amara raja batteries limited working capital assessment

INDIAN INSTITUTE OFMANAGEMENT, CALCUTTA

Project: Working Capital Assessment

AMARA RAJA BATTERIES LIMITED

BY:Sl No Name Roll No

1 Brajesh Kumar S13MMMMM006732 Deepak Gupta S13MMMMM006743 Himanshu Garg S13MMMMM010794 Kartikeya Raman S11MMMMM011605 Prateek Mathur S13MMMMM01009

NOVEMBER 29, 2013EPAF08

1 | PageBy: Brajesh, Deepak, Himanshu, Kartikeya & Prateek

On Amara Raja Batteries Limited

Name of the Borrower:

Amara Raja Batteries Limited.

1. Registered Office :

Registered Office & Works:

Karakambadi Tirupati, Andhra PradeshIndia. - 517 520Tel: +91-877-2265000Fax: [email protected]@amararaja.co.in

POCParul ShuklaM: +91 9711316250E-mail:[email protected]

POCDushyant SharmaM: +91 9953323022E-mail:[email protected]

2. Factories / Other major office :

Corporate Operations Office:

Fifth Floor, Astra Towers12P. HiTech City, KondapurHyderabad – 500038. Andhra PradeshTel: +91 (40) 2368 3000Fax: +91 (40) 2311 8219Email:[email protected]@amararaja.co.in

Other Office Adfactors PR Pvt Ltd,E-137, Okla. Industrial Estate III, New Delhi-110020Mobile: +91 9811499946

POCParul ShuklaM: +91 9711316250E-mail:[email protected]

mailto:[email protected]

mailto:[email protected]



POC Dushyant SharmaM: +91 9953323022E-mail:[email protected]

3. Constitution : Public Limited :

Industry focus:Telecom:Our Batteries power: almost half of BSNL / MTNL exchanges 70% of the Private BasicService providers' exchanges More than 70% of the Cellular service providers'exchanges.

Our prestigious telecom customers include: All ITI plants for In-house and switch requirements BSNL / MTNL All NT Switch OEMs viz., Lucent, Alcatel, Siemens, Nokia, Ericsson etc., All C-DOT switch OEMs viz. BEL, BHEL, CGL, UTL, etc. All private Basic and Cellular service providers All Network Integrators

Power Control:We provide Back-Up critical installations in Power generating Units and provide back-uppower for transmission and distribution sub-stations like:Raichur Thermal Power station North Chennai Thermal Power station.ARBL is an approved vendor for NTPC / NHPC and Power Grid Corporation.

Oil & Gas:ARBL provides integrated solutions for renewable energy back-up power for ONGC'soffshore platforms.The island of Lakshadweep is powered through Amara Raja Power Systems.We also provide back-up power for low power transmitters for Doordarshan.

Motive Power:ARBL is the country's first manufacturer of maintenance-free traction batteries used inForklifts and Pallet trucks.Our customers include APC, Siemens, Alstom, Crompton Greaves etc.,

Defense:



ARBL introduced new technologies for back-up power in Defense, Police andParamilitary communication systems.

UPS & EPABX:ARBL is the preferred suppliers for all leading UPS back-up manufacturers like APC,Numeric, DB Power, APLab, Electronics & Controls etc. Our UPS batteries are the fastestgrowing battery brand since it's launch in July 2002 with a nation-wide footprint ofSales and Service points and over 300, 000 batteries in use at over 10, 000 customersites.

Railways:ARBL pioneered the use of maintenance-free batteries in the Indian Railways. Over 50% of Indian Railways' II and III Tier self-generation Air-conditioned coaches are poweredby ARBL.Over 40% of Railway's Signaling and Telecom power supply solutions are provided byARBL.

4. Date of Incorporation :

L31402AP1985PLC005305

5. Whether the company has the power to borrow :

Yes

6. Authorized Capital of the company: Rs Million 200Issued Capital of the company: Rs Million 175.03Paid up Capital of the company: Rs Million 170.81

7. Share holding pattern :

Name of the ShareholderNo. ofShares

Shares as % of Total No. ofShares

Individuals / HUF 31974058 18.72Bodies Corporate 47526750 27.82Directors / Promoters & Their Relatives &Friends 9426644 5.52Institutions 44457396 26.04Non Institutions 31829172 21.90



100.00

8. Brief Back ground of the promoter :

a. Name of the promoter: Dr. Ramachandran N Gallab. Group’s/prompter’s other activities: Mr. Jayadev Gallac. Important milestones of the promoter:

Amara Raja clocks Rs. 10 billion in revenue for H1 for the first time. 2012 –Amaraja Batteries - Capacity expansion in a new location. 2011: Company has splits its Face value of Shares from Rs 2 to Re 1 Amara Raja Batteries Ltd forayed into an agreement with Japan's Honda Motor.

This is in order to develop a valve regulated lead acid battery. The Company has issued Bonus Shares in the Ratio of 1:2. The Company has splits its face value from Rs10/- to Rs2/- Launches zero maintenance battery

d. Members of any associations etc:

Mr. Ravi BhamidipatMr. Craig W RigbyMr. Shu Qing Yang

Mr. P Lakshmana RaoMr. Nagarjun ValluripalliMr. N Sri Vishnu RajuMr. T R NarayanaswamyMr. Raymond J Brown

9. Back ground of the company :

a. The year of starting operation:

1985, a public limited company on 6th September 1990.

b. The business phases in chronological order:

Multiple brands Amaron Volt (Telecom networks, data centres, power stations, oil and gas),Power Stack (Telecom networks, data centres, power stations, oil and gas, Indian Railways),Quanta (UPS applications), Power Sleek (Wireless telecom network, UPS applications).



Batteries for the telecom, UPS back-up systems, railways and power utility sectors.

c. Any adverse situation faced and how it did overcome such situation.

Though the growth rate of UPS OEM business has moderated by country’s adversemacro-economic conditions, the replacement demand continues to be strong. The companycould not fully capitalize on the growing demand and preference for its telecom (PowerStack)and UPS (Quanta) batteries for want of adequate capacity. The continuing strong performanceof industrial battery business is resultant of its “preferred supplier status” with all majorcustomers, backed by timely supplies, efficient after sales service, customer relationshipmanagement and consistent product performance. The company has progressively startedproviding total solutions to customers enabling it to forge strategic alliances and gain servicerevenue stream. The ongoing expansions, which are expected to commence supplies duringthe second half of this financial year, will ably support the growth plans of the industrialbattery business.

d. Any important milestones achieved in recent years

2012-2004 Amara Raja clocks Rs. 10 billion in revenue for H1 for the first time. 2012 -AmarrajaBatt - Capacity expansion in a new location. 2011: Company has splits its Face value of Shares from Rs 2 to Re 1 Amara Raja Batteries Ltd forayed into an agreement with Japan's Honda Motor. This is

in order to develop a valve regulated lead acid battery. The Company has issued Bonus Shares in the Ratio of 1:2. The Company has splits its face value from Rs10/- to Rs2/- Launches zero maintenance battery

10. Brief back ground of the management:

a. Name of key personnel and their prior experience :

Key Person Experience

Dr. Ramachandra N Galla Non-Executive Chairman

Jayadev Galla Vice Chaiman and Managing Director



Ravi Bhamidipati Executive DirectorShu Qing Yang Non-Executive Director

b. Comments on the overall management system

Amara Raja Batteries Limited (ARBL), a company with 26% equity each from Galla Familyand Johnson Controls Inc, USA, is the technology leader and is one of the largestmanufacturers of lead acid batteries for both industrial and automotive applications in theIndian storage battery industry. In India, Amara Raja is the preferred supplier to majortelecom service providers, Telecom equipment manufacturers, UPS sector (OEM &Replacement), Indian Railways and to Power, & Gas among other industry segments. AmaraRaja is also a leading manufacturer of automotive batteries under the brands - Amaron®and Powerzone, which are distributed through a large pan - India sales & service retailnetwork. The company supplies automotive batteries under OE relationships to AshokLeyland, Ford India, Honda, Hyundai, Mahindra & Mahindra, Maruti Suzuki, and TataMotors. The company’s Industrial and Automotive batteries are exported to Asia Pacific,Africa and Middle East.

c. Comments on corporate governance

Corporate Governance is based on principles and practices such that the affairs of theCompany are being managed in a way which ensures accountability, transparency andfairness in all its transactions in the widest sense and meet its stakeholder’s aspirations andsocietal expectations. Effective corporate governance practices constitute the strongfoundation on which successful commercial enterprises are built to last. Amara RajaBatteries Limited (“Amara Raja” or “the Company”) is committed to the adoption of bestgovernance practices and to its adherence in the business of the Company. The Company’scorporate governance practices are driven by timely disclosures, transparent accountingpolicies, internal control on operations and high levels of integrity in decision making withan objective to enhance the value to the stakeholders this is demonstrated in sustainablereturns to the shareholders, high credit ratings, performance focused work environmentand high quality products at competitive Prices.

d. Implementation of technology:

The capacity augmentation was based on a comprehensive study of battery technologies(existing and emerging) in the sectors of our presence. The lead-acid chemistry is expectedto remain the preferred and most commercially viable technology with innovation (productand process) likely to be critical in enhancing customer value.



e. Fulfillment of CSR:

The Company’s intranet-based e-induction enables on-boarding of new recruits within 72hours of their joining. The programme comprises training modules regarding thefunctioning of the Company, the core purpose and values espoused at Amara Raja, its CSRand people development activities. The modules are structured to provide information onthe culture, products, processes and important milestones of the Company. These modulesare interspersed with quizzes and interactive Content to ensure a faster alignment with theCompany Amara Raja cultivated medicinal herbs in a 222-acre hillock in Pemmagutta(Chittoor district), which provides livelihood to 40 tribal families. To expand this project, theRajanna Trust and Nandan Cleantech Limited, Hyderabad, conducted a baseline survey atthe Pemmugutta Hill under the Green Cover project to identify suitable land for growingthe Jatropha plantation (ideal for bio-diesel production). Under the Blue Sky CSR initiative,the Rajanna Trust extended the green cover at Petamitta village with the assistance ofcommunity, school children and employees.

f. Fulfillment of commitment on Environmental Aspect:

Amara Raja is working continuously to reduce its environmental footprint by offeringenvironment- Friendly products. The Company focused on waste reduction and naturalresource conservation. Key related measures comprised the installation of efficientpollution control equipment, tree plantation and safe disposal of hazardous wastes.Power consumption: The Company implemented several initiatives to reduce Energyconsumption:

Installed Variable Frequency Drivers (VFD) and Active Power Factor Correctors (APFC) Implemented day lighting systems Installed centralized lead melting pots in grid casting areas Optimized formation cycle times Installed LED streetlights and solar water heaters

11% Reduction in energy consumption in the four years leading to 2012-13 32000 Treesplanted within the Tirupati campus.

Investment Rationale:

Sustained performance over the past three years. Expansion plans to sustain momentum. ARBL is a market leader in select Industry segments.



Entry into new verticals like two- wheeler OEM will further diversify revenues andsupport

Robust growth in Replacement/ Aftermarket of two wheeler and four wheeler segment. Ability to pass cost increases by increasing prices.

Concerns:

Lead prices constitute 80% of raw material prices. Inability to raise prices could impactmargins.

Currency volatility could lead to short term impact on profits. A slowdown in any particular sector could derail the company’s growth projections.

Business and Operations:

Amara Raja is the second largest automotive battery manufacturer and the largest supplier ofIndustrial storage battery in India. It entered the automotive battery segment only in FY01 postits JV with Johnson Controls Inc (JCI, USA) when it introduced AMARON batteries based on Zeromaintenance technology for the first time in India. Johnson Controls, the global leader inlead-acid automotive batteries and advanced batteries for Start-Stop, hybrid and electricvehicles, holds a 26% stake in Amara Raja and provides technical support to the company.From FY08, it entered two-wheeler replacement segment with launch of Amaron Pro bikebrand. It has just entered the two –wheeler OEM segment from July 2013.

The industrial battery product portfolio offers capacities ranging from 4.5 Ah to 5,000 Ah. ARBLis the market leader in the telecom and UPS battery business with ~46% and ~32% marketshare respectively.

The company is investing significantly to expand capacities in both automotive and UPSsegment. Currently, it has only one manufacturing plant in Andhra Pradesh. It has planned Rs 7billion plus project comprising a brownfield expansion at existing location and a Greenfieldfacility near Chittoor (Andhra Pradesh) 90 kms from the existing site.

Industrial Battery division:



Overview ARBL commenced operations in 1991 to manufacture batteries for the telecom, UPSback-up systems, railways and power utility sectors. Its manufacturing facility is ISO 9001 andISO 14001 accredited.

Products Product portfolio offers capacities ranging from 4.5 Ah to 5,000 Ah under multiplebrands Amaron Volt (Telecom networks, data centres, power stations, oil and gas), Power Stack(Telecom networks, data centres, power stations, oil and gas, Indian Railways), Quanta (UPSapplications), Power Sleek (Wireless telecom network, UPS applications).

Capacities:

FY10 FY11 FY12 FY13 FY14E FY15E 16E

LVRLA mn AHpa 900 900 900 760 1000 1000 1000

MVRLA mn 1.5 1.8 1.8 1.98 3.6 3.6 3.6

Distribution network:

Largely a B2B model, 100 AQuA channel partners facilitate the reach for UPS batteries acrossthe country.

Customers:

Key customers include Indus Towers, Viom Networks, ATC, Bharti Infratel, Bharti Airtel,Vodafone, Aircel, BSNL, Idea Cellular, Indian Railways, APC, Emerson, Numeric, Delta, DB Powerand Schneider.

Niche features:

First to introduce VRLA batteries for telecom and rolling stock applications in India. Strategic supply partnership with leading telecom tower companies and operators Well-balanced OE and replacement mix in UPS sector.



760 million Ah per annum capacity of Large VRLA batteries. Capacity reduction from900 million Ah to 760 million Ah was due to a change in the product mix.

1.8 million units per annum capacity of Medium VRLA batteries. Largest supplier of batteries to the telecom and UPS sectors. 46% share of the Telecom market. 32% share of the UPS market. 40% contribution to the company’s revenue in 2012-13.

Automotive battery division:

Overview The Company commenced operations in 2000 with technology from JohnsonControls Inc. USA. Its manufacturing facility is QS 9000, ISO 14001 and TS 16949 accredited.

Distribution network:

Amaron network comprises 287 franchised distributors, including 21,000 plus retailers and2,400 plus service hubs, which is the second largest in the battery sector in India. PowerZonenetwork comprises 1,100 plus retail outlets for semi-urban and rural presence.

Customers:

Major OEM customers: Ford, Maruti Suzuki, Hyundai, Honda, M&M, Tata, Volvo Eicher,Daimler Benz, Tafe Tractors, Isuzu Motors among others.

Major private label customers: Bosch, Lucas, Cummins and AC Delco. Dominant player in the aftermarket sector for four-wheeler and two-wheeler batteries.

Niche features:

First to introduce zero maintenance four-wheeler batteries. First to introduce VRLA two-wheeler batteries. First to provide extended warranties to consumers. First supplier of batteries to M&M for micro hybrid vehicles. 5.6 million Units per annum four-wheeler battery capacity. 4.8 million Units per annum two-wheeler battery capacity. #2 ranking in India’s automotive battery business.



28% share of the four-wheelers (OEM) market. 37% share of the organized four-wheeler aftermarket and 22% market share in overall

automotive four-wheeler aftermarket. 25% share of the organized two-wheeler aftermarket and 15% market share in overall

automotive two-wheeler Aftermarket.

Investment Rationale:

Entry into New geographies:

Amara Raja is seeking foothold opportunities in the Indian Ocean Rim following a change in theglobal scenario. China’s focus on environmental management has resulted in a rationalizationof production capacities; increasing wages, lead price parity of the Shanghai Metal Exchangewith the global benchmark and currency appreciation have weakened China’s competitiveedge, strengthening prospects for other manufacturing countries. The company is attractivelyplaced to benefit from these factors as its products have demonstrated global quality andperformance standards. The company has drawn out a roadmap to explore opportunities inthe Indian Ocean Rim following the changing global competitive scenario in the wake of Chinaaligning its business environment with global best practices – creating a level playing field forother global battery manufacturers. It has identified certain high-potential markets, where it islooking to forge strategic alliances with channel partners for marketing its products.

OEM business – Four wheeler to gain on pent up demand and two wheelerentry to support high growth

FY13 was challenging for the Indian automobile industry. Car production in India fell for thefirst time in a decade – 3.19% in FY13. The sector witnessed a sustained slowdown on accountof higher interest rates, rising fuel prices, weak infrastructure growth, low consumerconfidence and declining consumption growth. There has been a significant shift towards dieselpassenger car variants to optimize operating costs. The widening gap between the cost ofpetrol and diesel enhanced a preference for diesel platforms.

The passenger car sector has not grown in the past 24 months, creating a large pent-updemand. With interest rates poised to mirror inflation decline on the one hand and risingincomes on the other, passenger car demand is expected to rebound in 24- 30 months. ARBL’ssuccessful entry in the diesel car platform, serving the needs of leading OEMs, will facilitatefaster growth in the sector.



Growth in an aspiring young population, improving incomes, rapid urbanization andaccelerated sub-urban development will make comfortable mobility an important aspect. Arevival of investment-friendly policies and the resumption of consumer confidence willaccelerate economic activity and automobile production growth. As an extension, theindustry’s volume is expected to improve from 3 million plus units to 5 million unitsmid-decade and a projected 9 million units by 2020, making India the third largest car marketbehind China and the US.

The Indian government has targeted a US$1 trillion investment in infrastructure for TwelfthPlan (2012-17). These investments will accelerate construction and improve road infrastructureleading to freight generation and commercial vehicle demand. In view of the government’srenewed thrust on agricultural growth and organized retail, the demand for small commercialvehicles and mini-trucks is expected to increase multifold, catalyzing the demand for batteries.Besides, increasing thrust on farm mechanization and the growing use of tractors beyondagricultural purposes (in infrastructure and construction industry) are expected to catalysetractor demand.

The size of Indian two-wheeler market is at about 16 million units a year. Two-wheelerproduction in India grew 1.73% in 2012- 13. India produces about 16 million two-wheelersannually; this is poised to grow rapidly due to increasing disposable incomes in rural andsemi-urban markets. As the battery has become vehicle-critical, two wheeler OEMs haveshifted to VRLA batteries. Amara Raja is a pioneer of these batteries in India. The companypartnered with Honda Motors for its large two- wheeler battery requirement (suppliescommence in 2013-14) and is optimistic of entering into similar alliances with other leadingOEMs. It has also earmarked 25% of capacity for this purpose.

India is the second largest two-wheeler manufacturer in the world, yet the market penetrationrate is only 92 vehicles per 1,000 people, which is expected to increase significantly over thecoming years as the incremental addition to the Indian youth is estimated to be ~ 41 million inthe next five years which should accelerate demand. The earning age of the average Indian hasdeclined significantly. The penetration of IT & ITeS services to Tier-II and III towns provided theyouth with more money and aspirations. The replacement cycle is said to have reduced from ~seven years (2001) to ~ five years (2011). As per industry estimates, around 50% of the sales ismade to first-time buyers and only 30% to repeat customers – the replacement marketprovides a huge growth opportunity.

Rising incomes, growing middle-class and easy credit access are driving demand growth:Personal (nominal) disposable income is expected to rise annually by 8.2% over FY11-17. Risingmiddle-class population is expected to touch 550 million by 2025 from 50 million in 2010.



Favorable demographics with a growing presence of youth apart from easier credit accessincreases the offtake of passenger, two-wheelers and commercial vehicles; the auto financeindustry grew at an average annual rate of 13% in FY08-12.

Expansion plan to support momentum:

Despite a persistent slowdown in key user sectors, namely the automotive and telecomsectors, product demand grew substantially, leading to a 90% plus capacity utilization andincreased throughput. With economic stability predicted in the foreseeable future and thenational power situation likely to remain grim, demand for its products is only expected togrow significantly, making it necessary to invest in additional capacities and graduate thecompany into a new orbit.



The capacity augmentation was based on a comprehensive study of battery technologies(existing and emerging) in the sectors of presence. The lead acid chemistry is expected toremain the preferred and most commercially viable technology with innovation (product andprocess) likely to be critical in enhancing customer value.

ARBL’ products are relevant across large and multiple user sectors, de-risking the companyfrom an excessive dependence on any single sector and providing it with a secure foundation



for capacity augmentation. The company is optimistic that it will need to increase capacityeven if it retains its share of the growing market.

ARBL’ expansion project envisages batteries for new applications, which will create newbusinesses, taking the company into a new orbit.

Aftermarket business to continue to perform consistently:

In the automotive sector, ARBL is a dominant aftermarket player for four- and two-wheelers,where every vehicle addition grows the aftermarket demand, irrespective of OEM growthtrends. As the battery has evolved into a critical vehicle assembly item, OEMs prefertechnologically superior VRLA batteries. This choice is fast cascading to the aftermarket,growing the inclination for branded alternatives.

The automotive replacement market demand remained strong, influenced by a considerableaddition of vehicles to the existing population following a spurt in OE production over therecent past (post 2008-09 global economic meltdown), realignment in the focus of smallplayers towards inverter batteries, growing preference for branded products, an attractivevalue proposition offered by organised industry players.

Battery demand depends on annual vehicle addition to the Indian roads and replacementcycle. Demand is likely to sustain momentum in 2013-14. Reduction in battery life due to thefrequent start-stop function is adding to replacement demand.

ARBL increased capacities to 6.00 million units per annum. Replacement market volumes forARBL grew at 20% plus in 2012- 13. The company is undertaking a major capacity expansion to8.25 million units per annum -- looking to the future demand. It is widening the distributionnetwork pan-India. The focus is on ground-level visibility initiatives.

Aftermarket demand is expected to grow significantly with increasing preference forelectric-start vehicles necessitating immediate replacement. The business is primarily driven bythe trade channel comprising battery shop owners, mechanics and auto electricians.

ARBL is a pioneer of VRLA batteries in India. Replacement market volumes grew at 37+% in2012-13. The company is undertaking a major capacity expansion to 8.4 million units perannum – looking to the future. Amaron has secured the preferred brand status with tradechannels.

Market leader in Industrial segment:



The telecom and UPS sectors are key users of the company’s LVRLA and MVRLA batteriesrespectively, with attractive medium-term prospects.

The Indian telecom sector is passing through challenging times as telecom operators areexperiencing margin pressure. The policy logjam on spectrum pricing and allocation,cancellation of 2G licenses by the apex court and slow progress in broadband rollout stallednetwork expansion and restricted an improvement in the tower occupancy ratio. As a result,the replacement demand prevailed with a preference for reliable, quick recharge and deepdischarge capable batteries.

There are about 350,000 telecom towers in India with a majority more than three to five yearsold, a sizeable business opportunity. Besides, as the battery operating environment becomesincreasingly harsh, the lifecycle of the battery is declining, adding to replacement demand. Fortelecom tower companies, energy cost reduction is a priority in view of frequent poweroutages and a spiraling diesel price. India has about 350,000 telecom towers; about 70,000towers are not connected to the grid. The telecom tower sector uses about 25 billion kWhenergy per annum; about two-thirds of Indian mobile towers face grid outages in excess ofeight hours a day. In 2011, the Indian telecom industry had consumed an estimated 3.2 billionliters of diesel and the amount could rise to 6 billion liters by 2020, according to a study byGreenpeace India. Telecom tower companies consume about 1.7% of the total dieselconsumption in India; about 60% of the towers in India depend solely on diesel for powergeneration. Diesel power costs upwards of 15/Unit compared to INR 6/unit for battery storedpower.

The Department of Telecommunications has mandated all tower companies to reduce theirdependence on diesel and cut carbon emissions by operating at least 50% rural towers and20% urban towers on hybrid power (solar) by 2015.

Increased internet access through mobile phones has necessitated higher power consumptionin towers, a need for large capacity batteries.

Spectrum re-farming (moving 2G services on the 1800 MHz from the existing 900 MHz) which isbeing debated among regulatory bodies, will call for redesigning of existing networks, mainlythrough the replacement of base stations, commonly known as telecom towers – set up newbase stations and replace earlier sites on the 900MHz frequency band. When this materializes,it could add to the opportunity potential in a big way.

Estimates suggest that telecom towers in India are expected to increase to 460,000 by 2015.



Tower companies are seeking opportunities to reduce operating costs as rentals decline andpower outages and diesel price increase. This positions batteries as a cost-effective andenvironment-friendly power source, building on the Green Site concept.

There was 18% improvement in volume for ARBL from telecom segment. Capacity utilizationwas in excess of 90% in industrial battery businesses.

The company is strengthening its industrial battery business through a broad-based approach.The company will continue to forge strategic alliances with telecom tower companies andoperators to provide comprehensive back-up power solutions while increasing an awareness of‘Green Sites’ in the domestic space.

Purchases are largely for replacement as new service roll-outs are minimal, thus makingdemand more stable and predictable. Huge power shortage and frequent power outagesprevent complete battery recharge. Soaring diesel prices and environmental concerns aredriving the telecom tower companies to create ‘Green Sites’ with batteries being the primaryenergy source. Tower companies are moving from product vendors to solution providers for asuperior value proposition.

The company has created a high quality product basket that meets the complete requirementsof all telecom tower companies and emerged as the preferred vendor. Quick Rechargebatteries are designed in keeping with this harsh operating environment. The company spreadsawareness of the product capability in achieving the ‘Green Sites’ goal and offers completesolutions – batteries, installation maintenance and disposal – which enable it to forge allianceswith leading telecom tower companies and operators.

Risks & Concerns:

Business growth risk:

The company’s growth percentage could decline due to technology risks, fresh competition,existing players becoming more aggressive, regulatory / policy changes, slowdown in userindustries etc. Amara Raja is yet to reach its rightful position in the market based on its productquality and preferred brand position. As a result, the Company’s growth will continue tooutpace the broad sectoral growth. In addition, the Company is expanding business verticals byestablishing a presence in new applications – solar batteries and Home UPS batteries – whichprovide large and sustained growth over the long-term. The Company is also working upon ablueprint to increase exports in the Indian Ocean Rim. On the supply side, the Company is



embarking on Rs 7 billion plus investment plan, which is expected to commence operations in2013/2014 and translate into attractive growth.

Sectoral downturn risk:

A slowdown in any particular sector could derail the company’s growth projections. Thecompany’s business is broad-based across a number of user sectors and sub-sectors, de-riskingthe Company’s performance from a slowdown in any particular sector. This is clearly visible:despite a lackluster performance by the automobile sector in 2012-13, automotive volumesgrew a healthy 20%. Further, the Company’s growth dominance in the aftermarket in theautomotive and industrial battery businesses – a recession-proof business sector – helpedmitigate volatility. In addition, the addition of new business verticals and new geographies willfurther de-risk the company from a sectoral downturn.

Raw material prices could increase:

While the lead prices has declined in the recent past, any volatile changes in lead prices couldimpact costs and resultantly demand if prices are increased although ARBL has exhibited somefavorable elasticity in the recent past. Commodity has other cost element which is thepremium on the procurement of metal which has gone up substantially because of the supplydemand situation globally, especially for lead.

Currency volatility could affect its margins:

Any depreciation in rupee versus dollar impacts the company raw material prices, mainly lead,which could impact the profitability of the company if it is unable to pass on the increase incosts.

Market share risk:

The company may yield market share through its inability to address opportunities. Theon-going slowdown in the OEM business in automotive and UPS sectors is expected to work asa boon as it will help the company in maintaining its market share in the aftermarket sectors.The company will protect the aftermarket supplies through increased capacity of four-wheelerbatteries from 5.6 to 6.0 million units per annum, allocating flat plate inverter battery capacity



for making four-wheeler batteries for the aftermarket sector, following the commissioning ofnew MVRLA lines in Q3 2013-14, a part of the capacity will be utilized for making four-wheelerbatteries for the aftermarket.

Profitability risk : Inflation could affect the company’s profitability. The company’s passion to strengthen returnfrom every rupee invested was derived from its Continuous Improvement (CI) and LeanManagement programmes. This enables the Company to eliminate wastage, strengthenman-machine productivity, reduce power consumption and improve product quality. TheCompany’s ability (through its joint venture partner) to access path-breaking processtechnologies and leverage sourcing efficiencies will help optimise costs. Its sustained efforts tolaunch superior product variants will sustain margins. Going ahead, the commissioning of thenew facilities will allow a better absorption of fixed overheads, improving business margins.Any depreciation in rupee versus dollar impacts the company raw material prices, mainly lead,which could impact the profitability of the company if it is unable to pass on the increase incosts.

Market share risk:

The company may yield market share through its inability to address opportunities. Theon-going slowdown in the OEM business in automotive and UPS sectors is expected to work asa boon as it will help the company in maintaining its market share in the aftermarket sectors.The company will protect the aftermarket supplies through increased capacity of four-wheelerbatteries from 5.6 to 6.0 million units per annum, allocating flat plate inverter battery capacityfor making four-wheeler batteries for the aftermarket sector, following the commissioning ofnew MVRLA lines in Q3 2013-14, a part of the capacity will be utilised for making four-wheelerbatteries for the aftermarket.

Profitability risk

Inflation could affect the company’s profitability. The company’s passion to strengthen returnfrom every rupee invested was derived from its Continuous Improvement (CI) and LeanManagement programmes. This enables the Company to eliminate wastage, strengthenman-machine productivity, reduce power consumption and improve product quality. TheCompany’s ability (through its joint venture partner) to access path-breaking processtechnologies and leverage sourcing efficiencies will help optimise costs. Its sustained efforts to



launch superior product variants will sustain margins. Going ahead, the commissioning of thenew facilities will allow a better absorption of fixed overheads, improving business margins.

Liquidity risk:

Capacity expansions could stretch liquidity. The company was zero-debt until March 31, 2013,a result of robust cash flows and prudent fund management. The company enjoys significantworking capital limits, which remain largely unutilised.

Forex risk:

ARBL Imports significant raw material for its products. While it had imports of Rs 738.4 crmainly related to raw material but exports of just Rs 101.64 cr during FY13. This exposes ARBLto significant foreign currency risk. While the company had very little un-hedged forexexposure as at FY13, it could get impacted on the old hedges in case of significant currencyvolatility.

Related party transactions:

ARBL had significant transactions in the form of purchase of goods/services with Amara RajaElectronics Limited (Rs 124.2 cr) and Mangal Industries Limited (Rs 204.8 cr) during FY13. It hadpurchased capital goods/services and advances recoverable from Amara Raja Infra PrivateLimited of Rs 66.6 cr during FY13.

Delay in capacity expansion:

If the proposed capacity expansions are delayed due to operational reasons or changed due tochanges in market conditions, ARBL’ market share and competitiveness could be impacted.

11. Financial Parameters analysis:Rs in Millions

For the Year Ended 2012 2013 Comments

Net Sales 23668.2

29620.1 Sales increases due to increase in sales of quantity



Operating Profit 3016.94

3929.38

Operating Profit increases due to increase in sales &better efficiency

Earnings Before InterestTax Depreciation andAmortization

3675.65

4889.07

Earnings Before Interest Tax Depreciation andAmortization increases as expected.

Profit Before Tax ( PBT) 3186.45

4218.17

Profit After Tax ( PAT) 2150.63

2867.05

Net Cash Accrual ( PAT+Depreciation )

2615.36

3527.97 Net cash Accrual increase as profits increases

Net Worth ( NW) 8234.69

10598.1

Current year profit added to the previous year networth.

Tangible Net Worth (NW – RevaluationReserves )

8234.69

10598.1

Tangible net worth is same as Net worth since thereis no revaluation reserves of the company

Adjusted Tangible NetWorth (ATNW) = TNW –Investment in GroupCompany

8073.93

10437.4

Investment in group company as a percentage oftotal net worth is not much.

Total Outside Liability (TOL)

5280.48

7106.56

Total outside liability is very much under control. Thecompany has taken very less debt.

Current Asset 9395.94

12568.5

Current assets have increased in line of the increasein sales.

Current Liability 4129.98

5761.93

Current liabilities have increased in line of theincrease in sales.

Current Ratio 2.27506 2.1813 Current ratio is much above the required level of lelel

of 1.33; so no issues to get the working capital loan.

TOL/TNW Ratio 0.64125

0.67055

Very good total outside liability to total net worth.Outside liability is less than the net worth this showsvery good health of the company.

PAT /Sales Ratio 0.09087

0.09679

PAT to sales ratio increase which is a healty sign forthe company

Return on CapitalEmployed

0.26117

0.27052

Return on capital employed also increases whichconfirms a good health of the company. Shows thatthe company is growing



Interest Coverage Ratio 123.291

393.725

No problem for interest payments. Interest costs isnegligible as compared to the profits of the company.

Justification of Current Assets:Rs in Millions

Year 2013 2014 2015 CommentsRM (Imported)(Rs in million) 372.33 409.563022 450.519269

HL (In months) 0.63391234 0.63391234 0.63391234Projected holding level of the importedraw material kept at the same level as theactual level of the previous year

RM(Indigenous)(Rs in million)

558.49 614.339034 675.772853

HL (In months) 0.63280743 0.63280743 0.63280743Projected holding level of the indigenousraw material kept at the same level as theactual level of the previous year

WIP (Rs inmillion) 828.95 907.448338 995.803707

HL (in Months) 0.42107571 0.42107571 0.42107571Projected holding level of the work inprogress maintained at the same level asthe actual level of the previous year

FG (Rs inmillion) 905.42 1000.11385 1100.12509

HL (in Months) 0.46577998 0.46577998 0.46683336Projected holding level of the finishedgoods maintained at the same level as theactual level of the previous year

Receivable (Rsin million) 3806.77 4165.89318 4582.48147

HL (In months) 1.3796944 1.37259277 1.37259246

Projected holding level of the receivablesnot increased from the actual level of theprevious year. In fact taken a pessimistapproach.



OCA 5650.87 6184.11381 6802.5017

% CA 0.44960504 0.44904408 0.44911407Projected percentage of the OCA kept atthe same level as actual level of the theprevious year

Total CurrentAssets 12568.52 13771.73 15146.49 Total current assets increased in the same

ratio of the increase in the sales.

Justification on Other Current Liabilities:

Rs in MillionsYear 2013 2014 2015 CommentsCreditor (Rs inmillions) 1362.84 1510.78622 1661.86469

HL (in months) 0.92990916 0.92990916 0.92990916Projected holding level of the creditorsmaintained at the same level as the actuallevel of the previous year

OCL (Rs inmillions) 4300.46 4607.83024 5101.85942

% OCL as 0.75935585 0.75308369 0.75429739 Kept consistent as the audited year.Total 5663.3 6118.61646 6763.72411

Assessment of Fund Based Working Capital:

Year 2013 2014 2015

Current Asset (Rs in Millions) (1) 12568.52 13771.73 15146.49

Other Current Liabilities (Rs in Millions)(2) 5663.3 6118.62 6763.72



Working Capital Gap (Rs inMillions) (3) 6905.22 7653.11 8382.77

Minimum NWC (25% of EstimatedCurrent Asset) (4) 3142.13 3442.9325 3786.6225

Estimated NWC (5) 6806.59 7539.69 8252.33

MPBF (Min of (3-4), (3-5) 98.63 113.42 130.44

Comments:

The company is providing NWC of 7540 million whereas the required minimum NWC is only3443 million.

Recommendation:

Amara Raja Batteries Ltd. has shown strong sales growth in the past two years (25%compounding). Also the company is providing NWC of more than double amount of therequired minimum NWC.So we recommend the sanction of the following credit limits.

Terms and Conditions:

1

Facility :Cash Credit/ OverDraft

Over Draft

2 Limit : Rs. 113.42 million

3 Security : a. 1st Charge on current asset both present andfuture ranking paripassu/exclusive charge



b. Equitable mortgage on land and building.

Thank You Note:

The Team would like to thank IIM Calcutta & Professor Praloy Majumder for this opportunityto do this Project.We have learnt a lot from the same and look forward to the future with added skill sets andknowledge that was added unto us by the Faculty throughout this course.

amara raja batteries limited working capital assessment

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