Dry cell batteries: Charged up by competition, but...

B. Krishnakumar

AFTER burning bright in 1999-2000, the Rs 1,500-crore dry cell battery industry appears to be dimming.

Following growth rates in excess of 10 per cent in the previous fiscal, dry cell production declined marginally in the first four months this year. While the delayed monsoons affected demand, rising input costs and growing competition sapped the profitability of dry cell battery producers.

While Indo National and Lakhanpal National reported a decline in post-tax earnings, the market leader, Eveready Industries, ended the June 2000 quarter with a net loss of Rs 11.28 crore. To compound the problems of the domestic manufacturers, dry cells have now been placed in the OGL. Apart from this, the recent changes in the marketplace are set to alter the industry's competitive dynamics.

Global major Duracell (brand owned by Gillette) acquired Geep Industrial Syndicate's production facilities while Eveready Industries plans to either sell its battery division or rope in a joint venture partner. Gillette is reportedly interested in acquiring Eveready's battery division. On the other hand, consumer electronics major BPL has entered the dry cell battery market. Thus, the industry is quite surcharged.

Click here for Table

Small-sized batteries charged up

Cf301,8.2,9>A dry cell battery basically converts chemical energy into electrical. Based on the size, the dry cell batteries are classified into three categories -- UM1 (large-sized batteries), UM2 (medium-sized batteries) and UM3 (pencil-sized or AAA-sized batteries). Batteries are either paper or metal clad. Paper-clad batteries, suitable for high-drain applications and prone to leakage, are cheaper than the metal-clad ones.

UM1 or large-size batteries are primarily used in transistor radios and torchlights. The demand for this battery flows primarily from the rural areas where transistor radios and torchlights are widely used. Thus, the demand for this battery depends on agricultural incomes.

Thanks to the good monsoon and the resultant improved farm income levels, the UM1 segment recorded an impressive growth over the last four years. However, the delayed onset of the monsoon and the drought of March-June affected the demand for UM1 batteries this current year. As a result, the production of this battery declined to 37.65 lakh pieces in the first four months of this year compared to 39.90 lakh pieces in the corresponding previous period.

Anyway, the share of this segment has been declining steadily over the years because of the higher use of the UM3, or the AAA-size, batteries. The growing offtake of electronic gadgets has increased the demand for AAA batteries.The UM1 batteries' share in the total dry cell battery production has been dropping over the past three years, from about 85 per cent to about 60 per cent.

The UM2, or the medium-size batteries, segment is not very popular, and its share of the total declined from about 4 per cent in 1996-97 to 2.7 per cent now.

The UM3 (AAA-size) batteries recorded the highest growth rate over the last four years. The share of this segment in the total improved from 20 per cent in 1994-95 to 37 per cent. This segment is slated to grow at a healthy 10-12 per cent. Given the nature of application, the demand for this battery comes primarily from the urban areas. In the first four months this year, the production of AAA batteries grew 4 per cent to 2.34 lakh pieces.

More hats in the ring

The dry cell battery industry used to be dominated by Eveready Industries, Indo National, Lakhanpal National and Geep Industrial Syndicate. The recent entry of Gillette (through Duracell) and BPL has added to the competitive pressure.

Eveready is the market leader, followed by Indo National (Nippo brand), and Lakhanpal National (it enjoys a strong position in the UM3 segment). Geep Industrial Syndicate is a marginal player but with significant exposure in the UM1 segment. Its presence is limited to a few northern States. With the acquisition of its production facilities and brand name, Geep has now come under Gillette's fold. BPL, the latest entrant, has managed to carve a place for itself in the fast-moving AAA segment through the Excell range.

High-end batteries

Apart size, dry cell batteries can also be categorised into zinc and alkaline batteries, based on the electrolyte used. The alkaline battery costs twice as much as the traditional zinc cell. The alkaline battery costs twice as much as a traditional zinc carbon battery.

The higher pricing is because of the relatively higher cost of production as also the better and lasting performance. BPL, the only listed company producing both alkaline and zinc carbon batteries, sells its alkaline batteries at around Rs 20 per piece, while its zinc battery is priced at around Rs 7 per piece.

Click here for Chart

Alkaline batteries are typically suited for high-drain applications, such as portable cassette players (walkman) and cameras. Given the prohibitive cost, the alkaline battery segment has not really taken off in India. This battery now accounts for less than 3 per cent of the total battery demand. In stark contrast, alkaline batteries are popular in developed economies. In the US, they have over 70 per cent of the total battery market, while in Europe the ratio is marginally lower at a little over 50 per cent.

In India, BPL and Duracell are the only major manufacturers of alkaline batteries. The alkaline battery production is capital-intensive. BPL invested Rs 130 crore to set up the alkaline battery unit with a capacity of about 75 million units.

Given the market conditions and the 20-million-unit alkaline battery segment, setting up exclusive alkaline battery lines would not be economically viable. However, since Lakhanpal National and Indo National have the technological backing of Matsushita Electric, they can access this technology if they so desire. With the easing of import norms, the two companies can also import and market alkaline batteries from their collaborator.

Limited power to charge

Cf301,8.2,9>The dry cell battery industry is highly raw material intensive, with their costs accounting for over 50 per cent of the turnover. The major raw materials used for the manufacture of dry cell batteries include zinc, carbon rods and manganese dioxide. Of the lot, zinc is the major input, accounting for about 35 per cent of the total raw material cost. Therefore, zinc's price movements would have a significant impact on the margins of dry cell manufacturers. After a relatively soft trend, zinc's prices have risen sharply in recent months. Besides, the rupee's recent depreciation against the dollar, and with the flare-up in crude prices have made other inputs, such as carbon rods and furnace oil, dearer.

On the other hand, the negligible differences in product appearance and quality, and the competitive pressure in the industry have prevented domestic producers from raising prices. They are handicapped in this also because volume growth is the key to improved performance. In fact, domestic battery prices have not been revised for over two years.

The profitability of domestic companies has therefore been strained by rising input costs. However, if the situation persists, industry majors would be forced to raise prices.

Open to global power

Cf301,8.2,9>Dry cell import has now been put on the Open General Licence (OGL) category, that is, there is no restriction on the import of dry cells. But the hefty import and countervailing duties of about 70 per cent (this includes other levies) should offer domestic producers reasonable protection. However, as protection barriers are progressively dismantled, the threat of cheaper imports is real for the domestic producer.

On the positive side, global majors Duracell, Energizer and Panasonic have a presence in Indian. Hence, imports from these companies are not likely to be a major threat as they already have a presence in India. Duracell, for instance, has production facilities in India and leverages the distribution network of its subsidiary -- Indian Shaving Products. Energizer, owned by Ralston Purina, has a presence in India through a tie-up with Eveready Industries. Matsushita Electric, owners of Panasonic and National brands, has teamed up Lakhanpal National and Indo National.

On the flip side, while top-notch global brands have a presence in India, cheaper imports could come from China and South-East Asia. While domestic majors are comfortably positioned in the present environment, a further reduction in the import tariff could heighten the competitive threat from cheaper imports.