Oct. 15 (Bloomberg) -- Amara Raja Batteries Ltd., backed by the largest U.S. auto-parts maker, is setting up a plant to make batteries for home backup power systems to revive profit growth that’s slowing amid weakening car sales in India.
The company, 26 percent owned by Johnson Controls Inc., is targeting a fivefold jump in revenue from selling backup power batteries in the next three years, Chief Financial Officer K. Suresh said in an interview in Hyderabad. It will build a factory in the southern state of Andhra Pradesh, which will start making the product by March 2016, he said.
India’s chronic power shortages are an opportunity for Amara Raja to reduce its reliance on automotive batteries. The company will vie with competitors including the local unit of Schneider Electric SA for a share of a market for inverters that Frost & Sullivan estimates will more than triple to $1.4 billion in the seven years through March 2017.
“With the power deficit growing every day, the demand for inverters will only keep rising and very soon, every household will require one,” said Suresh. “We expect inverters to be our fastest-growing segment.”
Power shortages continue to plague India as inadequate availability of fuel, losses at state-owned distribution companies and delays in government approvals discourage private investments in utilities. Peak electricity supply fell 4.6 percent short of demand in the six months ended September, according to the Central Electricity Authority.
Inverters, an electrical power converter that changes direct current from a battery to alternating current, have gained popularity in India for use in homes over the past decade as they are silent and convenient to use.
Amara Raja will have to compete with Exide Industries Ltd., India’s biggest maker of automotive batteries, Luminous Power Technologies Pvt., in which Schneider Electric bought a 74 percent stake in 2011, and Su-Kam Power Systems Ltd.
“To replicate the kind of brand recall Amara Raja has in the auto segment in the inverter segment won’t be easy,” said Arun Kejriwal, director, Kejriwal Research & Investments Pvt. “It will require a sustained marketing push, which will come at a cost.”
The maker of Amaron brand of batteries currently buys inverter batteries from small manufacturers and sells them under its brand name, Suresh said. It will spend 1.5 billion rupees ($24 million) on the factory, he said.
“Right now, we are only participating in the distribution margin,” said Suresh. “Once I start manufacturing, I would also be participating in the manufacturing margin.”
The business has operating profit margin of about 4.5 percent and that will increase to double digits once the company starts producing on its own, he said.
Operating profit margins from the business can be about 15 percent with its own manufacturing, said Rajasekhar R., an analyst with Cholamandalam Securities Ltd.
Amara Raja sells its batteries in more than 21,000 retail stores and has expanded its PowerZone outlets to 1,100 outlets in rural and semi-urban areas, according to its annual report.
“It’s a strong growth area considering the power shortages prevalent in the country,” said Mamta Verma, an analyst at DC India Research LLP. “They already have a strong distribution network which will help them gain market share.”
Annual profit and sales at Amara Raja, which has partnered Johnson Controls since 1997, are expected to expand at a slower pace for a second year in the 12 months ending March. Net income will rise 22 percent to 3.5 billion rupees in the period, according to the median of 22 analysts’ estimates compiled by Bloomberg. Sales will probably increase 21 percent.
Shares of Amara Raja rose 1.7 percent to 309.50 rupees at the close in Mumbai. The stock has gained 30 percent in Mumbai trading this year, compared with the 5.8 percent increase in the benchmark S&P BSE Sensex.
Inverter batteries accounted for about 7 percent of Amara Raja’s sales of 29.6 billion rupees in the year ended March. The company targets the business to generate 10 billion rupees in revenue in the 12 months ending March 2016, Suresh said.
The company gets 40 percent revenue from sale of batteries to provide power backup to telecommunications towers, uninterrupted power supply for computers and inverter batteries.
The growth in the UPS business is slowing as it is linked to government spending on e-governance, which is not taking place, Suresh said. While addition of new mobile-phone towers has slowed, there is demand for replacing diesel-powered generators with batteries, he said.
Amara Raja, which gets more than half its revenue from the automotive segment, is benefiting from demand for replacement batteries. Car sales in India had surged in 2009 and 2010.
About 75 percent of its automotive battery sales comes from the replacement market, Suresh said. Sales directly to automakers fell 2 percent in the quarter ended June, he said.
India’s automakers’ body last month forecast the first annual drop in passenger vehicle sales in more than a decade as an economic slowdown damps demand for cars and SUVs.
Amara Raja plans to spend 5.1 billion rupees to expand its automotive battery capacity, which will be available by the quarter ending in September 2014, Suresh said.
“We expect things to look up in the auto industry by that time,” said Suresh.
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