Jayadev Galla laughs as you make guesses on the origins of his company’s name. It’s obviously not after the founder — Jayadev’s father, Ramachandra Galla. When you give up, he explains that Amara Raja is a portmanteau created from his grandparents’ names, Amaravati and Rajagopal Naidu. “It really is that simple,” he says. And if the name can also be literally translated as “immortal king”, that’s an added bonus. “That is what we want the brand to be,” the 48-year-old Galla concurs.
Right now, Amara Raja Batteries seems on track to get there. Between FY09 and FY13, the Hyderabad-based company has seen revenue move sharply from ₹1,311 crore to ₹2,961 crore, a growth of 2.3 times. Net profit over the same period has gone up over 3.6 times, from ₹80 crore to ₹287 crore. “We want to be a global industrial battery player,” says Galla, the company’s vice-chairman and managing director. The target for the next five years: to become a ₹10,000-crore company by 2018. “This is not an easy market to be in. But we have managed to get a few things right,” he smiles. As it happens, Amara Raja has managed to do much more than that.
Getting started
In 1985, Ramachandra Galla returned to India after several years in the US, to explore the possibility of setting up an industrial batteries unit. Five years later, he set up the first plant at Tirupati, Andhra Pradesh, which went commercial the following year. Galla’s only son, Jayadev, meanwhile, stayed back in the US to complete his education and gain experience in the American battery industry, going on to work with GNB Battery Technologies. By the time Jayadev returned in 1992, Amara Raja had started making batteries for the department of telecommunications for landline exchanges. “This was much before the cellular revolution began and what today has emerged as a huge business opportunity was not exactly planned,” says Galla, whose distinct American accent is the only indication of the two decades he spent in the US.
Telecom was followed by power and railways. In 1997, the Milwaukee-based Johnson Controls, now a $42-billion industrial conglomerate, acquired a 26% stake in the company. Suddenly, the industrial batteries company’s ambitions transformed — it launched the Amaron brand to venture into the much tougher automotive battery space, leveraging Johnson Controls’ relationships with original equipment manufacturers (OEMs) such as Ford and GM, and after some years, went deeper into the consumer space with UPS batteries.
It wasn’t easy going, though. The battery market in India has for decades now been dominated by a single player, Exide (part of the Rajan Raheja group, which owns Outlook Business). With such a well-entrenched player, how did a relative newcomer grow so well and so fast — between them, Exide and Amara Raja now account for over 80% of the battery market across segments and categories. Perhaps the biggest differentiator was the introduction of valve regulated lead acid (VRLA) batteries. Not only do these batteries not require a regular supply of water, they can also be fitted into a car straight from the showroom (conventional batteries needed to be charged for up to five hours before they could be used).
VRLA, which is also touted as a zero-maintenance battery, was first introduced in the telecom sector by Amara Raja, before extending it to automobiles. The result, as the company website helpfully points out: every third car in India runs on Amaron batteries, as does every third telecom tower. Every second car in Singapore has an Amara Raja battery under the hood and even the Taj Mahal and Rashtrapati Bhavan are powered by the company.
The trick, says Galla, is to have a clear, long-term commitment to India and be patient, very patient. “It is difficult since there is not enough transparency,” he concedes. “Margins here are very low, coupled with serious concerns in areas such as after-sales service and distribution.” Despite those hurdles, 60% of Amara Raja’s income in FY13 came from the automotive segment (see: Hot wheels), which is especially commendable considering the company was a late entrant in the space in 2000. Within this segment, four-wheelers accounted for the lion’s share, while two-wheelers, which Amaron entered five years ago, brought in just 5%.
Given the difference in margins — 2-3% with OEMs and 16-20% in the replacement market — not surprisingly, over 78% of the four-wheeler battery market was in the replacement category. The life of a battery of a four-wheel vehicle is around three years, while it is just 2.5 years for a two-wheeler. In FY13, Amara Raja sold 5 million units to OEMs while 13 million were sold through the replacement market. “Replacement can be at least four times larger than OEMs,” Galla adds.
The other chunk of the company’s revenues comes from its industrial batteries business, where telecom brings in around half. That’s not very reassuring, since the pace of expansion of telecom towers (which run on the batteries) has slowed down in the past couple of years and overcapacity in urban areas. It doesn’t help that the number of operators has dropped from 15-odd to just three-four now. Still, so far, at least, it is business as usual. Indus Tower, the three-way JV between Bharti Airtel, Vodafone and Idea Cellular, started working with Amara Raja in 2008, and entered into a strategic relationship with the company in 2011.
Thus far, it has bought 1.5 million cells (batteries are sold in “banks” of 24 cells) that have been deployed at its 112,000 towers. “The key advantage with Amara Raja is high safety standards, a modern manufacturing facility and the ability to work to tight deadlines since our business has unexpected peaks,” says Mandeep J Sachdeva, chief supply chain management officer, Indus Tower. He adds that in FY13, the company bought 550,000 cells and the number is expected to increase to 700,000 in the current fiscal. And even as some business streams seem potentially difficult, Amara Raja is reaping the benefits of reduced costs of a key input.
Currency concerns
Lead accounts for about 80% of the cost of a battery. Since mid-2011, though, the price of this metal has fallen from $2,500 per tonne to around $2,100 currently because of shrinking global demand, especially in the US and Europe.
According to Amara Raja CFO K Suresh, 55% of the company’s lead requirement is imported from countries such as Australia and Korea, while Hindustan Zinc supplies locally. A falling rupee, then, poses a challenge for the company although in most cases, it is protected by a price-variance clause. The impact of the rupee was evident in the first quarter of the current fiscal, where Ebitda margins on a y-o-y basis declined by 1% even as global lead prices fell. Amara Raja, thus, had to hike prices by 3.5% in March and again by 5% in July.
“Increasing the price of our product is not an option we prefer to exercise,” says Suresh. Indeed, the company cannot keep increasing prices incrementally with every fall in the rupee, which means a hit on margins may be inevitable. Suresh is not too worried on that count. “With OEMs, we enter into contracts based on the rollout of a new model or vehicle and have a facility for escalation. If the price fluctuation of some inputs is so high then we will have to renegotiate with the manufacturers,’’ he says. In the case of industrial batteries, the approach is different as the prices are decided for, say, two months and then renegotiated.
While margin worries abound, analysts aren’t being too sceptical. Monami Manna, senior research analyst, Equentis Capital, says, “A combination of factors such as a significant presence in the higher margin replacement market and price hikes will have a positive impact on margins in the coming quarters.” Will that be enough to help Galla fulfil his ambitions for India’s second-largest battery maker? (see: Cell-ular growth)
The way ahead
The journey to ₹10,000 crore will mean getting stronger in existing areas and entering new businesses. Two areas Galla has identified as having “immense opportunities” are solar and motive power (used to produce motion). According to Suresh, these forays should attain form and shape by FY15. “There is a huge market here, for instance, for material handling equipment such as forklift batteries and pallet stackers.”
Also in the next couple of years, Amara Raja will expand the focus of its UPS business — thus far concentrated on large companies — to include the home segment as well. Industry estimates place the market for home-use power back-up products at about ₹6,000 crore and, given the ongoing power crisis across most states, it is expected that this market will only grow from here. According to Kunal Dalal, head of institutional research at KR Choksey Shares & Securities, the power deficit in rural areas alone is 8-10% each year. “This deficit is expected to continue, which will only increase the use of batteries,” he adds.
To feed these new business lines, the firm is expanding capacity at its existing plant at Tirupati, where it is working at 90% capacity. It is also building a new facility at Chittoor. (see: Growing, growing) Together, these will involve an investment of ₹700 crore, which Suresh says will be funded through internal accruals. “At best, we may opt for a bridge loan, if there is need. Our plan is to be a debt-free company by FY15,” he emphasises. As things stand, Amara Raja seems to be on track to meet that goal, since it has a debt of just ₹88 crore on its books for FY13 (down from ₹286 crore in FY09) with an interest outgo of only ₹1 crore.
Meanwhile, it will be business as usual for exports, which currently account for 15-20% of the topline. “The way we see it, each of our businesses will continue to grow over the next few years,” Galla says. The opportunity for Amara Raja lies at the “Indian Ocean rim”, encompassing key markets such as West and South East Asia and Africa. The company already addresses many markets in these regions such as Malaysia, Singapore, Indonesia, the Philippines, Australia and Sri Lanka. In Singapore, the Amaron brand has a key customer in the Comfort DelGro Corporation taxi fleet, which runs 16,000 of Singapore’s 27,000 taxis.
Back home, the company’s well-established business segments such as automobiles and telecom are expected to contribute in no small measure to Amara Raja’s surge in revenues. While it remains to be seen how the recent entry into two-wheeler OEM through a tie-up with Honda plays out, KR Choksey’s Dalal points out that automobile sales since 2008 have grown at a compounded annual growth rate of 22% — 17 million units in 2011 and 20 million last year. But it may be a short-lived bounty — automobile sales have been falling continuously in India since the start of the year. The only positive though is that while OEM demand could weaken, the replacement market will remain robust. “Given that the life of a battery is three years, it is clear that there will be a huge demand for replacement over the next three-four years,” believes Dalal.
Interestingly, Galla is also counting on replacement demand not just from the auto sector but in the telecom segment as well, since telecom batteries need to be changed every three to four years. “Yes, this sector is cyclical, but the replacement cycle has already started kicking in,” he points out. Higher diesel prices, too, could lead to use of more batteries in the telecom segment. The bigger task ahead, then, is to get more people to use Amara Raja’s brands.
Shifting into top gear
Already, Amara Raja has one of the widest networks among battery manufacturers in India, with availability across 21,000 multi-brand outlets (bigger rival Exide, in comparison, operates through dedicated outlets). In the next five years, says Suresh, that number will increase to 150,000. “The number of franchisee distributors, too, will increase from 295 to 400 during the same period,” he adds. Amara Raja has also been deliberately making inroads into rural India, starting in 2007 with the launch of Powerzone stores. These are small retail establishments that act as a one-stop shop for all types of batteries. “There are 1,100 such outlets spread across India and 20% of our volumes come from rural India. The advantage here is that we can tackle the unorganised sector in smaller towns,” says Galla.
When it launched batteries for the automotive sector, Amaron’s claymation TV campaigns ensured quick brand recall, as did the distinctive green signage and consumer products-style retail outlets (the Amaron PitStops). Now, advertising is more need-based and the idea is more to reach out to the maximum number of customers. For now, all eyes and focus will be on the manufacturing facilities getting into top gear. Galla believes growth in a difficult time such as this will come from the pent-up demand in the OEM segment. “Capacity building creates more opportunities,” he points out.
Given that the company has managed to grow its sales and profits at 22% and 25% CAGR, respectively, over the past five years, analysts continue to keep faith in the stock with a buy rating as they expect the current growth rates to continue till FY15 as well. Galla, too, believes that there is little to suggest that the double-digit run will not hold out. “We remain pretty confident about that,” he sums up. Looks like the batteries at Amara Raja are fully charged.
