
return which is less than the cost of borrowing then the Leverage is said to be
unfavourable.

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Combined Leverage

Combined Leverage is a use of operating Leverage and financial Leverage in an

appropriate proportion in the business. Operating Leverage affects the firm’s operating
profit and financial Leverage affects the earnings of the shareholder or EPS. Firm has to
use a correct mixture of both the Leverages to take the fullest possible advantage of
growing business opportunities.

Leverage Ratios

Leverage Ratios are tools that determine the extent to which a firm depends on debt for
purchasing assets and building capital.

Types of leverage ratios are Degree of Operating Leverage (DOL), Degree of Financial
Leverage (DFL) and Degree of Combined Leverage (DCL).

Degree of Operating Leverage (DOL)

It is a multiple that measures how much the operating income of a company changes in
response to a change in sales.

Degree of Financial Leverage (DFL)

It is defined as the percentage change in EPS due to a given percentage change in EBIT.

Degree of Combined Leverage (DCL)

It is a ratio used to help determine the optimal level of financial and operating leverage in
any firm.

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 3. ANALYSIS AND FINDINGS

Table 1:

Year Sales (in Cr.) EBIT (in Cr.) % change in % change in DOL
Sales EBIT

2018 1475 66 - - -

2019 1506 60 2.10 -9.09 -4.33

2020 1221 71 -18.92 18.33 -0.97

2021 1248 -453.89 2.21 -739.28 -334.52

2022 1206 68 -3.37 114.98 -34.12

Table 1 depicts the Degree of Operating Leverage of Eveready Industries India Ltd. from
2018 to 2022, calculated by dividing % change in EBIT by % change in sales. It can be
seen from the table that the company has negative DOL from 2018 to 2022. The DOL
increased from 2019 to 2020 then a steep decline is observed from 2020 to 2021 and then it
again increased in 2022.

Table 2:

Year EPS (in Cr.) EBIT (in Cr.) % change in % change in DFL
EPS EBIT

2018 6.77 66 - - -

2019 8.41 60 24.22 -9.09 -2.66

2020 6.91 71 -17.84 18.33 -0.97

2021 13.71 -453.89 98.41 -739.28 -0.13

2022 6.39 68 -53.39 114.98 -0.46

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Table 2 depicts the Degree of Financial Leverage of Eveready Industries India Ltd. from
2018 to 2022, calculated by dividing % change in EPS by % change in EBIT. It can be
seen from the table that the company has negative DFL from 2018 to 2022. The DFL
increased from 2019 to 2021 then a decline is observed from 2021 to 2022.

Table 3:

Year EPS (in Cr.) Sales (in Cr.) % change in % change in DCL
EPS Sales

2018 6.77 1475 - - -

2019 8.41 1506 24.22 2.10 11.53

2020 6.91 1221 -17.84 -18.92 0.94

2021 13.71 1248 98.41 2.21 44.53

2022 6.39 1206 -53.39 -3.37 15.84

Table 3 depicts the Degree of Combined Leverage of Eveready Industries India Ltd. from
2018 to 2022, calculated by dividing % change in EPS by % change in Sales. It can be
seen from the table that the company has positive DCL from 2018 to 2022. The DCL
decreased from 2019 to 2020 then greatly increased 2020 to 2021 and then again decreased
from 2021 to 2022.

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