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M. Ramesh

Mr Gopal Mahadevan, Chief Financial Officer, Amara Raja Batteries

CHENNAI, Oct. 1

AMARA Raja Batteries Ltd prides itself on the strength of its under-geared balance sheet. Last year, the company turned in a record sales of Rs 188 crore; assets expanded by Rs 45-crore but with practically no debt, and only a marginal increase in working capital.

Amara Raja, a joint venture of Indian promoters with Johnson Controls Inc of the US, has plans to expand both its product and market range, with an emphasis on exports.

In an interview to Business Line, Mr Gopal Mahadevan, Chief Financial Officer, Amara Raja Batteries Ltd, gives an insight into the financial management of the company. Excerpts :

Last year yourgross block increased by Rs 43 crore but there was no rise either in equity or debt. At the same time, there appears to have been a liquidation of net current assets by Rs 27 crore. Does it mean that short-term assets are being encashed to finance long-term assets?

Actually there has been a net increase in working capital - there has been no use of short-term funds for long-term investment. If you notice there has been a decrease in bank deposits and intercorporate deposits - as these were used for the expansion into Automotive Batteries.

We have actually financed the expansion through internal accruals. Basically, the company has been generating cash in the past years, and we also had a rights issue in the previous year. These are the resources which have gone into financing the fixed assets. It is not actually through liquidation of current assets.

Your company's shareholders' fund works out to Rs 158.75 crore as against a debt of Rs 13.36 crore. Don't you think that servicing equity is costlier than servicing debt?

It is the basic philosophy of the company not to rely too much on debt. I agree with you that equity is costlier than debt. But we would also need to weigh the cost options with the investment options available for cash surpluses. Amara Raja has had cash surpluses and it made more sense to use the surpluses than go in for borrowings while the surpluses earn lower returns.

Would that change in the future, or would you continue to rely more on equity?

Looking forward, it is very difficult to say what the company's plans are. We are not averse to debt. We might go in for debt, if interest rates are attractive. But this would depend on what exactly the asset addition plans are. If there are significant additions, we might, but not at this point in time. We are well placed to go in for debt if need be. Your company plans to put up a new line for producing 2-wheeler batteries and an expansion of the facilities at Tirupati is also on the cards. What is the capital expenditure plan for the current year?

I would like to correct your question. We are indeed planning for a 2-wheeler batteries line, but it is still very much at the drawing board stage. But we are looking at various options for going into the 2-wheeler battery market - we are studying the market. An investment in this area will not happen in the current year, certainly not.

Also, the second one-million battery line (at Tirupathi) would happen if things go well, maybe after a year or so, once we are able to fill in capacity at the first line . That will also not happen in the current financial year.

Last year, there has been some increase in your working capital. What is your comment on the working capital management in your company?

Our limit is Rs 13 crore. Growth in working capital has happened primarily because our sales have also gone up - Rs 188 crore - the highest in the history of the company. These sales happened during the end of the year, especially in the telecom sector, due to which our debtors level has gone up. We also had a good first quarter - because we knew orders were coming in the first quarterwe had to build up inventory levels. Creditors have gone up because the attendant credit has gone up.

With increase in sales, do you anticipate pressures on the working capital?

We are certainly expecting an increase in the topline. But the predominant part of our automotive business is after market, which is still cash-in-advance. We don't push stock into the pipeline. Our after market debtors are very negligible. So, while requirements might be there in terms of exports - which we are contemplating - we don't see any significant pressures coming (on working capital) because of the topline growth.

But you are speaking of only one segment - a sub-segment really - of your product range. What about the rest, such as UPS batteries? That cannot be cash-in-advance.

Oh, there might be some growth in the working capital requirements, nothing to cash-strap the company. Today, we are working on 45-day credit. Suppose it goes up to 90-day credit, obviously our working capital may go up. If your question is whether we are concerned about significant growth in credit, which is going to stifle working capital, the answer is no.

What is your preferred mode of funding?

Well, as of now, the company has been doing a plain vanilla cash credit. The reason is that the funds have been really not locked up for long. But we would certainly look at other options.

But wouldn't an FCNR (B) or CP, which are also short term, be cheaper than cash credit?

Certainly. Why FCNR (B), I can look at MIBOR-based loans, which are as cheap as FCNR (B). Today there is a plethora of instruments available, both rated and non rated. If I were to go for rated instruments, I could go for CP or private debt, structured paper. If I were to go for non rated, clean plain vanilla loans are available, such as FCNR (B), or MIBOR-based loans with an interest rate swap. Then why go in for a cash credit?

Cash credit is the basic facility that any company would take because that is a source on which you can readily take cash. Suppose tomorrow the call rates become very high, at that time going and looking for a cash credit would be an unwise thing to do.

But we are actively exploring going in for alternative sources of finance. We are aware of the various changes in the market in terms of innovative financing. But I would also like to point out here that interest as a percentage of overall cost is very small, though that does not mean that we will not try to reduce it further.

How's the company doing on the export front?

In the first quarter, we've done more exports than in the whole of last year. Last year, we did about Rs 89 lakh. We are aiming for ten-times that in the current year. Many negotiations are at an advanced stage. We are also looking at Johnson Controls' presence in Japan. They've their battery operations in Japan. We are predominantly a JIS (Japanese Industrial Standards) battery company and we're sure that we'd be able to make some headway.

Your company has said that Johnson Controls' takeover of other companies abroad will help you. Is it now possible to quantify the benefits?

No I wouldn't be able to quantify. JCI's global footprint is enlarging. Now with the acquisition of Vartha's automotive batteries business, they have become the single largest player in the European markets.

What does that mean for you?

Well, we could be a source of batteries for JCI's European markets. Also, JCI has acquired automotive battery division of Hoppecke last year. We are looking at supplying JIS batteries to Hoppecke.

Does that mean the collaborators have agreed to buy from you?

Discussions are on at a very advanced stage. We've not yet quantified the volume, but we are exploring various types and sizes of batteries that could be sourced from us. They also source JIS batteries currently from Korea and Taiwan, we could be an alternative source.

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