by Suhani Adilabadkar

The second largest manufacturer of lead acid batteries in India, Amara Raja Batteries Ltd (ARBL) reported robust December numbers. Largely dependent on the cyclical auto industry, ARBL has lost 33% over the past one-month, mirroring the pain of the automobile sector ridden with BS VI, supply issues from China and the current coronavirus-related lockdown. 

Amara Raja Batteries is the technology leader and second only to Exide, manufacturing lead-acid batteries for both industrial and automotive applications in the Indian storage battery industry. The company is a leading manufacturer of automotive batteries and home UPS /inverter batteries under the brands Amaron® and PowerZoneTM. 

ARBL supplies automotive batteries to top rung OEMs such as Ford India, Honda, Hyundai, Mahindra & Mahindra, Maruti Suzuki, Ashok Leyland, Tata Motors, Honda Motorcycles & Scooters, Royal Enfield, Bajaj Auto among others. The company is the preferred supplier to major telecom service providers, telecom equipment manufacturers, UPS sector, Indian Railways and power and oil & gas sector. Industrial segment comprises of brands such as PowerStack®, Amaron VoltTM, Amaron SleekTM, Amaron VoltTM, Amaron BruteTM and Amaron Quanta.

Quick Takes:

• The second largest manufacturer of lead acid batteries in India, Amara Raja Batteries Ltd (ARBL) reported robust December numbers.

• Company is a leading manufacturer of automotive batteries and home UPS/inverter batteries under the brands Amaron® and PowerZoneTM

• Operating profit for the December quarter stood at Rs. 284 crore, growing 12% YoY and PAT came out at Rs. 164 crore, rising 26% YoY.

• Amara Raja overhauled the lead acid battery industry by challenging Exide with its technologically superior products and better marketing and sales strategy. ABRL currently together with Exide caters to 90% of the organized segment of the battery industry.

• ABRL announced capital investment of Rs. 540 crores for advanced stamped grid technology for 2-wheelers. 

December Quarter FY20 saw profits helped by cost control measures 

ARBL reported revenue at Rs. 1,748 crore in Q3FY20 compared to Rs. 1,695 crore in the same period, previous year, rising 3% YoY. Operating profit for the December quarter stood at Rs. 284 crore against Rs. 253 crore, growing 12% YoY supported by cost control measures and lower lead prices (raw material). 

Operating margins came out at 16.2% in the December quarter FY20, expanding 133 bps YoY. PAT or net profit for Q3FY20 stood at Rs. 164 crore compared to Rs. 131 crore corresponding quarter, previous year, rising 26% YoY. ARBL has created a duopoly in the Indian battery industry which was once dominated by Exide.

Though Amara Raja’s growth pace has slowed down over the years, it is still the market leader in the industrial segment and giving Exide tough competition in the automotive segment. 

ABRL has been taking on a one player industry 

Amara Raja overhauled the lead acid battery industry by challenging Exide with its technologically superior products and better marketing and sales strategy. While Exide dithered on its capacity expansion after 2008, ABRL went full steam introducing superior VRLA technology and provided maintenance free batteries in the early 1990s, dethroning Exide in the industrial segment and capturing half of the market by 2015. 

The company also launched VRLA technology for Indian railways in 1996 and forayed into the 2-wheeler battery segment in 2007, further challenging Exide’s core strength. Thus, turning the battery industry into a two-player arena aided by its superior technology, strong operational efficiency, robust capacity expansions catering to the 2-wheeler, 4-wheeler, railways, UPS and telecom sectors. ABRL, currently together with Exide caters to 90% of the organized segment of the battery industry. 

Fast forward to 2020, the auto industry is in a one and a half year long downturn. Slowing macros, BS VI and various safety norms have increased vehicle cost and higher insurance costs have pushed auto industry momentum on an inclined plane.

 In addition to this telecom industry, challenges rose with the entry of Reliance Jio. Higher competitive intensity led to decline in ARPU, lower revenues and cash flows lead to slower pace of tower expansion. As a result,there is no other option, but to survive this downturn with higher efficiency, strong product mix and maintaining high standards of product quality.. 

The company has performed well in the December quarter with double digit growth in PAT and operating profit, though revenue witnessed mild growth as the OEM and telecom segment reported slower growth, declining about 15% and 14% YoY respectively. Automotive replacement battery segment came to the rescue, providing stable and profitable opportunities to battery players in this slowing growth environment, as it is dependent on vehicles in use and not on vehicles produced by OEMs. 

In addition to that, higher pricing power, diffused customer base and B2C nature of the business has led to higher growth of the replacement segment, which has risen at a CAGR of 8% over the past three years. 

As the automobile battery’s life is about 3-3.5 years, it translates into linear replacement demand from the existing vehicle population. This segment has given the required fillip to battery manufacturers, helping them to transverse auto downturn and poor telecom demand. Replacement segment reported strong volume growth, both in 2-wheelers and 4 wheelers, rising 16% and 11% YoY respectively for ABRL. 

Capacity Additions For Future Growth 

Despite headwinds from the auto sector, ARBL is moving ahead with its capacity additions. The company laid out a Rs. 700 crore capex plan for 2-wheeler capacity addition in December 2017. which is going to be completed by FY21 with final capacity of 17 mn units leading to a total 2-wheeler capacity of 29 mn for ABRL. 

4-wheeler capacity will have an addition of 6 mn units and the company also signed a technology license agreement with Johnson Controls to use advanced stamped grid technology with a total capital investment of Rs. 540 crore for 2-wheelers. To combat EV evolution in India, Amara Raja has set up a pilot plant to assemble battery packs with lithium technology to serve electric vehicle applications in 2-wheeler and 3-wheeler vehicle segments with development work underway for e-bus and passenger car segments. 

As per ABRL management, new segments in industrial batteries, motive power, and solar applications would drive growth and electric vehicles which are unlikely to displace lead-acid batteries completely as these are still preferred for SLI (starter, lighting, and ignition) applications. This stands true for electric cars, but not for electric 2 & 3 wheelers which would impact ABRL’s revenue in the long run. 

In addition to that, Reliance Jio utilizing lithium ion batteries for its towers has brought about a directional change in the Indian telecom sector.  On a more positive side, scrappage policy as and when it would be announced by the government, might come to everyone’s rescue, especially the auto and auto ancillary sector.  

Will Amara Raja gain market share post pandemic?: Currently, ABRL has shut all its manufacturing plants due to the coronavirus pandemic, which will result in losses in production activity. The Indian lead acid battery industry is about Rs. 300 bn with the organized players accounting for about 60% approximately, the remaining portion is about Rs. 100 bn of SMEs and Rs. 25 bn for small scale industries. In the wake of the coronavirus, this 40% will take the first and the biggest hit, while players like ABRL with strong technology, market leadership and balance sheet will survive and prepare more stringently for future contingencies.