Amara Raja Batteries Ltd Management Discussions.

Economic overview

Global economy

A year into the Covid-19 pandemic, the rising economic and personal toll continues to be a matter of concern, even as nations become more aggressive to inoculate its people.

2020 was unprecedented owing to the rapid spread of the virus across the globe and the stringent lockdowns enforced by Governments to contain its spread. As a result, the global GDP contracted by 3.3% - a deceleration far sharper than what the world endured owing to the global financial meltdown in 2009.

Prudent and unprecedented policy responses by nations across the globe helped in fiattening the pandemic curve. It built confidence among consumers and enterprises. This helped in a phased unlocking of restrictive measures. International trade in goods registered a V-shaped recovery.

The lockdown instituted across most nations, triggered an unparalleled demand collapse for oil, leading to a sharp decline in prices. This was further accelerated owing to the price war between Saudi Arabia and Russia. In

April 2020, WTI crude oil spot prices dipped below zero as oil producers struggled for the fast-depleting oil storage space.

The global oil market attained stability as the OPEC agreed to the single largest output cut in history (at 9.7 million barrels per day). As economic activity and global trade gained steam in the second half of 2020, oil prices climbed northward.

Going forward, the global economy is projected to grow at 6% in 2021, moderating to 4.4% in 2022 as consumption, investment and trade are expected to gradually improve supported by ongoing vaccination across the globe. These estimates depend on future course of the health crisis, the effectiveness of policy actions to limit continuing economic damage, commodity prices, and the adjustment capacity of the economy. Heightened geopolitical tensions and renewed trade wars will continue to be traditional downturn risks as well.

Indian economy

Aligned to the slide in global GDP, Indias economic progress was expected to contract. Indias GDP contracted by 7.3% in 2020-21 against a growth of 4.0% in 2019-20. This was marginally better than the earlier contraction estimate of 8% plus owing to a sharp V-shaped recovery by a resurgent India.

After a contraction in GDP for the first half of FY21 (a negative growth of 24.4% in Q1 and 7.4% in Q2), India recovered to post a positive GDP growth in Q3 at 0.5%, one of the few nations globally to emerge out of recession in such a short time period. As resurgence gained momentum, Indias GDP growth for Q4 of 2020-21 stood at 1.6%.

Among the sectors that comprise economic activity, the agriculture sector, which largely supports the rural economy, remained robust - it registered a growth of 3.6% in 2020-21 (lower than 4.3% growth recorded in 2019-20). After the expected de-growth in the manufacturing sector in the Q1 of 2020-21, the rebound was sharp as business activity and demand gained traction. Aligned to this trend, GST collections crossed the H 1 lakh crore mark during the second half of 2020-21 - it was H 1.23 lakh crore in March 2021, the highest collection since the launch of GST. Also, provisional net indirect tax collection in 2020-21 grew 12.3% annually to H10.71 lakh crore, exceeding the previous year collection of H 9.54 lakh crore.

In view of the economic momentum in Q4 of 2020-21, leading opinion makers had estimated a sharp growth in India GDP for 2021-22. But owing to the outbreak of the second wave of Covid-19 in India, these estimates have been revised downwards.

Business operations

AMARA RAJA Batteries Limited is one of the largest manufacturers of lead-acid batteries for industrial and automotive applications in the Indian storage battery industry. Headquartered at Hyderabad, India, the Company has two large manufacturing facilities at Karakambadi, Tirupati and Amara Raja Growth Corridor (ARGC) in Chittoor District, Andhra Pradesh, India. The Tirupati and Chittoor manufacturing facilities are benchmarked to the ISO/IATF16949, ISO 14001, OHSAS 18001 and EnMS 50001 standards. Business operations are managed by a team comprising a prudent mix of energy and experience.

The Companys automotive batteries and home UPS/ Inverter battery brands AMARONTM and PowerZoneTM respectively are distributed through its pan-India sales & service retail network. Amara Raja enjoys healthy OE relationships with all leading automobile manufacturers. It is also a leading private label supplier to prominent brands.

Amara Rajas entrenched pan-India distribution network comprising 30,000-plus AMARONTM and PowerZoneTM retailers has helped the Company sustain its competitive dominance in the aftermarket segment.

Performance in FY21

For Amara Raja, a fiscal which started with considerable uncertainty, ended on a high as it posted its best ever performance.

Amara Raja was among the first to commence supplying batteries to its customers, from its multiple warehouses across India as demand trickled in. Volumes upped towards the close of the first quarter as OE operations commenced. From the second quarter onward, demand continued northward owing to pent-up demand, pipeline filling by dealers and the festive season. The demand acceleration enabled the Company to operate its manufacturing infrastructure at peak utilisation. Demand from the agricultural sector remained steady right through the year owing to a normal monsoon and a good harvest prior to the monsoon.

Key Highlights for FY21

OE market Private Aftermarket Exports
Enhanced business volumes with leading 2-wheeler manufacturers Initiated supply of automotive batteries to Schneider Undertook registration of all partners in pollution control board, in accordance to BMHR rules Increased market share in focused countries like Malaysia, Thailand, Saudi Arabia & Sri Lanka
Started business with new 2-wheeler brands Received the license to market the ACDelco brand in India Ran a jump start campaign across India on FOC basis to support customers whose vehicles remained unused during the lockdown Introduced new warranty model in the Malaysian market
Secured 100% volumes for some fast moving 4-Wheeler brands Opened 2 more Pitstop, thus taking the tally of international Pitstop counts to 17
Initiated business with leading tractor brands Introduced a new range of tubular batteries for Inverter and E-rickshaw applications
Introduced new private label brands
Gained initial entry in Tubular Batteries business
Continued programs like service Training and Dealer meets

Optimism and opportunities

Automobile industry* in India is poised to grow at 12.7% CAGR between 2019-2026 to reach USD 512 billion by 2026.

Automobile industry market in India (in USD billion)2
(Includes new, used vehicles and associated services)

*THE AUTOMOBILE MARKET DISCLOSED ABOVE INCLUDES NEW VEHICLES (2019 DEPARTMENT OF HEAVY INDUSTRIES AND PUBLIC ENTERPRISES (GOI), USED CAR MARKET (MORDOR INTELLIGENCE REPORT), USED TWO WHEELERS MARKET (KEN RESEARCH REPORT) AND AUTO SERVICES MARKET THAT INCLUDES AUTO LOANS, AUTO INSURANCE, AUTOMOTIVE TYRE AND AUTOMOTIVE AFTERMARKET (RBI, ALLIED MARKET RESEARCH REPORT, MARKELINE RESEARCH REPORT AND GRANT THORNTON ANALYSIS)

Key growth drivers

Rising middle class and young population coupled with increasing disposable incomes and urbanisation is driving the growth of new vehicles sales in India.

Transparency, convenience and ease of transactions, digital banking and payments, certified quality of vehicles is driving the growth for used vehicles sales in India.

Theaverage duration of ownership across cars and two-wheelers is reducing due to increasing disposable income among consumers, introduction of new models in a shorter period, trade in benefits and buyback guarantees being offered by dealers.

The Indian auto industry will be driven by changing preference of consumers for personal mobility, increased disposable income and favourable government initiatives.

1) Passenger vehicles

The passenger vehicle (PV) segment in India is expected to grow up to 25% in 2021-22, even as shortage of semiconductors will continue to remain a key challenge for the industry.

Though industry volume will be impacted during Q1 FY2022, some normalcy is expected from June 2021 onwards, Indias dependency on overseas suppliers for semiconductor is likely to pose a challenge for the next 3-5 years.

As for capex, the industrys total investment outlay is estimated at H 28,000-33,000 crore during FY22-FY23; the incremental investments will primarily be for new product/ platforms and emission/safety compliance. Investment could be accelerated depending on the incentive structure under the PLI Scheme.

The aftermarket segment provides a larger and sustained business opportunity. This is owing to important realities:

India has a large and growing passenger vehicle base which requires batteries (see graph below); India has added more than 13 mn passenger vehicles between 2014 and 2018 which represent the immediate aftermarket opportunity A passenger vehicle, through its useful life, demands about 2-3 battery replacements; it means a fix larger opportunity than the OE market

The battery life is reducing owing to a) increasing use of the air conditioning in the car and b) more cranking due to road congestion The growing preference of the millennials to travel by road is also increasing the demand for batteries in the aftermarket segment Further, passenger vehicle owners are trending towards branded batteries owing to superior battery performance and extended battery life.

Two-wheelers: Currently, India is the second largest producer of two-wheelers in the world next only to China. One of the chief factors of more 2-wheeler ownership in India is poor public transport facility in many parts of India. Additionally, two-wheelers offer a great deal of convenience and mobility for the Indian family.

Moreover, the pandemic has prompted many individuals to move from shared and public transport to private transport for safety concerns. This trend has increased the demand for 2-wheelers across urban and rural India. Low interest rates are also contributing to a demand spike.

The Indian 2-wheeler market sales stood at 21.2 million units in 2019; it is expected to reach 26.6 million units by 2025 displaying a reasonable CAGR of 2.6% over the forecast period (2020-2025).

Moreover, India offers a huge aftermarket opportunity owing to the large 2-wheeler base of 120 mn vehicles sold between the last decade (2011 and 2018). Further regulatory compulsions from 2018 have increased the use of batteries in 2-wheelers, reducing its life. This has only increased the demand for batteries from the aftermarket segment.

2) Commercial vehicles

India is one of the leading manufacturers and exporters of commercial vehicles. Favourable government policies like the Make in India campaign, the Automotive Mission Plan (AMP) and National Electric Mobility Mission Plan (NEMMP) have enabled the country to develop into one of the most important commercial vehicles manufacturing hubs in the world. But dismal economic progress pushed this sector into the red for more than two year.

FY22 could turn the fortunes of the Commercial Vehicle space with India promising to register a high single digit economic resurgence despite the second wave of the Coronavirus. Rating agency Crisil expects Commercial Vehicle volumes to increase by 34-36% year-on-year in FY22 to 7.6-7.8 lakh units. The segment is also expected to benefit from the recently announced Scrapping Policy. But these estimates are subject to economic and industrial revival post the second wave of the pandemic.

Tractors: While every segment of the auto sector felt the pressure due to the Coronavirus pandemic, the tractor segment was the first one to revive; it continues to be the fastest growing in the automotive segment. This was primarily owing to the following factors 1) Rural India and hence agricultural activities were lesser impacted by the first wave of the pandemic.

2) Government stimulus received by rural Indian was ploughed into agricultural activities.

3) A section of the migrant labour opted to remain in villages and focus on agriculture. Going forward, there is the risk of slowing growth rate for the Indian tractor industry owing to the sporadic lockdowns, supply chain constraints and chances of deteriorating farm income. This is because the second wave of Covid-19 percolated to rural India leading to significant pain and su_ering. While the monsoon is expected to be good and crop prices are expected to be stable, credible experts suggest a demand contraction from the 9 lakh unit sales in FY21 (the highest in the last two decades).

E-mobility: According to ICRA, over the next five years, electric vehicles will comprise 3-5% of new vehicle sales in the passenger vehicle segment. The marginal penetration is owing to high prices and lack of direct and indirect fiscal stimulus from the union and the state governments. Also, lack of affordable finance schemes for such zero-emission vehicles could hamper prospects in coming years.

Two- and three-wheel vehicles are likely to lead the transition to electric technology in India during the coming decade as the cost difference with combustion engine vehicles is narrowing and these vehicles would not need public charging infrastructure like passenger and commercial vehicles.

ICRA suggests that electric vehicles will account for 8-10% of the new vehicle sales in two-wheelers and intra-city buses. The three-wheeler segment will witness a more rapid transition by 2025.

E-rickshaws: Most of the people living in Indian cities are still not wealthy, which is why the need for cost-e_ective public transportation, especially for short distances, has always been high.

Besides, rising environmental awareness, government incentives and implementation of stringent regulations to curb environmental degradation have also been instrumental in driving the growth of the Indian electric rickshaw market. These realties are expected to propel the Indian electric rickshaw market. The market size will likely rise to US$500 million by 2025 from US$250 million in 2019.

Business strategy

The automotive battery business has drawn up a roadmap designed to sustain its growth momentum over the medium term. It covers geographic expansion, new products and applications, and new technologies and processes.

1) Geographic expansion Strengthen and expand operation in identified markets in the Indian Ocean Rim Move towards internationalisation of the export business Forge international tie-ups to expand and hedge existing business operations

2) Leverage new technologies Use of advanced plate making technologies across product categories Cater to sunrise sectors which present interesting growth opportunities over the medium-term

3) Expand product offering Develop products catering to the e-mobility drive Enhance the product basket to cater to new platforms being launched by OEs operating in India

4) Continue to grow in India Build leadership across categories and markets Strengthen brand equity, as a vehicle for future growth

Risk Management

Demand risk

Deceleration in the automotive sector could impact the growth prospects of this division.

Minimising risk: The automotive sector comprises of multiple sub-segments. Even if the entire sector registers a negative growth (as in FY21), there were some sub-segments which were in the positive zone. Moreover, the Companys significant presence in the aftermarket segment (which is larger than the OE segment) allows it to de-risk itself from the ups and downs of the automotive sector. Further, the Companys sharpening focus on exports is expected to de-risk the Company geographically going forward.

Technology risk

New technologies could reduce the relevance of lead-acid technology.

Minimising risk: Lead-acid technology is a mature and most used technology used across the world for manufacturing storage batteries. Recently, the world is looking at lithium technology for developing batteries for e-mobility application. Currently, this technology is at its nascent stage. Experts suggest that even when lithium-ion technology gains traction, lead-acid will remain the dominant technology for storage batteries owing to its value-proposition against other technologies. As a proactive company, Amara Raja is working on deploying the lithium-ion technology to manufacture lithium batteries to capitalise on the e-mobility opportunity expected to play out in India.

Supply chain risk

Supply chain disruptions owing to uncertainties could impact deliveries to OEs and its large pan-India dealer base.

Minimising risk: The supply chain team is adept at managing just-in-time delivery to more than 26 OEs with distances ranging between 60 km and 3400 km. The Companys multi-modal transport strategy has helped the Company to minimise the transit time, and ensure safe transportation. To ensure quicker reach to Customers the Company has implemented the direct delivery model where the Finished Goods despatches are executed from Plant directly for few selected Channel partners located in four districts in Phase I. This helps in quicker deliveries and avoids multiple handling which reduced associated costs.

02

Industrial battery division

Amara Rajas Industrial Battery Division is the preferred supplier to major telecom service providers, telecom equipment manufacturers, the UPS sector (OEM & Replacement), Indian Railways and to the Power, Oil & Gas, Motive among other industry segments. Its key products are marketed under various brands namely PowerStack, Amaron Volt, Amaron Sleek, Amaron Brute, Amaron Solar and Amaron Quanta. The Companys products are exported to most of the countries in the Indian Ocean Rim.

Performance in FY21

FY21 was a year which commenced with considerable scepticism but ended with significant optimism.

After a three year lull, the prospects of the telecom sector are looking up. The ‘Work from Home trend require telecom companies to ensure 100% tower uptime for uninterrupted connectivity not only at urban areas but across the nation. As a result, the demand for storage batteries from most tower companies, increased substantially.

The UPS segment was a mixed bag. Demand for batteries from the OE segment remained muted owing to 1) UPS component shortages 2) reduced demand from majority segments due to the lockdowns 3) reduced investment by government agencies in digitsation projects. However, there was New Demand in the Home UPS space. The pandemic almost abruptly transitioned the ‘Work-in-Office culture to ‘Work-from-Home trend. This change mandated IT companies to provide power backup to its employees.

Amara Raja had an operational head-start over its peers owing to its local workforce (recruited from communities within the vicinity of its operating facilities). This coupled with the untiring efforts of the supply chain team enabled the Company to service the telecom and UPS sectors with speed despite the prevailing challenges owing to the health emergency.

The preparedness and agility enabled the division to register healthy growth in business and profits. Moreover, it cemented its position in the customers mind as a reliable and dependable supplier – a recall which promises to strengthen the Companys prospects over the future.

Key Highlights for FY21

Telecom UPS & Data Center Railways Motive Power Exports
Increased market share with most telecom players owing to the teams un_inching e_orts in reaching batteries to customers Capitalised on the opportunities coming from the Home UPS space Non-operations of train for most part of the fiscal was a dampener; replacement demand trickled through the year Increased presence in this space by making interesting inroads with select players The Middle East market, owing to local presence, reported healthy growth in volumes
The Company graduated from selling products to providing solutions - Amara Raja demonstrated its ability in managing & optimising energy cost in telecom towers Worked on developing lithium batteries for Data Center applications - allowing the Company to effectively capitalise on opportunities in this space Increased the indigenous proportion in the battery which helped in reducing lead time Established local presence in two important markets - Africa and South East Asia to strengthen global presence
Lithium batteries for tower applications were successfully tested; field trials are expected to commence shortly
Recovered long-pending dues from some telecom operators

Optimism and opportunities

There appears to be considerable optimism in the sectors of the Companys presence owing to the New Way of Life after the pandemic.

Telecom sector

Future of the telecom industry is expected to remain promising. This optimism is based on the following factors.

1) Short term (FY22)

According to India Ratings and Research, the second round of consolidation in the industry, which has kicked in, will drive telecom companies from being providers of traditional voice-only services to complete digital solutions for households that would enable customer retention.

High usage of data and increased preference of bundled services (such as broadband services, cable TV services (direct -to-home), enterprise solutions (B2B), e-payment wallets/platforms, music applications and over-the-top (OTT) transmission platform) has resulted in an increase in the proportion of high-paying customers. This showcases that the sector is moving towards higher average revenue per user (ARPU), despite no tari_ hikes.

2) Medium-term

Price Discipline: A comparison of mobile ARPUs (average revenue per users) of over 25 countries shows that Indias mobile revenues-to-GDP ratio at 0.7% is among the lowest versus countries with similar per-capita GDP, implying scope for a rise in ARPU. According to Je_ries, mobile revenues and realisation per user in India could double between financial years 2020 and 2025, and the telecom sector has entered a phase of "tari_ discipline." With tari_ discipline sustaining, ARPU could rise 3-5% annually even beyond 2024-25.

Data consumption: Internet consumption, especially 4G, has seen an all-time high. This has been showcased by Nokias Mobile Broadband India Tra_c Index (MBiT): lIn 2020, data tra_c grew by 36% in India owing to a rise in 4G usage as more than 700 million people are now 4G subscribers in India (Around 100 million new 4G users were added in 2020) l4G data consumption has alone contributed to 99% of the total tra_c in India lOwing to a rise in 4G usage, an average user consumed around 13.5GB of monthly 4G data in December 2020. This figure increased by 20% due to growth in subscribers and video consumption, which is mainly due to our increased dependency on the internet

Going forward, India will be transitioning to the 5G ecosystem which is more data intensive. According to a report by Ericsson, India is likely to have 330 million 5G subscribers by 2026 and the monthly data consumption per smartphone is expected to grow over 3-fold to 40 gigabyte per smartphone.

Data Centers

Today, India is one of the most capacity-hungry data center markets in the world, yet they are desperately short of their needs. Currently, capacity in all of India is only 400 MW (megawatt). Thats less than Singapore and just 10% of the capacity of Northern Virginia, the largest data center market in the world.

But this is about to change at a rapid pace. Data Centers is the new sunrise sector that is attracting huge global attention and investment. This is owing to the impact of data protection laws, increased shift from captive to co-location data centers and implementation of new technologies like 5G, edge computing and the internet of things (IoT) which is expected to drive sustained investor demand for this asset class over the next five years.

The India market will witness significant investment from colocation service providers due to high demand from BFSI, logistics, transportation, e-commerce, and government agencies, fuelled by the outbreak of the Covid-19 pandemic.

According to a report by JLL titled (re)Imagine Data Centres: Running Indias digital economy, Indias data center capacity is expected to grow from 375 MW in H1 2020 to 1,078 MW by 2025, presenting a US$4.9 billion investment opportunity.

Home UPS

The pandemic may have receded. But the uncertainty among families about its resurgence looms large. Even as Governments across India are loosening restrictions, families are choosing to adopt a mid-path - between working from home and going to office. Schools are also continuing with online education for students owing to the lack of vaccination for children, a trend which is expected to continue for some time.

These factors are expected to sustain the robust demand for Home UPS systems in the current year. Moreover, increased sales volumes now, would result in healthy replacement demand over the near future.

Motive Power

The motive power battery is driven by the needs of the manufacturing sector, warehousing/e-commerce and preference for electric vehicles over their diesel variants specifically in segments like pharma and food processing. Warehousing, or sheds have become crucial in the post-Covid world. Many e-commerce categories are expected to boom, as people make a behavioural shift from buying offine to shopping online. Many warehousing complexes are expected to come up across India. Supportive government policies such as establishment of logistic parks and free trade warehouse zones is expected to spur the market growth through 2025. The Indian Warehousing Market is expected to be an estimated US$12.2 billion in 2020, growing to US$19.5 billion by 2025.

In India the adoption of lift trucks per million people is very low. Among most of the emerging regions of the world, Indias fork lift population is at ~10 lift trucks per million against 273 in China and 693 in North America. This certainly offers a huge legroom for growth in the Indian market. The demand for forklift is only expected to increase as organised warehousing is expected to increase significantly.

Business strategy

1) Geographic expansion Continue to expand the distribution and local presence in ME, Africa and SEA

Participation in Global sourcing requirements of UPS OEMs after becoming the preferred supplier for their Indian operations

2) Tapping emerging applications Focus on capitalising on opportunities in motive power Cater to the growing demand for energy storage solution from the renewable energy sector

3) Expand product offering Strengthen the MVRLA product portfolio using advanced plate making technologies to support the business growth in global markets Product to Solution offering in various business segments to cater to changing needs

4) Continue to grow in India Maintain the current market positions in Telecom, UPS, and Railways and grow the business in solar and motive.

Demand risk

The current surge in demand could be short lived.

Minimising risk: The industrial business division, caters to a number of user sectors, and hence significantly derisked from an overdependence on any one sector. Moreover, its key user sectors namely telecom, Data Centers, Commercial and Home UPS segments are expected to gain traction over the medium term owing to the increasing need of Indians to remain connected in a post Covid-19 scenario.

Technology risk

There is a need to align with evolving technologies.

Minimising risk: Amara Raja has always been at the forefront of technology absorption enabling it to launch trend-disruptive products. The Company, currently, is working on new technologies that will allow it to upgrade its products to evolving sectoral needs. For example, the Companys lithium batteries for telecom application are currently undergoing field trials.

Geographic risk

Being dependent on a single economy for business could impact the Companys growth momentum.

Minimising risk: Currently, exports form a small proportion of the Companys revenue mix, but is a focus area. Because the pandemic has ampli_ed the relevance of a meaningful international presence. As a first step, the Company successfully established its presence in the Middle East countries which delivered satisfying returns in FY21. Next, it has extended its global footprint to Africa and South-East Asia which should increase export earnings going forward.