Deepak Khaitan And His Magic Lamp

Source : Business world

The metal road leading up to village Rani Purva is the brighter side of the discordant showcase of its development. On the seamier side, this village — located just 40 km from Lucknow and almost 14 km off the nearest highway connecting Sitapur with Lucknow — does not have power even 19 years after it was shown that dream. The lines laid to supply power to the village were stolen in 1990.

So, every evening when the Sun went down on Rani Purva, Mahku Lal Bhargav’s 15-member family’s life revolved around kerosene lamps. But that was until a few months ago when a grocer in a neighbouring village convinced him to buy Eveready’s LED (light-emitting diode) lantern that runs on batteries. It is 9.30 at night and the family’s nine grand children (four granddaughters and five grandsons) are huddled with their books around the lantern that Eveready branded as Home Lite (it was recently changed to Nu LITE after a trademark dispute) HL 08.

The eldest, 18-year-old Amit Kumar, is a first-year student of political science, sociology and Hindi at the prestigious Christian Degree College in Lucknow. He wants to be a lawyer. His 17-year-old sister Mamta Devi is in Class 12. Eight-year-old Suraj is in Class IV and wants to be a doctor. Each one of them is clinging to the lantern’s milky white light as opposed to the kerosene lamp’s dull yellow rays, smoke and soot. Amit complains that he is not sure how long his grandfather will be able to afford the batteries from the average Rs 20-50 he earns daily from the village’s only grocery shop and the family’s four bighas of land. Last time, the lantern ran only as long as the free batteries that came with it lasted. Convincing Bhargav to buy three more was not easy.

Click here to view enlarged image

Bhargav’s family is precisely the customer Deepak Khaitan, executive vice-chairman and managing director of Rs 925-crore Eveready Industries, India’s largest battery maker — had in mind when he introduced the LED lanterns as a substitute to kerosene lanterns in April this year. He thought he was filling a void in the market. But he had no idea how big a void that was. Built on the philosophy of giving better light at a lower monthly cost than running kerosene lanterns — Eveready has plastered front pages of regional dailies with this message — the LED lanterns have sold 2 million since April this year, gaining significant traction in power deficient states such as Uttar Pradesh, Bihar, West Bengal and Assam. In the first month Eveready sold 20,000 units. In May it sold 40,000 and in June 60,000. But as soon as ads broke on 8 July, sales shot up to 278,000 and the company was out of stock. In the three months since then, sales have averaged 350,000-450,000 units a month, largely constrained by manufacturing capacity. Company revenues have gone up nearly 19 per cent. “I can sell 500,000 a month if I could produce them,” says Khaitan who has set a stiffer target to sell 1 million units a month beginning fiscal 2010-11 when his capacity would be in place.

Rarely does a consumer product catch such a customer fancy in such a short span of time. Remember only an estimated 6 million radio transistors are sold in India every year. The total installed base of the seven-year-old DTH (direct-to-home) industry, some of whose offerings are priced at Rs 499, is just 17 million.

At the heart of the LED lanterns business is Eveready’s philosophy: “You can live in darkness. But once you are used to light, you will never go back to darkness”. Banking on this, Eveready hopes to tap nearly 100,000 villages that are still not on India’s power map. There are at least twice that much which have power but the supply is too erratic to call it a supply.

Whether these lanterns will change the lives of the power-starved is still to be seen, but they are making a difference to the image of what is perceived as a rather unadventurous company. “These are trendy. I don’t need it because I have an invertor at home, but I am tempted to buy one,” says 32-year-old Rakshita, examining Eveready’s first LED lantern HL 08 stacked up at the entrance of Spencer’s store at Pacific Mall in Ghaziabad. Rakshita’s bigger temptation was the six D-size batteries (worth Rs 90) offered free with the Rs 350 product.

Lanterns have ushered the company into its most disruptive phase since the Kolkata-based B.M. Khaitan group took over Eveready Industries from Union Carbide in 1994. The LED lanterns portfolio has grown to seven since April, priced between Rs 150 and Rs 450. But Khaitan is now desperate to prevent competition from capitalising on his success. The range will be bolstered to 20 by February, plugging any conceivable gaps in the portfolio. New offerings include mass-market products such as a detachable lamp that can be fixed on a bicycle and niche products such as a headlamp for miners, doctors or hikers. Khaitan, who has been with his suppliers in China and Taiwan for the past one month, travels there every two weeks to keep tabs on the progress.

Click here to view enlarged image

If Khaitan manages to sell the 12 million units, he would have expanded his company’s revenues by one-third in a year. He estimates that the total households to whom he can sell at least one LED lantern could be as high as 350 million. Theoretically, that is business worth Rs 10,500 crore (around $2.2 billion or nearly 11 times his company’s current turnover) up for grabs. Practically, he is laying the grounds for large volumes too. In anticipation of an even larger portfolio, Eveready has stopped naming its products Jumbo, Stylo or Mylite as it did. Instead, it has adopted the cellphone nomenclatures—HL 01, HL 05 and HL 02 (the Home Lite legacy in the HL prefix clearly evident there).

Necessity: The Mother Of Invention
Incidentally, Eveready’s LED lanterns are an advent of adversity. In 2006 and 2007, the Indian market got flooded with Chinese LED torches, which consumed one-sixth battery power compared to the incandescent bulb torches sold by Indian manufacturers, including Eveready. As batteries began to last longer, it jolted Eveready, which commanded nearly 60 per cent of the market then. Sales of its highest selling battery — the biggest D-size one — collapsed from 600 million units a year to 300 million units.

Making up for the shortfall with exports in very large numbers was not an option for two reasons. One, Eveready does not have the licence to sell under the Eveready brand anywhere except India, Nepal and Bhutan (the brand is owned by Energizer elsewhere in the world). Second, though Eveready exports small numbers under the Lava brand, demand for carbon-zinc batteries is dead in most parts of the world. Alkaline batteries account for at least 90 per cent of the entire developed world demand (in India their share is about 2 per cent).

When Khaitan began looking for ways to perk up battery sales, he found cues in Eveready’s history. The 104-year-old Eveready began operations in India as National Carbon Company, a subsidiary of Union Carbide Corporation of the US by importing dry cell batteries into India. It set up battery plants in Kolkata and Chennai. But to boost battery sales Eveready was forced to diversify into torch manufacturing with a plant at Lucknow in 1958.

Fifty years later, in 2008, history repeated itself at the same plant. This time, by entering yet another new business of assembling battery-based LED lanterns to prop up D-size battery sales. “We copied LED for torches initially. (They) made us learn more about LED,” admits Khaitan candidly. “We said why can’t we come up with a light which lasts for a month and is cheaper than kerosene. That’s how the LED lantern was conceived.” At two-three hours of usage every day, the LED lanterns cost 50 paise an hour, marginally lower than kerosene lanterns. Khaitan and his team went to China and located the first product they would introduce as the HL 08.

To be fair, local players discovered the power of LED lanterns well before Eveready — a few priced between Rs 50 and Rs 200 are still available in the market. But nobody could capitalise on it the way Khaitan did, for two reasons. One, nobody scaled up manufacturing capacity. Second, Eveready has significant distribution might. Fifty years ago it pioneered the concept of carrying products right up to the retailers with ‘Upcountry vans’ and ‘Local vans’. Today, Eveready’s salesmen touch nearly 3.2 million of India’s 12 million retailers at least once a fortnight. “Anybody can get a product from China. Distribution is the key to Eveready. Their distribution is as strong as that of FMCG (fast moving consumer goods) companies,” says Pinakiranjan Mishra, partner and national leader, retail and consumer products practice at consulting firm Ernst & Young. Analysts such as Mishra believe distribution is also Eveready’s competitive barrier against imports. Battery-based LED lanterns sell on Amazon.com in the price range of $10 (Rs 480) for the smallest to $25 (Rs 1,200) for the type Eveready sells as Jumbo (Rs 450).

From Gimme Red To Gimme LED
During peak afternoon rush, we make our way into the crowded Aminabad market — the nub of kerosene lantern sales — in central Lucknow. It caters to retailers from 18-20 neighbouring districts, some from as far away as Delhi (500 km from Lucknow). Elahi-family owned Sansar Lights is among the region’s oldest and biggest distributors of kerosene lanterns. Abid Elahi of the family’s second generation says he sells between 150-180 kerosene lanterns per day at Rs 100-125 each, but these sales are half of what they were before the advent of LED lanterns. Elahi, who also distributes Eveready products, says local and unbranded LED lanterns first hit the market for as low as Rs 50. At that time, Eveready’s LED lantern sales were less than
5 per cent of total sales but in the past five months it has risen to 95 per cent.

MASS PRODUCT: Print Ads like the one above in local dailies have helped Eveready increase sales manifold; (top) Mahku Lal Bhargav’s grandchildren (BW pic by Sanjya Sakaria)

Another dealer in the vicinity, Anil Chawla of Punjab Lights, says 60 per cent of his sales are still kerosene lamps while the rest are LEDs. Chawla says, while a year ago, nearly all LED lanterns were local, today 70-80 per cent of his lantern sales are Eveready’s. “Their sales and market share are up because they have the highest range.” Chawla, however, says his customers have encountered niggling quality issues such as a missing switch in a lantern or a missing spring in the battery compartment.

Right in the middle of this demand spurt, the celebration party has been interrupted by a trademark violation dispute. A Delhi-based company told Eveready that it has been using the ‘Home Lite’ brand for lanterns long before Eveready introduced LED lanterns. As a result, earlier in November, Eveready began shipping its products under a new brand Nu LITE.

An Endearing Need
Eveready’s exploits in the lantern market have woken up some stockmarket denizens. Among the equity analyst community, Eveready mostly passes off as a rather unglamorous company that rarely creates excitement. To most analysts, it is a competent battery maker. No more, no less. “Historically, it has not been tracked by us. We track companies on the basis of market capitalisation, float and investor interest. It does not qualify for us,” says Enam Securities’ FMCG and retail analyst Akhil Kejriwal.

But, Eveready’s company secretary Tehnaz Punwani says, fund managers are enquiring a lot more of late. Eveready’s stock has shot up 475 per cent from a 52-week low of Rs 11.51 on 4 December 2008 to Rs 66.25 as of 26 November on the Bombay Stock Exchange. The Sensex has gained 82 per cent during the same period.

Yet, institutional investor interest seems moderate, at best. In the past six months since its LED lanterns hit the market, three of the eight mutual funds invested in the company have exited. These included Birla SunLife Dividend yield fund, HDFC MIP-LTP and Tata Contra Fund. HDFC Prudence, the biggest investor holding 1.26 million shares, has reduced its holdings by two-thirds. ICICI Pru’s FMCG fund has made a very marginal reduction in its holding while UTI Master Value, Birla SunLife’s Long Term Advantage fund and DBS Chola’s Multi-Cap fund have increased holdings. The head of one of Eveready’s largest mutual fund investors, says, “The company has a lot of potential. It is up to the management to deliver on what they have been promising for the past two years.”

Analysts say the company will need to improve its financials significantly for greater investor interest. In fiscal 2008-09, for instance, Eveready reported a net profit of Rs 19.40 crore on sales turnover of Rs 925.31 crore (see ‘Gimme LED’). In comparison, its nearest rival Nippo Batteries posted a net profit of Rs 16 crore on a turnover of Rs 307.51 crore. Eveready’s earning per share of Rs 2.67 was lower than Nippo’s Rs 42.76 as was book value of Rs 66.48 versus Nippo’s Rs 339.71. “Our EBITDA (earnings before interest, taxes, depreciation and amortisation) margins are moving up. Last quarter we were about 13 per cent. Our objective is to take it to at least 17-18 per cent of turnover,” says Khaitan. At least Eveready’s bottom line appears rosier in the past two quarters, even though the topline has seen only a marginal improvement. While quarterly net ranged from Rs 2 crore to Rs 8.5 crore in the preceding three quarters, it has more than doubled the net profit to Rs 16.05 crore and Rs 17.54 crore in June and September quarters of 2009. In comparison, the topline has moved up just 19 per cent since the quarter of September 2008.
Damned If I Do, Doomed If I Don’t...

…At least, that is how Khaitan will explain his double dilemma of whether to introduce rechargeable lanterns, which is a perceived threat to its LED lanterns business. “Consumers want rechargeable lanterns,” says Sansar Lights’ Elahi. Lantern distributors echo Elahi’s voice. But the industry, as much as Eveready, is still double-guessing whether the rechargeable lantern market will ever be as strong as single-life battery lanterns. If Khaitan does introduce them, they defeat the very purpose for which he set up his lanterns business — to prop up D-size battery sales. If he does not — and a rival introduces a better value proposition —Eveready’s nascent lanterns business could be smothered. “The market is there. I can get into it but at the moment I have so much opportunity to expand this,” says Khaitan.

But the biggest reason why Khaitan is not introducing rechargeable lanterns is that it would require getting into an unchartered territory of a nationwide service centre network. Right now, Eveready’s products travel on a one-way street from plants to consumers. Their disposable nature does not require servicing. But rechargeable lanterns will. Elahi insists the rechargeable lanterns business cannot do well unless, “the company sets up service centres”. Khaitan is not convinced yet. “It requires specialised selling, it requires servicing. It does not suit my distribution so it doesn’t make sense to me,” says Khaitan.

CASH OUTLETS: Sansar Lights’ Abid Elahi says kerosene lanterns sales have halved

Moreover, rechargeables push up product price to Rs 1,200-1,300, which is three to four times Eveready’s existing range. In fact, Eveready has attacked the ‘costly’ rechargeable lanterns in a campaign suggesting consumers must buy four of single-life battery lanterns for the price of a rechargeable lantern. “In many parts of rural India, there is no power. Bihar and Uttar Pradesh go through power cuts of
12-15 hours (a day). How will you recharge?” Khaitan questions.

But what about solar lanterns? “As a company, why would I encourage selling solar? It will cut down my battery consumption,” says Khaitan. Besides, Eveready sees itself as a mass products FMCG company. Khaitan believes it must not market any products that sell volumes of less than 100,000-200,000 units a month. “At the price points of rechargeables you can’t get those volumes,” says Khaitan. “For us, it is very difficult to sell 5,000 or 10,000 pieces a month.”

Even as competition intensifies and winter sets in, Eveready is faced with a peculiar challenge: kerosene lamp sales shoot up in north India during winters because families use them as a source of heat as much as light. Khaitan’s biggest challenge now is to ensure that he generates enough heat with his offerings to keep his portfolio trendy and relevant. “We think the moment we hit the correct price point, the market will explode,” says Khaitan. But the irony is that even he does not know what that break-out point is. As for the back-current of LED lanterns on D-size battery sales — that is still to show up. Though the decline has got arrested. Eveready expects the ripple effect sometime in the January-March quarter. Largely, because two rounds of battery changes have gone free with the first 2 million lanterns Khaitan has sold.

(This story was published in Businessworld Issue Dated 07-12-2009)