Lucas loses its glory
A shortage of working capital has disrupted the production of Rahimafrooz batteries
For about 50 years, Rahimafrooz has been a success story on Bangladesh's industrial landscape – where local entrepreneurs were few and far between.
With sheer determination it rose to peak popularity as a premium automotive battery manufacturer. Lucas became synonymous with batteries; just as Honda was a synonym for motorcycles.
Almost all cars in Bangladesh ran on Lucas.
Not anymore.
A shortage of working capital has disrupted the production of Rahimafrooz batteries. Additionally, consumers are finding it harder to buy Rahimafrooz-made batteries, under different brand names, as their stocks have depleted.
Its exports have also been affected. One importer in the Middle-East reported he had placed an order for eight containers of batteries and received only two. Even local buyers have grown accustomed to waiting a number of days past delivery dates to receive Rahimafrooz-made batteries.
Disrupted raw material supply
Lead is the key raw material for Rahimafrooz's batteries, which makes up over half of its cost, and the metal is procured from the London Mercantile Exchange.
Forward booking on that volatile market helps procurement managers minimise the cost of this raw material. However, the company has not been able to forward book because of its current shallow pockets.
"We know the math to win in the volatile commodity market for lead. But for that, we have to book a sizable volume in the forward market for a period of six months or even more. That also requires financing capability," said a senior official at Rahimafrooz Group.
"We had been managing this with the support of banks, but for the last year banks have been too stingy to give such loans. Moreover, the interest is far too high," he added.
The anti-dumping shock
A possible celebration of Rahimafrooz's glorious milestone was disrupted in 2002 when India imposed an anti-dumping duty on batteries exported from Bangladesh.
India lifted the duty in 2005 when Bangladesh went to the World Trade Organisation.
However, the anti-dumping duty was a shock for Rahimafrooz because it had been deprived of cash flow – from a very large target market – for 4-5 consecutive years.
The group had invested millions of taka to expand its capacity in the neighbouring market. Consequently, their debt mounted.
However, Rahimafrooz managed to withstand the bad times because of a pioneering Bangladeshi entrepreneur group that was keen on investing in the businesses.
A changing scenario
Rahimafrooz pioneered the retail chain business and explored opportunities in the private sector – like a power generation business to cater to their growth and diversification. These added virtually nothing to the group's financial accounts – instead the power plant cost them millions of taka.
Like the export market, the local battery market has also become more competitive in recent years. At least half a dozen new competitors are now eating into Rahimafrooz's market share.
In the rapidly-growing local battery market with an annual turnover of above Tk10,000 crore, Rahimafrooz has missed out on the largest market share because it is fighting against low-cost non-compliant manufacturers who produce batteries for electric three wheelers – popularly called easy bikes.
"Two-thirds of local demand [for batteries] is for easy bikes now and the formal industry is struggling to cater to it because of unfair competition from a few dozen secret, unauthorised and – of course – extremely non-compliant factories," said Munawar Misbah Moin, a Group Director of Rahimafrooz and also the President of the Accumulator Battery Manufacturers and Exporters Association of Bangladesh.
However, in terms of exports from Bangladesh, Rahimafrooz remains almost the sole name on the market.
Bank loan a new source of pain
Rahimafrooz has been a trusted name for decades, and money was never a problem for the company. However, the situation changed in the last year.
The interest charged by banks surpasses the business' profit margin. Furthermore, banks are not particularly interested in financing their long-tested client's short-term needs.
A top official of the group told The Business Standard that banks are not willing to wait even one additional month for repayment, and want previous payments cleared before financing a letter of credit for import.
In such cases, the company used to borrow money from other sources. However, it is gradually becoming more difficult for this to be done because all the sources are facing the same challenges.
Thus, there is a disruption in the import of raw materials, making it difficult for Rahimafrooz to maintain its production cycle, said the group official.
The Group Director declined to comment in this regard as they are not a public company.
The pioneer's leadership
Rahimafrooz began as a trading house in 1950, and was incorporated as a limited liability company in 1954 – Rahimafrooz (Pak) Limited. In 1959, it entered into a joint venture with Lucas, UK to set up a modern automotive battery factory in Dhaka.
It was the only brand name in the areas of automotive and industrial batteries in the 1980s, and later started facing competition on the local market. However, it still retained a large market share. Rahimafrooz Batteries Ltd pioneered exporting batteries from Bangladesh in 1992.
It was unimaginable – to importers and users abroad – that a product like automotive batteries from Bangladesh could be on export markets. However, there had been a strategic call to diversify battery sources – mainly to reduce sole reliance on South Korea, said Mr Munawar.
He added, "Rahimafrooz well-positioned the Bangladeshi industry there." The markets include South Asian countries, South East Asia, the Middle East, Europe and even markets in America; they have bought millions of Rahimafrooz batteries.
The company has different technical collaboration agreements with the Lucas Battery Company, Technical support Group (TSG), Hawker Batteries, and Invensys of the UK; Eltek of Norway; and AEES of France to maintain the quality of their batteries.
Rahimafrooz even supported entrepreneurs in Pakistan as a technical partner to establish a battery factory. Rahimafrooz had been exporting batteries to Pakistan until 1997, when the Pakistani group's factory went into production.
The same year, Rahimafrooz began exporting batteries to the Indian market. Within a very short period, it had organised an extensive marketing network covering the entire neighbouring country with eight distributors and 450 dealers.
The three battery companies
The first company in the battery business was Rahimafrooz Batteries Ltd. It started with automotive batteries, and over the years, it added about 200 different varieties of batteries for motorcycles, instant power supplies (IPS), and other applications to its factory at Zirani Bazar, Gazipur.
As the country's largest lead-acid battery manufacturer, the company is also one of the leading regional players with market leadership at home, and export endeavours in more than 44 countries.
The Rahimafrooz Group started manufacturing industrial batteries in 1991 – in collaboration with Electrona of Switzerland. In 2009, the group separated the business unit of industrial batteries – for the local as well as international market – under a new company, Rahimafrooz Accumulators Ltd. The company's industrial battery manufacturing facilities moved to a new factory in Savar.
Rahimafrooz's expertise and reputation as a manufacturer of quality batteries locally and internationally has inspired the group to invest in setting up a new battery factory at the Ishwardi EPZ, in Pabna, to cater to its growing potential on the international battery market.
The export wing is named Rahimafrooz Globatt Ltd and its state-of-the-art Maintenance Free (MF) and Sealed Maintenance Free (SMF) battery manufacturing plant came into operation in 2009. With a 2.5-million-unit production capacity per year, it is the largest battery export plant in South Asia. All the batteries from the plant have been designed by a leading German company. These batteries are designed for millions of vehicle enthusiasts across Asia and the Pacific, the Middle East, Africa, Europe and the Americas.
Lucas and Spark are the leading names in the local automotive battery market while Globatt, Volta, Optus, and Delta have been gaining equity as international brands.
Profitability of the battery companies
Rahimafrooz Batteries Ltd and Rahimafrooz Accumulators Ltd are running their businesses with a mere double-digit gross profit margin. However, servicing all the debts – at an interest rate not less than the gross margin – pushed the companies into a near-zero profit area even though the annual sales of the two companies are over Tk 600-700 crore.
A few years ago the Rahimafrooz Group appointed a top local investment bank to advise them on better capital structure and corporate efficiency.
Sources now say that the two highly-leveraged companies are likely to merge and seek a reasonable gross and net profit margin.
Rahimafrooz Globatt Ltd suffers the most despite the fact that the company contributes the most to the country's foreign currency earnings. The company's annual sales are now below Tk250 crore, and the accumulated loss over the years has surpassed Tk350 crore, according to competent sources.
Business analysts blame the high cost of raw materials, the low or negative profit margin due to stiff competition abroad, and of course, the extremely high cost of local financing for the losses.
One analyst told The Business Standard that the initial setback for the EPZ-based company was its failure to sustain itself on the Indian market because of anti-dumping measures by the government of that country. The company subsequently entered different countries but could not make a decent profit-making deal because of a price war with competitors.
Whatever returns it is making are being taken away by the banks in the form of interest.
"The company needs a capital injection from investors to survive and to perform better," he added.
Insufficient policy support
Rahimafrooz Globatt Limited had been enjoying tax-free operations in the EPZ – until recently when the pre-declared exemption period expired.
The corporate tax exemption has been meaningless as the company has been bearing accumulated losses.
The company is enjoying VAT exemption on raw material imports, though this is insufficient because its competitors from other countries enjoy facilities that are not less than that.
"If we export from a plant outside the EPZ, we will receive a 15 percent cash incentive on export value, which would be near double the incentive we are receiving in the form of VAT exemptions on raw material imports," said Mr Munawar, the group official.
"However, is it a good idea to relocate the EPZ plant outside?" he asked, frustrated.
Mr Munawar said the group is trying to export more from its plants outside the EPZ.
EPZ plant dragging down mother company
Rahimafrooz Batteries Ltd holds 60 percent of Rahimafrooz Globatt Ltd's shares, and the mother company is also suffering because of its subsidiary's accumulated losses.
Rahimafrooz Batteries Ltd is not bearing losses in its own operation.
The turnaround strategy?
Mr Munawar, while talking to The Business Standard, neither accepted that there is a working capital shortage nor denied that production has been disrupted.
He instead said, "We have been looking for opportunities in different businesses and invested proportionate to their growth potential. Many have worked, some have not."
"Now we are focusing more on our core businesses like the automotive sector. Our local market also has huge growth potential, as do export markets, so I do not think there is anything to worry about regarding temporary headwinds," he added.
With confidence, he added, "Improving efficiency alongside gradually reducing debt will place the group in a much stronger position in coming days."
From family business to corporate practice?
Rahimafrooz Group entrepreneurs have participated in a Harvard-initiated training on effective succession.
Meanwhile, they are receiving corporate advisory services from top investment banks that usually lead to a stock market listing.
"A few years ago advisors had been talking about debt instead of equities on the capital market. Now it seems equity is better for financing growth," said Mr Munawar, adding, "We are not sure about going public because that is very complicated, as far as we have heard from others."
