High volumes, low profitability

B. Krishnakumar

THE FUTURE prospects of the battery industry is captured well by the following extract from the Director's Report of Indo National for the year ended March 2000: ``...Dry cell battery industry is witnessing intense competition among the players. In addition to this, the entry of other new players and the impact of globalisation has had an effect on all existing players of the industry.

The Import Policy announced by the Government recently has allowed free import of batteries and torch lights which will further increase competition...''

While the easing of import norms would have major implications for domestic companies, battery users now have a choice of an array of popular global brands. For the domestic producers there will be a persistent pressure on margins. The mounting competition from domestic and global brands will prevent domestic majors from raising prices to make up for the enhanced input costs.

Coupled with the steadily rising sales and other promotional costs, this will keep profitability under pressure. If Gillette manages to acquire Eveready Industries' battery business, it would lead to a drastic change in the industry's competitive dynamics. Given Gillette's strong brand image and financial muscle, others such as Indo National and Lakhanpal National could see a consistent pressure on performance and growth.

The aggressive stance of BPL is cause for more concern. After making its presence in the alkaline battery segment, BPL turned its attention to the zinc carbon segment. The company is steadily gaining ground in South India, and this should worry Indo National, which enjoyed a prominent presence in this region.

While competition is slated to pick up, there is substantial growth potential if the per capita consumption of batteries across Asian countries is any indication. Compared to an average per capita consumption of 24 batteries in Japan and five in the Philippines and Sri Lanka, the number is significantly lower at around two in India.

While the UM1 segment would continue to lose share in the total battery market, the AAA size or pencil batteries would continue to grow at a fast pace. The steady rise in the use of walkmans, cameras, quartz wall clocks and TV remote-control units will propel demand for the AAA batteries.

Apart from the overall growth in demand, the rate of growth of alkaline battery use would be another critical factor for the long-term prospects of domestic companies. In the present market situation, BPL and Indo National appear comfortably positioned to weather the highly competitive conditions.

Given that Eveready plans to sell its battery unit, the prospective acquirer would gain a competitive edge in the market place. Lakhanpal National needs to be more aggressive in marketing and promotional strategy to grow.

From an investment perspective, Indo National appears to be the only company worth looking at. The performance of Lakhanpal National has been rather lacklustre in recent years. BPL, on the other hand, is well positioned to tap the growing demand for dry cell batteries, though however, this is not its core operation. BPL's performance would be influenced more by the consumer electronics business. Gillette's core battery business is not a listed entity in India, but its overall business presence through Indian Shaving Products bears a close watch. Its other listed outfit, Geep Industrial Syndicate, is more or less a production outfit and as such any spurt in valuation in it appears unlikely.