COMPANY ABC

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COMPANY ABC B U S I N E S S D U E D I L I G E N C E R E P O R T

OUTLINE Company ABC, a wholly owned subsidiary of China based Parent Company ABC has approached Mr XYZ and Mr DEF for investment in the firm. Incorporated in 2005, Company ABC is engaged in manufacturing and supply of electric meters. The manufacturing unit of the company is located at xxxxxxxx, xxxxxxxxxx.

The parent company Parent Company ABC has been engaged in the business of manufacturing energy meters for over forty years. Being a major supplier to xxxxx utility companies and also exporting to over 60 other countries, with current annual production capacity of more than 10 million pieces of meters, Parent Company ABC is among one of the largest manufacturers in metering industry in the world.

Key Products

The company is primarily engaged in manufacture and supply of single phase residential consumer meters, with variety of multifunction, multi-tariff, anti-tamper features, or for tropical area. It also has the capability to manufacture three phase residential meters.

Key Employees

The company is currently manned by a 35-member team organized under five primary departments. The organization structure of the company is as below:

Managing Director

Vice-President

GM Marketing

Mnaager Marketing

GM Production

Manager Production

Equipment Engineer

Manager Purchase

Manager Planning

Manager F&AManager HR &

AdminManager QA &

Tech

Manager QA

Manager Technical

Documentation & ISO Executive

COMPANY ABC

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ELECTRONIC ENERGY METERS INDUSTRY OVERVIEW

Overview

is currently witnessing a revolution in the field of power sector with programs focusing on rural electrification, smart grids, alternate energy sources and energy efficient solutions. Energy Metering industry, a sub-sector of the Indian Electric Equipment Industry is poised for changes in products

being offered and its modus-operandi too. In terms of products, the electronic energy meters are fast replacing the conventional Ferraris meters and the smart meters are making their presence felt too.

The key drivers for the growth in this sector are:

Rural electrification Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) conceived in 2005 has is the spearhead program in the space of rural electrification. It has been in implementation during the X and XI plan periods and is being continued in XII plan. The total planned outlay of the this program in

XII plan is 35,447crs

Power sector reforms: Deregularization in power sector is being implemented fervently by both central and state governments. Formation of privately owned discoms with a mandate to improve revenues and efficiency in system operations is another massive change. Restructured Accelerated Power Development and Reforms Program (R-APDRP), a Govt. of India initiative to improve energy accounting and lower the losses has improved the demand for electronic energy meters which have higher efficiency in recording the power usage

Market Potential

With a total electricity consumption of 7,85,194 GWh during 2011-12 and projected growth to 8,52,902 GWh during 2012-13 (provisional), the highest demand for electricity is from Industry followed by Domestic users.

The Indian electrical equipment sector which caters to the power sector and draws its major strength from the

same is estimated at 1,10,000crs in 2010-11. The industry can be broadly classified into two sectors

Generation Equipment and T&D equipment. Generation equipment segment consists of boilers, turbines and generators while the T&D equipment segment consists of transformers, cables, transmission lines, switchgear, energy meters, capacitor, etc. Energy Meters make up about 4% of the T&D market implying a market size of

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Source: Growth of Electricity Sector in India from 1947 2013, Central Electricity Authority, Govt. of India

India

COMPANY ABC

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Key Varieties of Energy Meters

SL NO TYPE APPLICATION CAPACITY

1 Single Phase Meter Mainly deployed in domestic applications (homes, shops, etc.)

5 60 A

2 3-Phase Meter kWh and KVA measurement Mainly deployed in agricultural sector

10 80 A

3 3-Phase Meter kWh, KW, KVA, V/ph, I/ph, pf, frequency measurement Mainly deployed for light industrial and commercial applications

10 80 A

4 3-Phase Meter kWh, KW, KVA, V/ph, I/ph, pf, frequency measurement, load survey, multi tariff, time of use features used in heavy industrial applications

10 80 A

The market demand is currently inclined towards single phase meters due to the higher use in residential areas. The RGGVY program demands single phase meters and hence the demand for the same is expected to go up. According to a recent report of Indian Electrical and Electronics Manufacturers Association (IEEMA) the demand for energy meters has gone up by 19.7% y-o-y during the six month period Apr14 Sep14.

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Source: Indian Electrical & Electronics Manufacturers' Association, 2010-11

Source: Indian Electrical & Electronics Manufacturers' Association

COMPANY ABC

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EVALUATION OF THE INVESTMENT OPPORTUNITY

Manufacturing capabilities

Company ABC is currently engaged in manufacture and supply on single phase energy meters. The below diagram details the manufacture process of the energy meters and also mentions the capabilities of the company

Schematic of Electronic Energy Meters Company

Legend: Electronic Circuit Casing Company ABC Capability

The manufacturing of electronic energy meters at Company ABC is an assembly process. The PCB Assembly, testing and injection molding are currently outsourced. The electronics assembly along with hardware such as connectors, switches, terminals, display, are assembled and housed in a polycarbonate casing. An attractive front panel (or fascia) is fitted on to the casing.

The testing process is the most critical in the entire manufacturing process. The electronic energy meter is tested and calibrated to the desired specification on the testing assembly using standard voltages and currents. Endurance, impulse, climatic, vibration, shock, harmonics and ingress protection testing ensure the reliability of the electronic energy meter. After testing and calibration, the equipment is packaged and ready for dispatch.

The companys current capacity estimate by the management is at 1,500 single phase meters or

alternately 600 three phase meters. The company has single assembly line and six 24 meter

test benches and one 48- meter test benches for testing single phase meters. It also has two 16

meter test benches for testing three phase meters. The capacity estimate is for single shift for

assembly line workers and two shifts for testing and calibration workers

The company currently assembles single phase meters with 5 20A and 5 30A capacity

Raw Material Procurement

The raw material is primarily divided into two categories electrical components and mechanical components. Key raw material inputs are as below:

Electrical Components Mechanical Components

Current Transformers (CT), Integrated Circuits (ICs), LCD Display, Potential transformer (PT), Printed Circuit Boards (PCBs) and Components (Diodes,

Housing Material (Polycarbonate Casing) and Terminal Block

PCB Assembly PCB Testing

Injection Moulding

Fitting of Fascia

Electro Mechanical Assembly

Testing and

Calibration

Packaging

and Dispatch

COMPANY ABC

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transistors, resistors, capacitors, potentiometer, rectifiers, transformers, switches, filters, etc.)

Company ABC imports most of the electrical components which it sources all of mechanical

components from within the country. Some of the consumables like PC seals and screws are

also sourced from outside xxxxxxxxx. Based on the Bill of Material for a recent purchase order

from xxxxxxx, the approximate cost of raw materials consumed for manufacture of per meter

amount to XXX (inclusive of customs and excise duty). The sale price for the purchase order is

XXX (exclusive of the taxes). This implies a margin of X.X% over the cost of raw material. A

review of raw material costs across other companies indicates a lower cost of raw materials

ranging from XXX - XXX for single phase meters

Competitive landscape

There are 25-30 energy metering companies in India which are engaged in manufacturing and supply of electronic energy meters. While a few of them manufacture energy meters solely, the rest are into the electric equipment industry largely. The manufacturing and supply landscape is highly competitive with suppliers having no pricing power. An analytic overview using Porters Five Force Model is presented below:

Threat of New Entrants: The entry barriers in this industry is very low. Based on analysis done in 2011-12 by North Eastern Development Finance Corporation Ltd (NEDFi), the capital required to setup a unit with annual capacity to produce 54,000 units (42,000 units of single phase meters and 12,000 units of three

phase meters) is approximately 50.0lkhs including the cost of machinery and provision for a month of

working capital. With the low capital requirement and public reference designs for meters there are virtually no entry barriers. The only significant deterrent or factor causing delay in entry are

Industry Rivalry

HIGH

Threat of New Entrants

HIGH

Bargaining Power of

Buyers

HIGH

Threat of Substitutes

LOW

Bargaining Power of Suppliers

MODERATE

COMPANY ABC

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requirement to be certified by the BIS after standard testing and the requirement to be an approved

vendor with the key contractors / discoms.

Bargaining Power of Buyers: The discoms are the primary and significant consumers of the meters. The tender process ensures they have a high bargaining power with the suppliers being virtually only takers of the price.

Threat of Substitutes: The electronic energy meters are making their presence felt in the Indian market in the big way by replacing the erstwhile Ferraris meters. Smart Meters which are predicted to make the electronic meters obsolete in India by 2020 have a tough way ahead due to bureaucratic slag and

significantly higher price compared to the current meters. Some of the key players in the electronic energy meters sector like L&T, Landis+Gyr, Secure Meters, HPL Electric & Power, Genus Power etc. have already made significant advancement in terms of smart meter technology.

Bargaining Power of Suppliers: Most of the players in the industry import the key raw material components from China and Singapore. The suppliers of key components are Texas Instruments, Hitachi, National Semiconductors, Philips, etc. which are mostly specified by the discoms / contractors. The meter manufacturers have little say in the component sourcing and hence in the choice of component maker

selection purely based on price.

Industry Rivalry: Inter-industry rivalry is high due to low entry barriers and easy raw material sourcing. There is low requirement for skilled manpower which otherwise acts as another key entry barrier. The

industry size estimate of 3,000crs with 25-30 existing players gives an average market share for

each player of only 100crs. The industry has no place for niche players or Blue Ocean strategies

causing players to fight for current pie. An estimate by IEEMA states that projected CAGR for the

energy meters industry is only about 5.5% p.a.

A list of key players and their brief description is mentioned below.

NAME OF THE COMPANY DESCRIPTION KEY CAPABILITIES

XXXXXXXXXX A private limited company engaged in the business of electronic meters primarily in northern India

1. Single Phase Electronic Meters

2. Three Phase Electronic Meters

3. Single Phase and Three Phase CT Operated Electronic & High Precision Meters

XXXXXXXXXX A technology, engineering, construction and manufacturing company

1. Grid Meters 2. Commercial & Industrial

Meters 3. Residential Meters 4. Energy Management

Products 5. Metering Solutions

XXXXXXXXXX Engaged in the design, development of products & solutions for e-

1. Single Phase Static Electronic Energy Meter

COMPANY ABC

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governance, banking, finance, energy, telecom, utilities, logistics and retail sectors

2. Three Phase Electronic Energy Meter

XXXXXXXXXX Manufacturers of electrical switchgear, energy management equipment, energy meter, digital meters and power meters

1. Single Phase Meters 2. Offer other metering solution

equipment like Ammeter, Voltmeter etc.

XXXXXXXXXX HPL is a multi-product electric equipment company with product range in four categories including electronic energy meters, switchgears, lighting, and wires & cables, electrical wiring accessories

1. Single & three phase LCD type meters

2. Multi-function meters 3. Digital panel meters 4. Digital energy meters 5. Smart meters 6. Prepaid metering solutions

XXXXXXXXXX Operating across 7 locations worldwide with customers across 50 countries, Secure Meters is engaged in development and manufacturing of smart metering products and energy management solutions

1. Grid and bulk power metering

2. CT/VT Operated Metering 3. Direct Connected Metering 4. Distribution Transformer

Metering 5. Multi-fuel 6. Prepayment Metering

XXXXXXXXXX Headquartered at Switzerland, the company is a global leader in smart metering, energy management solutions, and related services, with presence in 30 countries

1. Single & Three Phase Residential Meters

2. Single & Three Phase CT Operated Meters for Industrial and Commercial Use

XXXXXXXXXX Engaged in manufacturing and distribution of Electronic Energy Meters, Metering Solutions, Power Distribution and Management projects, Inverters, Home UPS, Online UPS, Solar Hybrid Inverters, Batteries and Hybrid Microcircuits across India and globally

1. Smart Meters 2. Prepaid Meters 3. Single Phase Meters 4. Three Phase Meters 5. Group Meters

XXXXXXXXXX Specializes in manufacturing Tamper Proof Metering and Distribution Solutions for Power Utilities customized to their requirement

1. Single Phase Meters 2. Poly Phase Meters 3. Group Metering Solution