Last week, global private equity giant Warburg Pincus- which manages over $80 billion in assets-led a $100 million round in Imagine Marketing Pvt. Ltd, which runs the boAt brand of earphones, audio and other accessories. The deal is an important one for a few reasons. boAt has raised less than $10 million in equity in the four years it has been around, and the $300 million valuation this round also gave a handsome part payout to its founders, Sameer Mehta and Aman Gupta.
There is a cultural aspect to it too. boAt clearly has a young audience in mind. Its brand ambassadors include cricketers Hardik Pandya and KL Rahul, and its earphones are so commonly seen in Mumbai’s local trains and the Delhi Metro, it almost looks like a uniform. boAt has cracked the market many are after- young Indians.
More so, India has seldom seen electronic brand startups scale to success. The last time that happened, mobile phone maker Micromax was the talk of town- an overnight success which evaporated just as fast- led by Chinese competition and replicas at lower prices. Many investors fear the same could happen to boAt, whose manufacturing and design are in China. But the company steadfastly disagrees. In an exclusive interview with Moneycontrol, co-founder and CEO Sameer Mehta talks about building a global brand, why electronic brands have traditionally not made it big in India, and what makes boAt unique. Edited excerpts from a Zoom call-
You have diluted about a third of the company’s shares for this round. What is the rationale, given you’re not a cash burning company?
The money is mainly to take more control of our design- our Research and Development (R&D), and to start making in India. That’s a large part of this fundraise. Setting up entire manufacturing systems here will need time and capital.
We also understand you and Aman (Gupta, co-founder) have also taken some money out as secondary. So how much do you own right now?
I can’t get into the structure, but we still own the majority of the company.
How have you been de-linking from China?
So delinking is in two stages. One is design, R&D and control over the product. So over the last eight months, we have set up an R&D team in Bangalore. And over the next two-three quarters you will see some products made out of India.
Secondly, once we go through a few quarters, then we will put more impetus to manufacture in India.
When you say you designed in China, what does that really involve?
So we have a team in China that works very closely with our Original Equipment Manufacturers (OEMs) on the design side. But it makes sense to have our own design capabilities, because the kind of products we want to make in the future are very different from what we have made so far.
Is manufacturing still largely in China? How long will it take to change?
Yes, it is. But, the new production-linked incentive (PLI) that the government is going to bring in should help us and, hopefully, we’ll start making most products in India. The government is realising the importance of this sector, and I think wearables and hearables will also come under the PLI scheme. That will bring in the whole ecosystem, and once the ecosystem is here, then it should get easier for everyone. The whole world is looking to reduce risks related to China. So, a company of our size needs to look for diversification.
By when can you manufacture fully in India?
It is hard to give a timeline. But, even if we can get 50-60 percent manufactured in India over the next two-three years, it will be a very good start.
Product wise, you have gone beyond headphones- to sound bars and even smartwatches. But, two-three years from now, do you see these categories becoming a leading revenue contributor?
It is already a good revenue contributor. We launched sound bars in 2019, and it has already become a very significant portion of our revenues. We launched fitness trackers in November 2020, and it looks promising. I think the wearables market in India will keep growing, and COVID-19 has made people want to be even more aware of their health status regularly. The world is moving away from analog watches, and in this category there is a lot of headroom for us to grow.
Give me some context on your revenue?
We closed FY20 at about Rs 700 crore revenue. We are growing at 30-40 percent and should be able to touch the golden number of Rs 1000 crore this fiscal. We have always been EBITDA level profitable, and that won't change. We’ll continue to stay focused on economics.
Can you give us a breakup of revenue across products?
I do not have the numbers off hand but earphones still dominate and audio contributes a very large part of our revenues. It will stay that way for some time but we know the parallel set of products we are building will become a large part of revenue later on.
What other categories do you want to go into?
You’ll see a big range of gaming products coming from boAt in the next quarter or so. We are looking at gaming headsets, professional gaming keyboards, mouses, etc.
Is there a risk of over-diversifying and stretching yourself too thin?
We already have teams in place who focus on particular product verticals. So in terms of focus I think we have the right structure and it makes sure we don't lose focus from the current product portfolio. But the newer products are also important because the market is moving that way and you don’t want to lose out on those markets.
What is your moat? Some people see boAt as a trading business, that anyone can source these parts from China and bring it back.
Our moat is our brand, our community of followers, our design, our marketing, R&D capabilities, product ideation. The last piece of the puzzle is manufacturing and that’s something we are working on. So that will be the final moat, which the investor community wants.
How do you view comparisons to Micromax, which was also very successful for a short while- reliant on China, and then faded out because of Chinese brands and no local manufacturing?
We are very different from those companies. One thing that separates us is that we are a more aspirational brand. We are not the cheapest product in the market. We compete with the Germans, the Japanese and have worked because our products are solid- very very well built and made for India. And we are backed by fantastic marketing. We have 1.5 million boAtheads who love us.
How does demand for boAt compare between the metros and Tier 2,3 cities and beyond?
As a digital native company, our reach is of course equally good everywhere. The metros are our largest contributors, but Tier 3 cities are coming up, and really fast. People are aspirational, and on the offline side, Tier 3 cities don't have distribution for too many brands. So they look forward to brands. So, there is not a huge difference in the way people buy.
What’s your average ticket size per customer?
It has gone up over time. Right now it will be at about Rs 800-900 because our prices have increased and we have launched new categories (eg. sound bars ) which are more expensive.
But while you may be expensive in absolute terms, a lot of your products are much cheaper than alternatives, sometimes by even 50 percent?
No, I don’t think so. If you compare apples to apples, it will be 5-7 percent here and there. We don't want to be a cheap brand, we want to be an aspirational brand. So there is a lot of competition in our products and price points. A lot of our competitors are pricing products cheaper than us, in fact.
What does Warburg Pincus bring to the table?
They’re great partners to have. Everyone talks about their pedigree. They can help us build a strong organisation over the next four-five years, make us a little more structured, and get us across the finishing line.
What do you see as the finishing line?
To be a global Indian brand.
So to be a global brand, how do you see other markets?
We aren’t selling anywhere outside India . We haven’t even seriously thought of it. There is a lot of headroom to grow in India. But over a period of time, we’ll look at other markets where behaviour is similar.
What do you see as your biggest challenge today?
Scaling up the organisation. We want to have a high performing organisation, and the next year is going to be dedicated to ensure we have the right folks for the right strokes. We want to hire for the supply chain, R&D, and strengthen our IT systems.
How big do you think boAt can be in India?
The market is highly fragmented, and there’s no single study on how big it is or can be. The market is growing and we are well poised to grow with it for at least the next two years. After that we will decide more on categories, or channels or countries.
Why did you start this business?
Five-seven years ago, there was this entire lifestyle segment coming up in the US, where Beats came in and changed the way people bought headphones. They made it aspirational and stylish. So, that is when Aman and I thought, there’s going to be a big change in the Indian market. Back then we were competing against earphones that came out of a mobile phone box. We considered many use cases- for sports, books, traveling in the metro. The youth are hooked on to music.
And a couple of years after we started, data becoming cheaper, fast mobile internet and the explosion of OTT (over the top) content platforms was also important. Because of OTT today mobile is the main mode of consumption. Nobody was building products for India.They would build for other markets and bring it to India. That was our opportunity.
Why haven’t we seen too many long-term hardware Indian brands?
One is, distribution in itself was very capital intensive. Nobody focused on creating this market. The advent of ecommerce has certainly helped. Just understanding of the consumer psyche was not there. Today with ecommerce and ratings, you can get quick and constant feedback. You can iterate very quickly and bring a product out. The feedback loop is fast. Earlier by the time you get feedback, you’re six months into business with the same set of products which are performing badly.