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Light Wave

In just over two years, a state-owned company has ushered in an LED revolution. It has brought down prices, disrupted the marketand made the industry nervous. Whats next?
By Sumant Banerji | Print Edition: September 11, 2016
Light Wave
Saurabh Kumar, Managing Director, EESL (Photo: Shekhar Ghosh)

A tectonic shift is underway in the domestic consumer electronics sector. Starting with LED bulbs, government-controlled Energy Efficiency Services (EESL), which was set up in February 2010, is rewriting the rules of the game - bringing down prices and creating awareness about lower energy consumption.

"We are now selling 600,000 bulbs per day. In 2014, we did that many in six months. But we are not in the business of selling LED bulbs forever"

In a little over two years - since it started distributing LED bulbs at less than half the market price - it has captured a lion's share of the lighting segment, selling over 130 million units. In the past one year alone, EESL sold 90 million of the 150 million bulbs sold countrywide. Ironically, the company does not manufacture the bulbs, but sources them from its rivals in the open market. Now, it plans to storm the market with cutting-edge ceiling fans and air conditioners, promising 30 per cent energy saving and 40 per cent lower prices. The company's aggression, in fact, has left the industry battered and nervous, and some of them want it to exit the business.

However, EESL, a joint venture of four power PSUs - NTPC, Rural Electrification Corporation, Power Finance Corporation and Powergrid Corporation of India - is not going to quit anytime soon. Instead, it plans to go places, literally. Over 40 countries have reached out to the company for its services and it is ready to oblige. It has a robust investment pipeline of Rs 49,605 crore for the next three years, besides plans to raise $250 million through green bonds from both domestic and overseas markets, including the UK, in this financial year.

The stakes are certainly high, but the company is confident. And, if EESL can pull it off, its revenues will rise manifold to make it one of the most profitable PSUs in the country. But what is it that makes EESL such a disruptor?

The Catalyst

Barely four months after taking charge in September 2014, Union Minister for Power, Coal, and New and Renewable Energy, Piyush Goyal had asked a clutch of industry representatives if they could bring down the price of an LED bulb by a third before 2019. The industry dithered, but EESL readily accepted the challenge.

It gave a new twist to the oldest law of manufacturing - scale is inversely proportional to price. In other words, more the number of units sold, lower the cost of the product - making it affordable for consumers. EESL bought products from the market in bulk, forced companies to lower prices and took the risk of creating demand on its own. To make it even more affordable, it partnered with power distribution companies to offer easy instalment options to consumers through electricity bills.

Harsh Chitale CEO, Philips Lighting Solutions, South Asia

"Prices of LED lights would have come down even without EESL's intervention, but yes, it has reduced much faster and adoption has been quicker. However, the Rs 10 GLS lamp segment will survive"

The formula proved to be a winner. In January 2014, the pilot in Puducherry worked wonders - the first tranche of 600,000 seven-watt bulbs was sold in six months. "The main reason why people were not buying LED bulbs was the high cost, besides little awareness of its merits," says Saurabh Kumar, Managing Director, EESL, adding: "The first challenge was to take the state governments into confidence and then get the consumers to understand the benefits of the classic pay-as-you-save model. That, too, by paying a nominal amount upfront."

By November, six million bulbs had reached Andhra Pradesh households. And, with each round of procurement, the tenders became bigger and the prices came tumbling down - from Rs 310 to Rs 149 per unit by December 2014; in early 2015, when Delhi joined the bandwagon, a tender of 16 million bulbs brought the prices down to Rs 82; by mid-2015, a fresh tender of 50 million bulbs cut it down by another Rs 12.

EESL then moved to a higher wattage (9 watts) and procured 30 million bulbs in July 2015 for Rs 73-74 apiece. At present, an LED bulb costs Rs 55 - far lower than Goyal's target price, 82 per cent to be precise, and in just two years. "Initially, the industry was just importing the bulbs because of uncertainty whether we would be able to continue with the tenders. Now (2015), they started investing in manufacturing units," adds Kumar

What's more, the 130 million LED bulbs sold by EESL have helped India save 49 million KWh per day and reduced carbon dioxide emissions by 39,981 tonnes. Almost 1.1 million conventional street lamps were replaced with LED lamps, saving 143 million power units. By 2019, the company's target is to sell 770 million bulbs and replace 35 million street lamps.

The domestic industry has, however, struggled to cope with the might of a government-run company. "We did face resistance from our distributors and retailers who saw EESL as competition. Quite a few of them refused to sell LED bulbs as they felt that they cannot compete. But, in a dynamic environment, where technology is changing so fast, these are some of the challenges that any business would face," says Harsh Chitale, CEO, Philips Lighting Solutions, South Asia.

Further, given the durability of LED bulbs, the lighting industry is undergoing structural change. While an incandescent (wire filament) bulb had a six-month life, an LED bulb can last for even 10 years. And, the industry fears very little will be left for them once EESL achieves its 2020 target. However, Kumar of EESL is reassuring. "We are not in the business of selling LED bulbs forever. In the next six months, prices of LEDs will be less than CFLs. If that happens we will reduce our outreach in a phased manner, and exit. This year, if the industry can sell 150 million bulbs, I will be happy to distribute only 100 million and, in a year and a half, exit the market."

But clearly, that piece of news is not enough to make the industry happy. "Distribution of goods is not the governments job. They should make the right policies and let market forces take over," says a visibly upset Sunil Sikka, President, Havells India, adding: "While we were supplying to EESL, they over-publicised the scheme and disturbed the entire ecosystem. When prices fell so rapidly, our retailers started asking for back coverage of the stocks they were stuck with. They (EESL) have done a great job - prices have already come down, people have tried the product and are aware of it. Now is the time for them to step back and leave it to the market forces."

But then, mid-way through its LED gambit, EESL is already looking at the household appliances segment, which will make the industry sweat even more.

Fanning Growth

Competing with a ceiling fan that consumes 40 per cent less power, at a price 30 per cent lower, could very well be the next challenge the industry will have to overcome, more so, if the customer gets to pay for it in equated monthly instalments. And that's where EESL is looking to swing the tide in its favour.

The company wants consumers to move from the usual 75-80 watt fan to a more efficient 5-star rated 50 watt product. The modus operandi is the same - to aggregate demand, buy in bulk and sell it at a significantly lower price. For now the signs are encouraging. The company has already bought 100,000 units in April 2016 for Rs 955 each. Add local taxes and EESL's own margin, the fan is being sold for Rs 1,300. In comparison, the open market price for a fan with similar specifications is Rs 1,800-1,900.

So far, the company's pilots in four districts - West Godavari and Vijaywada in Andhra Pradesh, and Kanpur and Varanasi in Uttar Pradesh - have been a success. It has sold 42,000 fans. By the year-end, it plans to launch the scheme in five states - Delhi, Haryana, Maharashtra, Rajasthan and Madhya Pradesh.

But considering that the ceiling fan market is dominated by un-labelled 80-watt fans that come for Rs 1,000, it may take a while to convince the customer. Still, the signs are encouraging. The latest tender for one million fans has already brought the prices down to Rs 770. Yet, it may not be a cakewalk. Unlike bulbs, consumers do not buy fans as frequently. Besides, there are others factors such as aesthetics, colour and design that matter for the aspirational Indian consumer.

"The consumer today looks at so many other parameters while buying a fan. Merely blowing air is just one aspect. How it blends with the overall décor of the house are also important parameters. The concern towards energy efficiency is not as high for the consumer," says Sikka.

But Kumar is not convinced. "Of course, LED lamps were a low hanging fruit for us as it was visible and the amount of investment was low. But we are tasting success in fans as well. The model is the same - we have merely taken out the bulb and put in the fan. We want to progress slowly. This is the largest ever non-subsidised energy efficiency programme in the world, something that was never done before. So, there will be skeptics," he argues.

Cold Cash

By far the most ambitious and the most challenging venture for EESL, however, is its plan to disrupt the air conditioner market. Only 6 per cent households in India uses air conditioners and any quantum of energy saving may not add up in the larger scheme of things, despite the fact that ACs consume far more electricity than a fan or a bulb.

There is no doubt about the immense scope for energy saving in the AC segment. A 2013 study by Lawrence Berkely National Laboratory of the US says India stands to gain the most in economic savings by using super-efficient air conditioners compared to other markets around the world. "The total potential energy savings from room AC efficiency improvement in India using the best available technology will reach over 118 TWh in 2030; potential peak demand saving is found to be 60 GW by 2030," the report says, adding: "This is equivalent to avoiding 120 new coal-fired power plants of 500 MW each."

Sunil Sikka President, Havells India

"EESL has done a great job – prices have come down, people have tried the product. Now is the time for it to step back and leave it to the market forces"

Besides, EESL is asking companies to manufacture 5-star inverter ACs that are not even available in the market - 3-star inverter ACs available in the market are 30 per cent more expensive than regular variants with a start-stop compressor - and hoping that the bulk procurement formula will result in 15 per cent lower prices of even regular 3-star ACs. "I would like to see ACs rated above 5 stars being offered at prices comparable to 3-star or below in the market from next year. We will only offer these ACs through the EMI route," says Kumar. And, unlike LEDs and ceiling fans, where the gap in pricing was a few hundred rupees, for ACs, the difference will work to be in the range of Rs 15,000 to Rs 20,000 per unit. Therefore, the risks are high, but so are the rewards.

"We will start with ACs in the first quarter of 2016/17. We do not want to rush into it as it is a costly affair - 100,000 units will cost Rs 400 crore-500 crore. We are trying to figure out how to bridge this gap and may need some interest subvention," reveals Kumar. The industry seems to be playing ball for now. Sale of inverter ACs are picking up and outgrowing other segments, albeit on a smaller base. One hindrance in the adoption of super-efficient ACs, however, could be poor and inconsistent supply of power in most parts of the country.

"EESL's plan to promote more (super-efficient) 5-star-rated inverter AC is a welcome step and we support it. We have the complete range to cater to their requirements," says Pradeep Bakshi, President and Chief Operating Officer, Voltas India. "Start-stop ACs will continue to sell in robust numbers in Tier II and III towns, due to a variety of factors like quality of power, and initial cost of acquisition. For an Inverter AC to work efficiently it is important to have consistent and stable power supply, hence the demand will be higher in metros. The present market dynamics say that the first time buyer continues to prefer start-stop ACs, but the repeat customer is more inclined towards inverter ACs. Our estimate is that for inverter ACs to gain a share of around 20 per cent , it would take approximately three years."

Guiding Light

With EESL's various projects gathering steam, the size of the company has grown significantly. Its revenue has gone up from Rs 12.68 crore in 2011/12 to Rs 700 crore in 2015/16, while profits rose from Rs 5 crore to Rs 32 crore during the same period. By 2018/19, the company targets Rs 5,000 crore in revenues and Rs 2,000 crore in profits.

Pradeep Bakshi President and COO, Voltas India

"We support EESL's plan to promote more (super efficient) 5-star rated inverter ACs. It will take three more years for inverter ACs to gain 20 per cent market share of the industry"

The company's investment plans over the next few years are also robust. It will invest Rs 4,919 crore in the current financial year, Rs 13,027 crore the following fiscal, and Rs 31,659 crore in 2018/19. The trajectory mirrors its increased spending on high-ticket appliances like air conditioners. At the same time, its success with LEDs has also attracted nations across the world. By the year-end, it will set up 21 offices across the world, including in London, Tanzania, Colombo and Bangkok. To fund its projects, EESL plans to float green bonds in the UK and tap climate financing where loans are disbursed at low interest rates. An initial public offering in India may also be in the works next year.

Its efforts in energy saving have started bearing fruit. Earlier this year, Goyal's ministry lowered the estimates for India's power demand during 2017/22 by 20 per cent at 239 GW against the original estimate of 298 GW, taking into account EESL's contribution. And, surely, the stakes are only getting higher with the company studying the market for refrigerators and televisions. EESL may not only prove to be a game changer in reducing the world's carbon footprint, but will also make the customer king.

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