Replacement market margins attractive than OEMs: Amara Raja

Kalyan said, "Presently, OEMs are very critical for product development, quality and efficiency improvement. We would like to focus on both, the OEMs and replacement business." "However, the margins from replacement markets would be quite attractive compared to OEMs," he added.

Below is the verbatim transcript of the interview. Also watch the accompanying video.

Q: There has been a lot of shift towards the replacement market and a majority of your sales have come from that segment. Can you take us through the trends with regards to what you are seeing in the replacement market vis-à-vis the original equipment manufacturers (OEM) market? What does this mean to you in terms of sales?

A: As much as 65% of our automotive business comes from replacement market in terms of volume and about 35% comes from OEMs. In revenue terms, it would be around 28% OEMs and the balance comes from the replacement markets. The replacement market includes our two brand sales which are Amaron and Power Zone as well as some private label opportunities. We also export battery out of India for our replacement application. The trend remains more or less the same. There is some kind of slowdown in OE business, but we would like to cover it up focusing on our replacement market.

Q: Now that you are seeing a bit of shift coming into the replacement segment, how does this change the margin profile of the company?

A: Replacement market is definitely a better margin compared to OEMs. Presently, OEMs are very critical for product development, quality and efficiency improvement. We would like to focus on both the businesses. However, in absolute terms, the margins from replacement markets would be quite attractive compared to OEMs.

Q: Last quarter, your EBITDA margins were close to about 14.5%. Where would it stand in the coming quarter given the raw material pressures haven’t subsided?

A: There is definitely a pressure from the raw material side, but OE business takes care of that pressure through a price variant class. We make changes as and when required in replacement market. I would like to be a silent on the margins because our board meeting is round the corner.

Q: What are the key trends that we are seeing in terms of you being an industry player within OEM markets and replacement market? Do you expect the replacement market to completely outgrow the OEM market going forward in terms of growth trajectory?

A: OEM market growth depends on macroeconomic conditions. We would like to improve our market share in OEMs beyond growing at a pace of the industry. As far as the aftermarket is concerned, it’s a stable business, but the growth rates depend on the OE production rates of the earlier years. We would like to be ahead of the market growth both in OEMs and aftermarket to improve our market share.

Q: You are present in the telecom sector as well. What are you seeing with regards to a 3G rollout? What does this means in terms of the industrial segment in particular?

A: We are the leading players in the telecom sector. We have roughly about 42% market share in FY10-11. The demand from telecom would be much better than the previous year due to the 3G rollout and replacement demand coming in. We would like to maintain the market share by improving our volume in the telecom sector.

Q: Are you facing any kind of pricing pressure in the telecommunication space?

A: The prices have bottomed in the previous year. The current trend is much better than the earlier years. We don’t see anything worse than what we have already experienced.

Q: What is the market share?

A: It is around 42%.