Batteries included: Amara Raja's game plan

The battery industry is in the throes of change with the emergence of lithium-ion batteries, which are enjoying a boom in demand thanks to the rapid adoption of electric vehicles.

If Amara Raja does not invest in the new technology, it will be finished. If it does, Galla explains, its margins will take a hit in the interim as the imported content in a lithium-ion battery will be high and the stock market will punish the company.

The Amara Raja boss, however, is clear that he will not miss the bus. A lot has happened in the last few quarters. Amara Raja has announced a ₹9,500 crore investment in a lithium-ion Giga factory at Divitipalli in Mehaboob Nagar district of Telangana (a Giga factory produces lithium-Ion batteries on a large scale). It has laid the foundation for a state-of-the-art research facility near Hyderabad, which will look into not just lithium-ion batteries but also other advanced cell chemistries. Indeed, over the long term, Amara Raja harbours ambitions of becoming India’s biggest li-ion battery maker.

But can Amara Raja realistically think of becoming the leader in the domestic lithium-ion battery space? To do so, it needs to develop an efficient product that is competitive both in terms of performance and cost, not just in India, but globally. It has to get a supply chain in place. Getting all this right the first time is critical as it needs to scale up fast to ensure an optimal return on investment. At the same time, it has to achieve all of this without losing focus on its lead-acid business. For good reason—because that is its core business, and one that is doing rather well.

Lead-acid batteries serve as a source of power in internal combustion engine powered automobiles, in telecom towers, and in various industrial applications. This is Amara Raja’s golden goose—one in three batteries sold for automotive and industrial use in India is from Amara Raja. The company’s Amaron brand is well established and it has almost caught up with market leader Exide Industries in the replacement market. In the first quarter of 2023-24, Amara Raja posted its highest-ever quarterly revenue of ₹2,796 crore. Last year, the company generated ₹10,386 crore in revenue thanks to the lead-acid business.

Simply put, Galla has to invest his energy into building the lithium-ion battery business from scratch, without taking his focus off the lead-acid battery business. The two businesses are very different: lead-acid batteries are a high-volume, low-value and reasonably high-margin business; lithium-ion batteries are a high-value, low-volume and low-margin business. Can Amara Raja successfully manage the two diverse business models simultaneously?

Galla certainly thinks so. Going forward, he plans to expand the global footprint of the lead-acid batteries business. At the same time, he has begun building the lithium-ion battery business from the ground up. If that is not enough, he also wants the company to transition from being a battery maker to a services provider for the mobility and energy storage space. Consequently, it is in the process of changing its name to Amara Raja Energy & Mobility Ltd.

Baton change

All of these developments are taking place amid a generational change at Amara Raja. The company’s founder and Galla’s father, 85-year-old Ramachandra N Galla, chose to retire in June 2021, after 36 years, to focus on social work.

Galla, popularly known as Jay, took over as the chairman and brought the third generation in to run the business. His nephews, Harshavardhana Gourineni (Harsha) and Vikramadithya Gourineni (Vikram), have joined as executive directors. Harsha takes care of the lead-acid business while Vikram handles the new-energy business, which includes the lithium-ion venture.

The advent of the new generation has come as a welcome relief for Galla, who has to devote considerable time to politics as well—he is a Lok Sabha member for the Telugu Desam Party (TDP) from Guntur in Andhra Pradesh and also the TDP’s Parliamentary party leader.

Meanwhile, his sons, Ashok Galla and Siddharth Galla, are pursuing their passion for acting under the mentorship of their uncle, Telugu superstar Mahesh Babu.

A long sunset?

In the early 1990s, Amara Raja took advantage of a technology shift—the emergence of maintenance-free batteries—to become a leading player in the lead-acid battery industry. Back then, the company did not have a strong business to defend while pursuing new technology. Now, it does.

It is not clear how long lead-acid batteries, which have dominated the energy space for a century, will last. Thirty-five–year-old-Harsha sees a very long sunset, if at all there is one.

Lithium-ion batteries are making rapid inroads thanks to their longer life, higher energy density, quicker discharge capability and smaller size. That does not necessarily mean the end of lead-acid batteries. They can still find use where space and weight are not a factor, in industries and residences, for instance, explains Harsha. Not many know that electric vehicles, too, have lead-acid batteries to power their lighting and electronics.

“We are certain there will be no sudden death. If at all there is a sunset, the horizon is far and we can’t even see it," Galla says.

Amara Raja has therefore decided to continue investing in the lead-acid battery business.

Global ambitions

The company has big overseas ambitions. “We currently have just 2.5% of the global market. There is huge headroom for growth," says Harsha. Amara Raja exports 3 million units of lead-acid batteries worth about ₹1,000 crore (accounting for around 15% of its total revenue). It is a market leader in Singapore, Malaysia and Cambodia. The company is the single-largest brand in the United Arab Emirates. “We want to go deeper into existing markets and enter new geographies," says Harsha.

Amara Raja is also looking at building capacity abroad. “We already export 3 million units. A facility with 6-million-unit output will be ideal either in South-East Asia or the Middle East," says Galla.

Expansion within India is also under consideration, as the company was forced to slow down its exports a bit to meet domestic demand, which shot up post-covid. The company may shortly announce plans to build capacity outside Andhra Pradesh (where the existing capacity is).

Harsha expects revenues from the lead-acid business to touch $3 billion (from current $ 1.2 billion) in the next 5-7 years.

Apart from growth, the company is also looking at improving efficiency in its existing operations. Amara Raja’s operating margins have declined (to 12.8% in the first quarter of 2023-24) from the heady levels of 16% earlier due to high lead prices.

And so, it is trying to cut costs and improve efficiency. To that end, it is setting up a recycling unit that will recover 150,000 tonnes of lead, with an initial investment of ₹400 crore, in Tamil Nadu. This unit will meet 30% of Amara Raja’s annual lead requirement.

It is also investing in research to improve lead-acid batteries. “We believe in the hope of the unknown," says Harsha, adding, “new technology, new material and new processes may make lead-acid batteries a lot more efficient than today. If that happens, they could last for another 100 years."

The future

Even if lead-acid batteries last forever, the company needs to master lithium-ion technology and deliver quality products if it wants to be a player to reckon with in that space. The rising adoption of electric vehicles and increasing investment in battery energy storage systems mean that demand for lithium-ion batteries will only gather pace.

The company has already committed a large investment of ₹9,500 crore to Amara Raja Advanced Cell Technologies Private Ltd, its wholly owned subsidiary, for the Giga factory that will come up on 250 acres at Divitipalli. It will have a capacity of 16 GWh of lithium cells and 5GWh of battery packs.

“Work has already started in the Giga factory, and we expect it to be operational in 24 months," says 32-year-old Vikram, who spearheads the new energy business. But the company hopes to be in the market before that. It will start work on a packing facility, where imported lithium cells will be assembled.

Amara Raja has adopted a different strategy in developing a lithium-ion battery compared to its approach to lead-acid batteries, where it had accessed technology from the US-based Johnson Controls through a joint venture. “In the early 1990s, we were a ₹180 crore company with little technical expertise when we chose to partner with Johnson Controls. Today, we are a ₹10,000 crore company with a lot more resources and capabilities. So, we have decided to develop the technology ourselves," Galla explains.

This change in approach came with experience. The alliance with Johnson Controls restricted Amara Raja from exploring overseas markets. In 2019, the joint venture was terminated, and the company began to export its lead-acid batteries.

There is another reason as well; the company has chosen to focus on batteries for light electric vehicles such as two-wheelers and three-wheelers in India. “This is a segment that is taking off rapidly and volumes will be high," says Vikram, adding, “no one in the world has a readymade solution for these types of batteries. It is better to develop them ourselves."

Amara Raja has thus adopted a ‘string of pearls’ strategy where it will develop the technology on its own, only tying up with partners for specific requirements. The company set up an R&D line many months ago in Tirupati to validate the product and process. “Our A sample (the first working sample) is ready, and we will be sending it to some of our customers for their feedback," says Vikram. It will then develop the B and C samples before starting a pilot line at its Giga factory in the next 18 to 24 months.

“While developing your own technology has its benefits, the challenge is that you need to get it right quickly. Lithium-ion cell chemistry is complicated. In China, where 80% of lithium-ion battery production happens, manufacturers took considerable time to stabilize production. The pass-through yield won’t be optimal initially and wastage will be in excess of 50%," says an expert who consults with battery companies in India and abroad.

Market leader Exide Batteries, Amara Raja’s biggest competitor, has opted for a technical tie-up with a Chinese manufacturer. “Such a tie-up will help you get off the ground faster, partner with suppliers quickly, with less risk of failures or delays," adds the expert, who spoke on condition of anonymity.

Investing in R&D

But Amara Raja is willing to take that risk as it wants to be a technology leader. In August, it laid the foundation for its ₹200 crore E Positive Energy Labs, an advanced energy research and innovation centre near Hyderabad airport. The centre will have facilities for material research, prototyping, product lifecycle analysis and proof of concept demonstration.

“This facility, apart from meeting Amara Raja’s needs, will serve as a catalyst for multi-stakeholder collaboration, including leading research institutions in India and abroad," says Vikram. To start with, it will work on lithium-ion batteries and then focus on other chemistries such as sodium-ion and so on.

Galla feels that Amara Raja is in the best position to achieve what it has set out to do. It is strong financially with strong reserves and almost no debt. But the stock market has re-rated the company in recent years. Its stock is currently trading at ₹650 levels as against the ₹900 levels of a few years ago.

Financial services firm B&K Securities, in its August report, explains why. “Challenges of high investment for lithium-ion plant with uncertainty in terms of demand and battery technology remain," it says. Further, large original equipment manufacturers are expected to control battery technology as battery cost forms a major cost of an electric vehicle.

The next few quarters are critical for Amara Raja, and Galla can rest easy only after the company’s Amaron brand establishes its dominance in the lithium-ion battery space as well. For now, he says, “The market must view our new energy business like a start-up."