Tried & Tested
Lupin wants to keep bingeing on overseas markets and specialty segments
for growth
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Special Issue: The Outperformers
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October is a good time to be in Goa if you’re in the mood for some
beachside R&R. But when the team from Japan’s Kyowa Pharmaceutical Industry
Co landed at Dabolim in 2007, it wasn’t for the sea, surf and sand. Kyowa and
Lupin were in the midst of serious negotiations and the visit to the Indian
pharma giant’s three-year-old facility at Verna was to be followed by meetings
in Mumbai.
Lupin and Kyowa already had a two-year-old strategic alliance to market
finished formulations in Japan. Now, Lupin was about to acquire its Japanese
partner, and when the discussion moved to dinner at a plush Mumbai hotel, Kamal
K Sharma, the then-managing director of Lupin, asked Kyowa’s chairman Y Sugiura
what he thought of the Goa facility. “He said it was nice but there was some
discomfort on his face,” recalls Sharma. He prodded a little and was told that
the surface of the tablets being manufactured was a little rough. “I was taken
aback. The plant manufactures over 8 billion units each year and had been
approved by the USFDA,” he says. Sugiura reached into his pocket and pulled out
a magnifying glass and a small plastic bottle with Lupin’s tablets. “In the
restaurant light, it looked perfect to me. But I courteously said we would take
care of it.”
For Sharma, who is now vice-chairman of Lupin, there was an important
takeaway from that meeting. “I was surprised that the vice-chairman thought it
necessary to carry a magnifying glass in his pocket, but it showed how the top
brass of a company pay attention to even minute details of the business.” Back
at Goa, Sharma initiated some minor changes to the punches to ensure the
tablets had the smooth feel preferred by Japanese consumers. The deal went
through and Japan is now a key market for Lupin, bringing in $240 million in
revenues in FY13, a 52% jump over the previous year.
As it happens, it is only one of several markets for India’s
third-largest pharma company by revenues. “Today, we have a strong onshore
presence in 10 countries. We are much stronger than we were earlier,” says
Sharma. Between FY09 and FY13, Lupin’s revenues have moved impressively, from
Rs 3,867 crore to Rs 9,641 crore, while net profit has kept pace, zooming from
Rs 508 crore to Rs 1,340 crore. The growth has been driven by the US, India and
Japan markets, in that order, and by products such as Suprax, Antara, Alinia,
Tunact and Aimel. The US — the world’s largest pharma market — brings in 40% of
Lupin’s revenues, while India brought in 25% in FY13 and Japan, 14% (see: The rising sun). Not bad at all for a company that
started its global journey less than a decade ago.
Zen markets
Oddly enough, the entry into Japan was a direct fallout of the US
experience. “We thought we were late in entering the US and decided we had to
be the first to enter another market,” says Sharma. Besides, being in Japan was
an imperative — at $100 billion, it is the world’s second-largest pharma
market, growing at 7-8% a year. It was a vastly different market, he adds, and
Lupin decided to first work with a few local companies to understand the
region. Hence, the alliance with Kyowa, which later became Lupin’s first
overseas buyout. Within a year of taking over, Lupin had improved productivity
to push margins up from 33% to 41%. At the same time, it has had to follow the
Japanese practice of reducing prices across categories by 12-15% every two
years; so far, Lupin has had to cut prices thrice in Japan.
People would argue that Japan is actually more benevolent than the US
when it comes to dropping prices for generic drugs. Price erosion in
plain-vanilla generic drugs in the US could be as high as 98% as soon as the
exclusivity period is over, whereas in Japan, typically, prices for the first
year are set at 70% of the innovator price. Also, generic penetration in Japan
is at barely 17% of the total market, compared with over 80% in the US. But, as
the government looks to increase use of generics, companies such as Lupin that
have a headstart in the market stand to gain.
Of course, it won’t be easy. Sharma points out that, unlike in the US,
in Japan, given the low acceptance of generics, the company needs a sales force
to promote its products. “That alone could increase costs by as much as 30%.”
How, then, does it maintain margins, considering it also has to take price cuts
every two years? By launching new products: in the past three years, there have
been 18-20 new products launched in Japan. Business in other markets, too,
seems to have been bitten by the same growth bug.
The growth engine
It is Nilesh Gupta’s first day as managing director of Lupin and he
heads to the conference room for a meeting. Instead, he walks into a surprise
party, complete with cake. The 39-year-old Gupta, who is the son of Lupin’s
founder Desh Bandhu Gupta, was till recently the company’s executive director.
He cuts the cake and quickly settles into his first media interaction after
taking over as MD. In the past decade, says Gupta, Lupin’s sales have grown
eight times, while profits jumped 20 times. Market capitalisation, too, is up
50 times. “This is a far cry from 2000, when analysts would not even meet us.
They thought the company was going nowhere,” he says with a laugh.
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Started in 1968, until 2003, Lupin was making 80% of its revenues from
the acute segment (especially the anti-TB segment). Today, the company gets 60%
of its income from the chronic segment, while anti-TB brings in 9%. Four years
ago, the company entered the diabetes market and is now the No.3 player. It has
also had successful launches in asthma treatment, where it has become No.2 in
just six years, and in nephrology and central nervous system (CNS). Those
successes have acted as a tonic for the company’s ambitions: it now wants to be
a $5-billion company by 2018, from $1.5 billion currently.
Gupta believes the current income mix won’t change drastically as Lupin
pushes towards this new goal. Currently, 80% of revenue comes from the US,
India and Japan. “In five years, this may come down marginally, but these will
continue to be high-growth markets,” he predicts. That wasn’t the case nine
years ago, when Lupin first entered the US market. The company struggled to be
taken seriously — not only was it among the last Indian pharmas to head
Stateside, it also offered just five products. “We had to test the waters
before making serious investments,” explains Sharma. That happened soon enough,
though: R&D spend climbed to 6.5% in 2005, up from 3% the previous year; it
is now at 7.5%.
In the US, Lupin quickly entered the branded generics space by
relaunching Suprax, an antibiotic Wyeth had discarded a couple of years
earlier. Over the years, it has launched various extensions of the drug, which
now has annual sales of $120 million. The company also acquired the US rights
of anti-cholesterol drug Antara, which now brings in $25 million. The company
now has 52 branded generics in the US market, which have helped it become the
fifth-largest pharma company there by prescription (165 million prescriptions
last year). Lupin also has one of the largest ANDA filings (abbreviated new
drug application, for the clearance of a generic version of a branded drug) —
177 as of June 30, 2013, of which 86 have been approved. Accordingly, the
company has plans to launch 20 products in the American market next fiscal
year. And analysts such as Hemant Bakhru of CLSA think the depth in the US
pipeline will easily facilitate a 20% y-o-y growth (see: American dream).
Moving up the value chain
Gupta believes moving from generics drugs to specialty areas will drive
a large part of the journey to $5 billion. Specialty includes five areas: oral
contraceptives, ophthalmology, dermatology, asthma and biosimilars (generic
equivalents of biotech drugs, such as insulin). “Both asthma and biosimilars
can become $1-billion verticals each in the next eight to 10 years,” he
predicts. “Dermatology can bring in $200 million in three years, while oral
contraceptives can bring in $150 million. Ophthalmology will account for
another $100 million.”
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But, while oral contraceptives bring in $50 million a year, Lupin is yet
to get off the block in ophthalmology and dermatology. It will be another three
years before the company is ready to make filings for asthma and biosimilars,
which means the products won’t even hit the market before 2018 and they will
have no role to play in achieving the $5-billion goal.
In which case, how will Lupin get there? The short answer: inorganic
growth. Lupin is actively seeking acquisitions in Latin America, especially its
biggest markets, Brazil ($12 billion generics market) and Mexico ($8 billion),
but is yet to find a suitable target. “There are many companies here with
turnover of $50-100 million. We have looked at 10 companies at least, but none
of the deals came to fruition,” he says. Most pharma companies in the region
are owned by first-generation promoters, who are all too aware of the market
potential — generics have an over 60% share — so valuations are often
prohibitively high. “If deals in the US are struck at 10-12 times Ebitda, it is
15-18 times in LatAm,” says Gupta.
It’s also not an easy market, warn analysts. Surjit Pal, analyst at
Prabhudas Lilladher, points out that Latin America is characterised by
whimsical regulations and a bad workforce. “There is no doubt that it is
attractive, but also extremely difficult. Firms like Dr Reddy’s, Torrent and
Strides have not done well in this region,” he adds. But Gupta is convinced of
the potential and, as long as the deal matches the company philosophy — payback
of not more than seven years — he will go ahead. “I am certain we will have a
presence of consequence there in five years. But for that, we will have to
loosen our purse strings.”
Opportunities in other geographies may be far more limited. In FY13,
Europe brought in just 2% of revenues. While Gupta dismisses western Europe as
“difficult”, Turkey, Poland and Russia remain attractive. “We will need to
build a sales force, since this is a branded generics market. We make very
little money in this huge market, but it will be of some consequence in five
years,” he maintains. South Africa, Australia and the Philippines, too, remain
bit players for Lupin, contributing just 9% to FY13 income. While Japan
continues to grow well, more acquisitions there seem unlikely — so far, the
company has made two buyouts there: Kyowa and I’rom in 2011 for an estimated
$50 million. India, too, seems set to remain an organic play. “The fact is that
nothing is available. Besides, high valuations here mean it will be difficult
to get returns,” sighs Gupta.
In India, Lupin is already in a leadership position in TB, diabetes and
cardiovascular drugs. If it has to grow further in these areas, it will have to
take market share from other players. “That is not easy,” acknowledges Gupta.
But there is still scope for growth in rural markets and over-the-counter drugs
and the company has an insignificant presence in cancer and injectables. So, is
there potential at home? India revenues grew 22% to touch Rs 2,252 crore in
FY13, but CLSA’s Bakhru maintains things will start slowing down. “There is a
constraint on discretionary expenditure, which will cut across sectors. That is
coupled with the tightening of new drug approvals,” he says.
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Lupin’s track record on drug discovery, too, is a can-do-better. Gupta,
who leads this division, concedes that the company had nothing to show at the
end of seven years’ work. Lupin’s peers agree that it’s a difficult business.
In an earlier interaction withOutlook Business, GV Prasad, chairman
and CEO, Dr Reddy’s Laboratories, acknowledged that getting a new molecule
to the market is a huge challenge, because one needs deep pockets and large
research budgets. “Companies are developing their own innovation models and
combining it with their generic and services business,” he explained. His
company, he added, was looking at areas where the risk was lower and where the
translation from lab to commercial products was higher.
Gupta, too, remains optimistic. Lupin’s first compounds in the
metabolic/endocrine disorders, pain and inflammation, autoimmune diseases, CNS
disorders, cancer and infectious diseases categories have entered phase 2 of
clinical trials, with more compounds entering phase 1. “If we don’t have success
with drug discovery in three or four years, something must be very wrong,” he
says confidently.
He is just as optimistic when it comes to predicting Lupin’s course over
the next few years. “We have always been known for 20-25% growth. We will continue
to do that with a focus on research, acquisitions and high-quality execution.”
Sharma agrees. “We have always scored when it comes to differentiation and
having a good value-proposition. Yes, the dynamics are changing in the global
pharma business, but we are ready for it.” The name Lupin is derived from a
flower, but the word, in Latin, also means wolf. This one is certainly on the
prowl.
Natural Instinct
FMCG major Dabur is looking to dig deep in existing categories, both in
India and overseas. Will the move pay off?
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Special Issue: The Outperformers
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Remember chyawanprash? It was the thick, greasy paste from a distinctive
white and red plastic jar that your mother and grandmom shoved down your throat
when you were in school. Now, it’s available in orange, mixed fruit and mango
flavours (there’s even a sugar-free variant) and comes in slick, ergonomic
colourful plastic containers. “We have to present Ayurveda to people in modern
formats,” says Krishan Kumar Chutani earnestly. And the executive
vice-president of Dabur India isn’t talking only of chyawanprash. He asks an
assistant to fetch old packs of Honitus and Stresscom and places the cough
syrup and strip of stress-relieving tablets next to the latest packaging. “See?
Now, don’t these new packs look premium,” he asks, comparing Dabur’s efforts
with garment and home decor chain, Fabindia. “It sells the same traditional
stuff, just like others, but presents it in a modern format. That’s what we
have to do as well.”
New packaging, new products and new geographies may not seem like a
drastic change in strategy, but this is Dabur, a 129-year-old family business
that started professionalising less than 20 years ago. Things happen slowly
here. “Our strategy is not about opportunistic growth,” confirms Sunil Duggal,
the man at the helm of Dabur India. “We have focused on certain portfolios and
geographies and are aggressively seeking growth there.” The 56-year-old Duggal
joined Dabur in 1995 as a general manager, at a time when it was an
internal-looking, promoter-run company that barely scraped together Rs 100 crore
in revenue. Over the years, he climbed up the ranks and as the promoters
stepped aside for professionals, became the CEO in 2002. But it’s really in the
past five years that the consumer goods company has come into its own. Between
FY09 and FY13, sales have more than doubled, from Rs 2,805 crore to Rs 6,176
crore. Ebitda reached Rs 1,120 crore from Rs 520 crore, while profit after tax
nearly doubled from Rs 391 crore to Rs 766 crore. Investors, too, seem to
approve of the Delhi-based company’s efforts — market capitalisation tripled in
the past five years, from Rs 8,540 crore to Rs 28,450 crore. Here’s what Dabur
did right.
A managed portfolio
Perhaps the biggest plus for Dabur is its diversified portfolio. Apart
from the 300-odd Ayurvedic medicines and products that are sold over the
counter and by prescription, the domestic business (accounting for 69% of
sales) is divided between four verticals — health care (chyawanprash, honey, glucose,
etc.), personal care (hair, skin and oral care), food (mostly packed fruit
juice) and home care (Odonil, etc.). (see: Charting a different course) “Within
these verticals, we have scaled up successfully and built capabilities,
platforms and levers of growth, organically and through acquisitions,” says
Duggal. Certainly, Dabur has 14 brands that are worth over Rs 100 crore each,
including Fem and Odonil, which were acquisitions, as well as homegrown brands
such as Real, Hajmola, Dabur Amla and Dabur Chyawanprash. “It takes time to
build brands in FMCG. But in just the past two years, Fem, Glucose-D and Odonil
became Rs 100-crore brands,” adds Chutani. “Dabur has a robust strategy. It
believes in segmentation and reach, and is not afraid of using celebrities. So,
it has high brand salience,” says Jagdeep Kapoor, chairman and managing
director, Samsika Marketing.
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At the same time, while Dabur is No.1 in packed juice and niche areas
such as digestives (Hajmola) and cosmetic bleach (Fem), none of its products is
the category leader in mainstream FMCG categories such as skincare, haircare
and oral care — which cannot be a positive for the country’s fourth-largest
FMCG company. “Dabur should look at newer categories and add growth. It is
sticking to categories that do not have much growth in volume terms,” says A
Mahendran, former MD, Godrej Consumer Products (GCPL).
Still, analysts give Dabur points for focusing on a few categories and
offering staple products within these. Chutani also points to the changed
thinking within the firm, which is to offer better packaging and make
traditional Ayurvedic products appealing to a wider customer base. “Ten years
ago, we would stress the purity of our honey. Now, we say honey is better than
sugar and position it as a replacement for sugar,” he proffers an example.
Chyawanprash, too, is now promoted as building immunity and something that
makes you “andar se strong” rather than a general health tonic. “Health needs
have multiplied and we have aligned ourselves with such trends, which has led
to constant growth,” he adds.
What’s also brought in the numbers in the personal and home care
segments is new product launches and investment in existing products. “After
Unilever, Dabur is easily one of the most diversified companies,” says Abneesh
Rai, associate director of research at Edelweiss Capital. “Diversified
companies don’t need to keep launching new categories as long as they innovate
within existing categories.”
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Dabur seems to have been working on that model. In the past couple of
years, it has launched new variants in Fem skincare and bleach, a gel variant
in Odonil insect repellant and Gulabari moisturising lotion. In hair oil, where
it already had a presence in amla and coconut oil, last year, the company
launched almond hair oil and claims to have already gained close to 10% market
share. “In the north, our strategy is to convert loose mustard oil users to
amla oil. In the south, we launched localised brands, Dabur Amla Nelli in Tamil
Nadu and Dabur Amla Vasuri in Andhra Pradesh,” says George Agnello, executive
director, sales, Dabur India.
Medicines and Ayurvedic formulations, though, can’t be sold the way FMCG
products are, so three years ago, Dabur adopted what it calls the 3E approach:
education of customer, expert opinions from doctors, anganwadi workers etc.,
and editorial, which is third-party advocacy through medical associations,
journals etc. The result: more than 16% growth in the consumer healthcare division
in FY13.
Meanwhile, in foods, the lion’s share of revenues comes from the packed
juices business (sold under the Real, Activ and Burrst brands). While Dabur is
the market leader here, with a 54% share of a Rs 1,100-crore category,
“Competition is warming up now with other players getting in,” warns Bhavesh
Kumar Jain, analyst at Sushil Finance. Closest rival Tropicana, which has a 30%
share, is strong in west India. Jain points out that Pioma Industries’ Rasna,
too, has launched packed fruit juice now. Another worry is that Dabur imports
about 30-40% of the raw material and packaging for the juices business and
import dependence can lead to margin pressures as the rupee depreciates.
Chutani doesn’t believe it’s a big threat, saying the company can easily absorb
these costs. As things stand, Dabur is banking on new variants and brand
extensions in the juice business to draw in more customers and increase
stickiness of existing buyers. In the past year, the company has launched
fibre-enriched juices and juice-based drinking yoghurt and now plans to launch
coconut water, all under the Activ sub-brand. Real’s weak presence in south
India is also likely to get a boost, thanks to improved supply from a
recently-commissioned plant in Sri Lanka. But juices are a predominantly urban
phenomenon. Like other FMCG players, Dabur, too, is turning its attention to
rural India.
It’s project time
The focus on the hinterland is not only because rivals are making a play
for the hinterland; according to NSSO, between 2009 and 2012, increase in
monthly per capita expenditure in rural India (19.2%) was higher than in urban
India (17.3%). Besides, Nielsen estimates the rural FMCG potential to be as
much as $100 billion by 2025. In such a scenario, Dabur’s poor penetration into
rural India could be a huge hurdle for future growth (see: Hinterland calling).
Accordingly, in FY13, the company rolled out Project Double with the objective
of doubling its direct coverage of villages in 10 states that Agnello says
represent “72% of the FMCG rural potential in India”. Already, direct village
coverage has increased from 17,882 in March 2012 to 30,091 a year later.
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The project isn’t about only expanding reach, but also increasing the
depth and effectiveness of the reach. Agnello recalls a recent visit to a
village in West Bengal that highlighted the need to take note of local habits
and customs. “Our local pointman asked me to be ready at 6 am. This was
surprising because FMCG sales people usually make market visits after 10 am.
But when I took his advice and turned up at 6 am, I realised that in that
village, stores open between 6 and 10, after which the storeowners shut shop
and go to their fields,” Agnello recounts. Based on that insight, in the past
year, Dabur has hired over 1,000 people in villages across the 10 states to
improve local awareness.
Project Double is only one of several projects Dabur has
undertaken in the past five years to improve efficiency in processes and
distribution. In FY12, the company initiated Project Speed, under which it
reorganised distribution to focus on its three main verticals, rationalised
distributor count from 4,500 to 3,600 (current strength: 5,000) and also merged
Fem’s distribution (which was acquired two years previously) with the existing
consumer care division.
Dabur has also embraced technology in a big way, especially when it
comes to operations. Agnello points out that all salespeople have been provided
smartphones with which they can upload daily reports, and share live reports
and data analysis. “Sales loss due to poor ordering has reduced considerably because
of this,” he adds. Teams visiting Ayurvedic doctors now carry 10-inch tablets
with product testimonies and archived clinical studies. Some 200 sales
personnel at Dabur have already been provided with tablets and the number is
likely to increase in the coming years. Meanwhile, its focus on domestic
markets doesn’t mean Dabur has lost sight of the world stage.
Going global
Like most Indian FMCG companies, Dabur’s first exports were to the
Indian diaspora in West Asia, since there was a ready market there. That was
back in the 1980s and the company started a franchise in Dubai in 1989 seeing
the heavy demand, which it followed up with manufacturing facilities in Dubai
and Egypt in the 1990s. The international business was consolidated under a
separate company, Dabur International, in 2003, but the focus on organic growth
continued as manufacturing facilities were set up in Nigeria and Bangladesh.
“We have defined our core geography as being the Indian subcontinent, greater
MENA [Middle East and North Africa] region and all of Africa,” says Duggal.
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It was only in 2010-11 that a shift in strategy occurred, and Dabur made
two overseas acquisitions: Hobi group in Turkey for $69 million and Namaste
Labs in the US for $100 million. The results: a mixed bag. Although
international business’ contribution to the topline has grown from 25% in FY09
to 31% in FY13, the Namaste Labs acquisition is still to pay off. Where Hobi
grew 42% in FY13, sales at the American company were down 10%. “Growth in
Namaste business was disappointing in FY13 as the company exercised a number of
strategic initiatives by way of distribution restructuring in the US and
rebranding in Africa,” says Navin Kulkarni, vice-president, Phillip Capital.
Adds GCPL’s Mahendran, “Post-acquisition integration has to be done properly
for FMCG overseas acquisitions to work well.” Duggal defends the inorganic
growth plan, though. “The paybacks are quick and they enable us to get into new
categories/geographies that would otherwise take very long to build,” he says.
And the Namaste deal is for “future growth”, he avers. “It has a strong
component of Africa-relevant products, which will be useful in building
business there, especially the sub-Saharan region.”
Analysts remain sceptical. Edelweiss’ Rai says that even though Namaste
posted 15% growth in the last quarter, it needs to be “seen in the light of the
low base due to degrowth”. Further, an Ambit Capital report points out,
“[Dabur’s] capital deployment towards M&A, especially for the Namaste
business has been disappointing so far, due to: (a) distribution-related
disruptions; (b) rebranding of the US portfolio in FY13 due to regulatory
constraints; and (c) fairly large management reshuffles in the US business.
Hence, Namaste’s growth rates are unlikely to normalise for at least another 12
months.” As it happens, that’s not all analysts are wary of.
Future tense?
As much as Dabur has outperformed the market in the past half-decade, it
has also come in for its share of criticism. For one, the mass appeal of its
products itself is cause for concern, say some analysts. Nearly 45% of the
company’s revenues come from oral care, hair care and skin care, which face
headwinds from a combination of mass-market positioning; intense competition
from Colgate, Marico and Hindustan Unilever; and relatively high penetration of
these segments, especially in urban India, point out analysts. Another 23% of
the portfolio includes health supplements and digestives, which offer no scope
for premiumisation. Moreover, products such as Hajmola have achieved more than
80% market penetration in India and Glucose-D faces tough competition from
Heinz’s Glucon-D. “These factors limit Dabur’s scope for strong revenue growth,
gross margin benefits and better defence against competition. The juices and
home care segments (15% of consolidated revenue) remain the only two areas of
strength in its portfolio,” says the Ambit report.
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However, industry veteran Mahendran has a different take. “Perhaps
Dabur’s Ayurvedic imagery comes in the way of its products being perceived as
premium. Having an independent brand not associated with the Dabur brand will
help.” But then, that’s another mark against the company. Kulkarni of Phillip
Capital says Dabur isn’t a consistent outperformer, unlike Marico. “Dabur has
numerous brands and is able to invest well in these only in cycles when
commodity prices are stable. It will do well for the next year or two, but it
isn’t consistent,” he explains.
For his part, Duggal remains unfazed by investors’ worries and believes
the current categories offer Dabur enough headroom to grow over the next three
years, not just in India, but overseas as well. “In India, domains such as skin
care and home care can be scaled up massively. Overseas, while we are a
personal care company, 80% of our business is from hair care. So we have to
scale up oral care and skin care, which have huge potential,” he says. That
being the case, Dabur will need more than one dose of chyawanprash to
outperform once again.
Life In The Fast Lane
Amara Raja has a stellar record to show, but its ambition of a
three-fold jump in revenue needs more than just the ordinary
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Special Issue: The Outperformers
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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
Rs 1,311 crore to Rs 2,961 crore, a growth of 2.3 times. Net profit over the
same period has gone up over 3.6 times, from Rs 80 crore to Rs 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 Rs 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.
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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.
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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 Rs 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 Rs 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.
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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 Rs 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 Rs 88 crore on its books for FY13 (down from Rs 286 crore in FY09) with
an interest outgo of only Rs 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.
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