Amara Raja Batteries is having a bad day today. The stock is among the top five losers on the BSE since the opening bell and the counter is streaked a deep red.

As we have explained in the ‘Whats Buzzing’ section, the bulk selling by Clarios ARBL Holding is most certainly a big reason. But the underlying reason for this is the increasing threat from lithium-ion batteries used by Electric Vehicle (EV) makers. There seems to be a structural change happening in the battery sector and there is growing worry – is Amara ready for this change?

Though the company posted a decent set of earnings for Q4FY21, there is rising concern that lower demand could impact the margins in the coming months and in the long run, analysts opine that with lithium battery costs coming down, this could be the new threat on the horizon for industrial battery makers unless they too invest in R&D and set up lithium battery making facilities.

Well, the current battery sector in India is a duopoly – there are only two players – Exide Industries which is the market leader and Amara Raja. Both make lead-based batteries for vehicles as well as for industrial use – like the generator/USP used by almost every single industry.

Some analysts are of the opinion that we are jumping the gun as EV replacing lead batteries is a long way off; we are looking at a horizon of at least 10 years or more. That’s 100% true but the question is whether these two are getting ready for this change. They have to move now to be able to catch the wave 5-years later or else they will be left behind. It’s like our current pandemic situation – you cannot start making and ordering for vaccines when the country is ravaged; we needed to have placed the orders way back in Dec. And that’s the kind of mistake this duopoly can ill-afford. The going remains good now but they need to be future ready and that is probably the message which the market is sending.

Currently, though lithium-ion batteries are the favoured options for EVs and grid-scale energy storage application, lead-acid batteries continue to stay ahead in terms of production costs and recycling (up to 99% recyclable), making them more affordable energy storage solutions.

At the same time, there is also no denying the fact that when demand will surge, it will be an avalanche. Already, thanks to the 89% drop in lithium-ion battery charges over the last 10 years, prices of EV two and three-wheeler is also down and this has pushed up demand. Of course, unless problems around charging infrastructure is not resolved, the demand will remain muted.

Exide has entered into a JV with a 80% share for lithium ion batteries. The JV has a production scale of 1.5GWh with six production lines ordered for the battery pack assembly for cylindrical, prismatic and pouch cells. The company has launched the Li-ion battery for application in telecom, traction and energy storage.

Amara Raja is also working on this – it has opened the country's maiden technology hub to develop lithium-ion cells, at its Tirupati facility in Andhra Pradesh, which will become the country's first lithium-ion cell manufacturing facility in the private sector over the next few years. The company has a technology transfer agreement with ISRO and it has invested Rs 20 crore into the hub, excluding technology transfer and bidding fees paid to the ISRO.

Tata Chemicals is also likely to set up a huge manufacturing facility for lithium-ion cells in Gujarat by seeking incentives under the PLI scheme. The company has acquired land for the proposed facility in the Dholera region of Gujarat.

What could really speed up things is Tesla Motors – once its cars enter the Indian market, it could pose challenges as well as create opportunities for the existing lead acid manufacturers.

The bottomline – yes, there is a structural change round-the-corner but the duopoly will continue to rule for the next 10 years at least. Maybe the transition to Electric two and three wheeler will happen sooner but for cars, it will take a while as cost will remain the impediment. And yes, change is coming so they need to be future-ready or else they will become another case study like ‘Kodak.’