Draft Letter of Offer December 13, 2012 For our Equity Shareholders only HITACHI HOME & LIFE SOLUTIONS (INDIA) LIMITED Our Company was incorporated on December 7, 1984 as Acquest Air-conditioning Systems Private Limited and subsequently our Company was converted into a deemed public limited company on April 18, 1990. On September 14, 1990, the name of our Company was changed to Amtrex Appliances Limited and further to Amtrex Hitachi Appliances Limited on January 25, 1999. On March 12, 2003, the name of our Company was further changed to our present name Hitachi Home & Life Solutions (India) Limited. For details of change of our name, please see the chapter History and Other Corporate Matters on page 63. Registered Office: 9 th Floor, Abhijeet-I, Mithakhali Six Roads, Ahmedabad - 380 006, Gujarat, India. Tel: +91 79 3041 4800; Fax: +91 79 3041 4999 Contact Person: Mr. Parag Dave, Company Secretary and Compliance Officer E-mail: compliance.officer@hitachi-hli.com Website: http://www.hitachi-hli.com FOR PRIVATE CIRCULATION TO THE EQUITY SHAREHOLDERS OF HITACHI HOME & LIFE SOLUTIONS (INDIA) LIMITED (THE COMPANY OR THE ISSUER ) ONLY ISSUE OF [ ] FULLY PAID-UP EQUITY SHARES OF FACE VALUE OF ` 10 EACH ( RIGHTS ISSUE EQUITY SHARES ) FOR CASH AT A PRICE OF ` [ ] PER EQUITY SHARE INCLUDING A SHARE PREMIUM OF ` [ ] PER EQUITY SHARE AGGREGATING UPTO ` 5,500 LAKHS TO OUR EXISTING EQUITY SHAREHOLDERS ON A RIGHTS BASIS IN THE RATIO OF [ ] FULLY PAID-UP EQUITY SHARE(S) FOR EVERY [ ] FULLY PAID-UP EQUITY SHARE(S) HELD BY THE EXISTING EQUITY SHAREHOLDERS ON THE RECORD DATE, I.E. [ ] ( THE ISSUE ). THE ISSUE PRICE FOR THE EQUITY SHARE IS [ ] TIMES THE FACE VALUE OF THE EQUITY SHARE. FOR FURTHER DETAILS, PLEASE SEE THE CHAPTER TERMS OF THE ISSUE ON PAGE 136. GENERAL RISKS Investment in equity and equity related securities involve a degree of risk and Investors should not invest any funds in the Issue unless they can afford to take the risk of losing their investment. Investors are advised to read the Risk Factors carefully before taking an investment decision in the Issue. For taking an investment decision, Investors must rely on their own examination of the Issuer and the Issue including the risks involved. The securities being offered in the Issue have not been recommended or approved by Securities and Exchange Board of India ( SEBI ) nor does SEBI guarantee the accuracy or adequacy of this Draft Letter of Offer. Investors are advised to refer to the section Risk Factors on page XI before making an investment in this Issue. ISSUER S ABSOLUTE RESPONSIBILITY The Issuer, having made all reasonable inquiries, accepts responsibility for and confirms that this Draft Letter of Offer contains all information with regard to the Issuer and the Issue, which is material in the context of the Issue, that the information contained in this Draft Letter of Offer is true and correct in all material aspects and is not misleading in any material respect, that the opinions and intentions expressed herein are honestly held and that there are no other facts, the omission of which makes this Draft Letter of Offer as a whole or any such information or the expression of any such opinions or intentions misleading in any material respect. LISTING The existing Equity Shares are listed on the BSE Limited ( BSE ) and the National Stock Exchange of India Limited ( NSE ), (together the Stock Exchanges ). We have received in-principle approvals from BSE and NSE for listing the Rights Issue Equity Shares to be allotted in the Issue vide their letters dated [ ] and [ ], respectively. For the purposes of the Issue, the Designated Stock Exchange is [ ]. LEAD MANAGER TO THE ISSUE REGISTRAR TO THE ISSUE ICICI Securities Limited ICICI Centre H. T. Parekh Marg Churchgate, Mumbai 400 020 Maharashtra, India Tel: +91 22 2288 2460 Fax: +91 22 2282 6580 Website: www.icicisecurities.com E-mail: hitachi.rights@icicisecurities.com Investor Grievance E-mail: customercare@icicisecurities.com Contact Person: Mr. Sumit Agarwal SEBI Registration No.: INM000011179 Sharepro Services (India) Private Limited 13 AB, Samhita Warehousing Complex Sakinaka Telephone Exchange Lane Off Andheri-Kurla Road, Sakinaka Andheri (East), Mumbai 400 072 Maharashtra, India. Tel: +91 22 6191 5400 Fax: +91 22 6191 5444 Website: www.shareproservices.com Investor Greivance E-mail: hitachi.rights@shareproservices.com Contact Person: Mr. Prakash Khare / Mr. Anand Moolya SEBI Registration No: INR000001476 ISSUE PROGRAMME ISSUE OPENS ON LAST DATE FOR RECEIPT OF REQUEST FOR SPLIT APPLICATION FORMS ISSUE CLOSES ON [ ] [ ] [ ]
TABLE OF CONTENTS SECTION I GENERAL... I DEFINITIONS AND ABBREVIATIONS... I NOTICE TO OVERSEAS SHAREHOLDERS... VI CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA AND CURRENCY OF PRESENTATION... VII FORWARD LOOKING STATEMENTS... X SECTION II - RISK FACTORS... XI SECTION III- INTRODUCTION... 30 SUMMARY OF THE ISSUE... 30 SUMMARY OF FINANCIAL INFORMATION... 31 GENERAL INFORMATION... 36 CAPITAL STRUCTURE... 40 OBJECTS OF THE ISSUE... 44 SECTION IV STATEMENT OF TAX BENEFITS... 49 SECTION V ABOUT US... 60 OUR BUSINESS... 60 HISTORY AND OTHER CORPORATE MATTERS... 63 OUR MANAGEMENT... 64 SECTION VI FINANCIAL INFORMATION... 72 FINANCIAL STATEMENTS... 72 ACCOUNTING RATIOS AND CAPITALISATION STATEMENT... 111 STOCK MARKET DATA FOR EQUITY SHARES... 113 MATERIAL DEVELOPMENTS... 115 FINANCIAL INDEBTEDNESS... 116 SECTION VII LEGAL AND OTHER INFORMATION... 123 OUTSTANDING LITIGATIONS AND DEFAULTS... 123 GOVERNMENT AND OTHER APPROVALS... 126 OTHER REGULATORY AND STATUTORY DISCLOSURES... 127 SECTION VIII OFFERING INFORMATION... 137 TERMS OF THE ISSUE... 137 SECTION IX STATUTORY AND OTHER INFORMATION... 166 MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION... 166 DECLARATION... 167 2
SECTION I GENERAL DEFINITIONS AND ABBREVIATIONS Definitions In this Draft Letter of Offer, unless the context otherwise requires, the terms defined and abbreviations expanded below shall have the same meaning as stated in this section. References to statutes, rules, regulations, guidelines and policies will be deemed to include all amendments and modifications notified thereto. In this Draft Letter of Offer, unless otherwise indicated or the context otherwise requires, all references to Hitachi Home & Life Solutions (India) Limited, the/ our Company, Issuer, we, our and us are to Hitachi Home & Life Solutions (India) Limited and references to you are to the prospective investors in the Issue. Conventional and General Terms/ Abbreviations Term Description Act/ Companies Act The Companies Act, 1956 AGM Annual General Meeting AS Accounting Standards notified pursuant to the Companies (Accounting Standards) Rules, 2006, as amended Bps Basis Points BR Base Rate BSE BSE Limited CAGR Compounded Annual Growth Rate CDSL Central Depository Services (India) Limited Depositories Act The Depositories Act, 1996 Depository A depository registered with SEBI under the SEBI (Depositories and Participant) Regulations, 1996 Depository Participant/ A depository participant as defined under the Depositories Act DP DIN Director Identification Number DP ID Depository Participant Identity EGM Extra-Ordinary General Meeting EPS Earnings per Share FDI Foreign Direct Investment FEMA The Foreign Exchange Management Act, 1999, including the regulations framed thereunder FII Foreign Institutional Investor as defined under the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, registered with SEBI under applicable laws in India Financial Year/ Fiscal/ FY Period of 12 months ended March 31 of that particular year FIPB Foreign Investment Promotion Board, Ministry of Finance, GoI FVCI Foreign Venture Capital Investors as defined under the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000 registered with SEBI under applicable laws in India FCNR (B) Foreign Currency Rupee Loan GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product GDR Global Depository Receipts GoI Government of India i
Term Description HUF Hindu Undivided Family ICAI Institute of Chartered Accountants of India IFRS International Financial Reporting Standards IFSC Indian Financial System Code ISIN International Securities Identification Number IT Act The Income Tax Act, 1961 IT/ ITeS Information Technology/ Information Technology enabled Services Indian GAAP Generally accepted accounting principles followed in India MICR Magnetic Ink Character Recognition Mutual Fund/ MF A mutual fund registered with SEBI under the SEBI (Mutual Funds) Regulations, 1996 NAV Net Asset Value NECS National Electronic Clearing Services NEFT National Electronic Funds Transfer NR Non-Resident NRI Non-Resident Indian NRE Account Non-Resident External Account NRO Account Non-Resident Ordinary Account NSDL The National Securities Depository Limited NSE The National Stock Exchange of India Limited OCB Overseas Corporate Body p.a Per annum PAN Permanent Account Number under the IT Act PAT Profit After Tax PBT Profit Before Tax PLR Prime Lending Rate RBI Reserve Bank of India Registrar of Companies/ Registrar of Companies, Ahmedabad, Gujarat RoC Regulation S Regulation S under the Securities Act Rupees/ INR/ `/ Rs. Indian Rupees RTGS Real Time Gross Settlement SEBI Securities and Exchange Board of India SEBI Act Securities and Exchange Board of India Act, 1992 SEBI ICDR Regulations/ SEBI Regulations Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended Securities Act U.S. Securities Act of 1933 Takeover Regulations Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 U.S./ US/ USA United States of America Issue Related Terms Term Abridged Letter of Offer Allotment Allottees Application Description The abridged letter of offer to be sent to the Equity Shareholders with respect to the Issue in accordance with the SEBI ICDR Regulations Allotment of Rights Issue Equity Shares pursuant to the Issue Persons to whom our Rights Issue Equity Shares will be allotted pursuant to the Issue Unless the context otherwise requires, refers to an application for Allotment of Rights Issue Equity Shares in this Issue. ii
Term Application Supported by Blocked Amount/ ASBA ASBA Account ASBA Investor Bankers to the Issue Composite Application Form/ CAF Consolidated Certificate Controlling Branches of the SCSBs Designated Stock Exchange Designated Branches Draft Letter of Offer Equity Shareholders/ Eligible Equity Shareholder(s) Investor(s) Issue/ Rights Issue Issue Closing Date Issue Opening Date Issue Price Issue Size Issue Proceeds Lead Manager/ ISEC Letter of Offer Description The application (whether physical or electronic) used by ASBA Investors to make an application authorizing the SCSB to block the amount payable on application in ASBA Account Account maintained with a SCSB and specified in the CAF or plain paper application, as the case may be, for blocking the amount mentioned in the CAF, or the plain paper application, as the case may be Equity Shareholders proposing to subscribe to the Issue through ASBA process and: a. Who are holding our Equity Shares in dematerialized form as on the Record Date and have applied for their Rights Entitlements and/ or additional Equity Shares in dematerialized form; b. Who have not renounced their Rights Entitlements in full or in part; c. Who are not Renouncees; and d. Who are applying through blocking of funds in a bank account maintained with SCSBs. All QIBs and other Investors whose application value exceeds ` 2 lakhs complying with the above conditions may participate in this Issue through the ASBA process only [ ] The form used by an Investor to make an application for the Allotment of Rights Issue Equity Shares in the Issue In case of holding of Equity Shares in physical form, the certificate that we would issue for the Rights Issue Equity Shares Allotted to 1 folio Such branches of the SCSBs which coordinate with the Lead Manager, the Registrar to the Issue and the Stock Exchanges, a list of which is available on http:// www.sebi.gov.in/ cms/ sebi_data/ attachdocs/ 1325570097787.html [ ] Such branches of the SCSBs which shall collect application forms used by ASBA Investors and a list of which is available on http://www.sebi.gov.in/cms/sebi_data/attachdocs/1355129055836.html This draft letter of offer dated December 13, 2012 filed with SEBI for its observations which does not contain complete particulars of the Issue A holder/beneficial owner of our Equity Shares as on the Record Date The Equity Shareholders(s) on the Record Date, applying in this Issue, and the Renouncees who have submitted an Application to subscribe to the Issue Issue of [ ] fully paid-up Equity Shares of face value of ` 10 each for cash at a price of ` [ ] per Equity Share including a share premium of ` [ ] per Equity Share aggregating up to ` 5,500 lakhs to our existing Equity Shareholders on a rights basis in the ratio of [ ] fully paid-up Equity Shares for every [ ] fully paid-up Equity Shares held by them on the Record Date (i.e. [ ]). [ ] [ ] ` [ ] per Rights Issue Equity Share This Issue of [ ] Rights Issue Equity Share aggregating up to ` 5,500 lakhs The gross proceeds to be raised through this Issue ICICI Securities Limited The final letter of offer to be filed with the Stock Exchanges after incorporating the observations received from the SEBI on this Draft Letter of Offer iii
Term Listing Agreement Net Proceeds Qualified Foreign Investors/ QFI QIBs or Qualified Institutional Buyers Record Date Registrar of Companies Registrar to the Issue/ Registrar and Transfer Agent/ RTA Renouncee(s) Retail Individual Investors Rights Entitlement SAF(s) SCSB(s) Stock Exchange(s) Description The listing agreements entered into between us and the Stock Exchanges The Issue Proceeds less the Issue related expenses. For further details, please see the chapter Objects of the Issue on page 44. Non-resident investors, other than SEBI registered FIIs or sub-accounts or SEBI registered FVCIs, who meet know your client requirements prescribed by SEBI and are resident in a country which is (i) a member of Financial Action Task Force or a member of a group which is a member of Financial Action Task Force; and (ii) a signatory to the International Organisation of Securities Commission s Multilateral Memorandum of Understanding or a signatory of a bilateral memorandum of understanding with SEBI. Provided that such non-resident investor shall not be resident in a country which is listed in the public statements issued by Financial Action Task Force from time to time on: (i) jurisdictions having a strategic anti-money laundering/combating the financing of terrorism deficiencies to which counter measures apply; and (ii) jurisdictions that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the Financial Action Task Force to address the deficiencies. Public financial institutions as specified in section 4A of the Companies Act, scheduled commercial banks, mutual fund registered with SEBI, FIIs and subaccount registered with SEBI, other than a sub-account which is a foreign corporate or foreign individual, multilateral and bilateral development financial institution, venture capital fund registered with SEBI, foreign venture capital investor registered with SEBI, state industrial development corporation, insurance company registered with the Insurance Regulatory Development Authority, provident fund with minimum corpus of ` 250 million, pension fund with minimum corpus of ` 250 million, National Investment Fund set up by the Government of India and insurance funds set up and managed by the army, navy or air force of the Union of India and insurance funds set up and managed by the Department of Posts, India [ ] The Registrar of Companies, Ahmedabad, Gujarat Sharepro Services (India) Private Limited Any person(s) who has/ have acquired Rights Entitlements from Equity Shareholders Individual Investors who have applied for Rights Issue Equity Share for an amount not more than ` 2 lakhs (including HUFs applying through their Karta) The number of Rights Issue Equity Share that an Investor is entitled to in proportion to the number of Equity Shares held by the Investor on the Record Date Split Application Form(s) A Self Certified Syndicate Bank, registered with SEBI, which acts as a banker to the Issue and which offers the facility of ASBA. A list of all SCSBs is available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1354769582471.html BSE and NSE, where our Equity Shares are presently listed Company Related Terms iv
Term Articles/ AoA/ Articles of Association Auditors Board of Directors/Board Equity Shares Group Companies Memorandum/ MoA/ Memorandum of Association Promoter and Promoter Group Registered Office Description Our articles of association, as amended Our auditors, S. R. Batliboi & Associates, Chartered Accountants Our board of directors or any duly constituted committees thereof Equity shares of face value of ` 10 each Includes those companies, firms and ventures that are promoted by our Promoter, irrespective of whether these entities are covered under section 370(1) (B) of the Companies Act. Our memorandum of association, as amended Hitachi Appliances Inc. and Hitachi India Private Limited Our registered office located at 9 th Floor, Abhijeet-I, Mithakhali Six Roads, Ahmedabad 380 006, Gujarat, India Technical/ Industry Related Terms Term Description HP Tr. VRF HVAC NOD Horse power Tons of refrigeration Variable refrigerant flow Heating, Ventilating and Air conditioning No. of Days The words and expressions used but not defined herein shall have the same meaning as is assigned to such terms under the Companies Act, the Securities Contracts (Regulation) Act, 1956, the Depositories Act, 1996 and the rules and regulations made thereunder. Notwithstanding the foregoing, terms defined in the chapters Statement of Tax Benefits, Financial Statements and Terms of the Issue on pages 49, 76 and 132, respectively, shall have the meanings given to such terms in these respective sections. v
NOTICE TO OVERSEAS SHAREHOLDERS The distribution of this Draft Letter of Offer and the issue of Equity Shares on a rights basis to persons in certain jurisdictions outside India may be restricted by legal requirements prevailing in those jurisdictions. Persons into whose possession this Draft Letter of Offer, Letter of Offer, Abridged Letter of Offer or CAF may come are required to inform themselves about and observe such restrictions. We are making this Issue of Equity Shares on a rights basis to the Equity Shareholders and will dispatch the Letter of Offer/ Abridged Letter of Offer and CAFs to such shareholders who have provided an Indian address. Those overseas shareholders who do not update our records with their Indian address or the address of their duly authorized representative in India, prior to the date on which we propose to dispatch the Letter of Offer / Abridged Letter of Offer and CAFs, shall not be sent this Draft Letter of Offer / Abridged Letter of Offer and CAFs. No action has been or will be taken to permit this Issue in any jurisdiction where action would be required for that purpose, except that this Draft Letter of Offer has been filed with SEBI for observations. Accordingly, the rights or Equity Shares may not be offered or sold, directly or indirectly, and this Draft Letter of Offer may not be distributed in any jurisdiction, except in accordance with legal requirements applicable in such jurisdiction. Receipt of this Draft Letter of Offer will not constitute an offer in those jurisdictions in which it would be illegal to make such an offer and, under those circumstances, this Draft Letter of Offer must be treated as sent for information only and should not be copied or redistributed. Accordingly, persons receiving a copy of this Draft Letter of Offer should not, in connection with the issue of the rights or Equity Shares, distribute or send the same in or into the United States or any other jurisdiction where to do so would or might contravene local securities laws or regulations. If this Draft Letter of Offer is received by any person in any such territory, or by their agent or nominee, they must not seek to subscribe to the rights or Equity Shares referred to in this Draft Letter of Offer. Envelopes containing a CAF should not be dispatched from any jurisdiction where it would be illegal to make an offer, and all persons subscribing for the Equity Shares in this Issue must provide an Indian address. Any person who makes an application to acquire rights and the Equity Shares offered in this Issue will be deemed to have declared, represented, warranted and agreed that he is authorised to acquire the rights and the Equity Shares in compliance with all applicable laws and regulations prevailing in his jurisdiction. We, the Registrar, the Lead Manager or any other person acting on behalf of us reserve the right to treat any CAF as invalid where we believe that CAF is incomplete or acceptance of such CAF may infringe applicable legal or regulatory requirements and we shall not be bound to allot or issue any Equity Shares or Rights Entitlement in respect of any such CAF. Neither the delivery of this Draft Letter of Offer nor any sale hereunder, shall under any circumstances create any implication that there has been no change in the Company s affairs from the date hereof or that the information contained herein is correct as at any time subsequent to the date of this Draft Letter of Offer. The contents of this Draft Letter of Offer should not be construed as legal, tax or investment advice. Prospective investors may be subject to adverse foreign, state or local tax or legal consequences as a result of the offer of Equity Shares. As a result, each investor should consult its own counsel, business advisor and tax advisor as to the legal, business, tax and related matters concerning the offer of Equity Shares. In addition, neither our Company nor the Lead Manager is making any representation to any offeree or purchaser of the Equity Shares regarding the legality of an investment in the Equity Shares by such offeree or purchaser under any applicable laws or regulations. vi
CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA AND CURRENCY OF PRESENTATION Certain Conventions References in this Draft Letter of Offer to India are to the Republic of India and the Government or the Central Government is to the Government of India ( GoI ). Financial Data Unless stated otherwise, the financial data in this Draft Letter of Offer is derived from our audited financial statements. Our Financial Year commences on April 1 for a year and ends on March 31 of the next year. In this Draft Letter of Offer, the audited financial statements for the FY 2011-12 and the Unaudited statement of assets and liabilities as at September 30, 2012 and unaudited statement of profit & loss for six months ended September 30, 2012, duly limited reviewed by the auditors, have been included. For details of such financial statements, please see the chapter Financial Statements on page 72. We publish our financial statements in Indian Rupees. In this Draft Letter of Offer, any discrepancies in any table between the total and the sums of the amounts listed are due to rounding off, and unless otherwise specified, all financial numbers in parenthesis represent negative figures. Numerical values have been rounded off to two decimal places. Any percentage amounts, as set forth in Risk Factors, Our Business and elsewhere in this Draft Letter of Offer, unless otherwise indicated, have been calculated on the basis of our audited financial statements prepared in accordance with Indian GAAP. Unless stated otherwise, throughout this Draft Letter of Offer, all figures have been expressed in Rupees in lakhs. For definitions, see the chapter Definitions and Abbreviations on page i. Currency of Presentation All references in this Draft Letter of Offer to Rupees, `, Rs., Indian Rupees and INR are to Indian Rupees, the official currency of India. All references to U.S.$, U.S. Dollar, USD or $ are to United States Dollars, the official currency of the United States of America. All references to Yen and are to the Japanese Yen, the official currency of Japan. All references to Euro or or EUR are to the Euro, the single currency of the participating member states in the third stage of the European Economic and Monetary Union of the Treaty establishing the European Community, as amended Please Note: One million is equal to 10 Lakhs One billion is equal to 1,000 million One Lakh / Lakhs is equal to 100 thousand One crore is equal to 10 million/100 Lakhs Exchange Rates Fluctuations in the exchange rate between the Rupee and the U.S. Dollar will affect the U.S. Dollar equivalent of the Rupee price of the Equity Shares on the Stock Exchanges. These fluctuations will also affect the conversion into U.S. Dollars of any cash dividends paid in Rupees on the Equity Shares. The following table sets forth, for the periods indicated, information with respect to the exchange rate between the Rupee, the U.S. Dollar, Japanese Yen and Euro based on the reference rates released by the vii
RBI. No representation is made that the Rupee amounts actually represent such amounts in U.S. Dollars, Japanese Yen and Euro or could have been or could be converted into U.S. Dollars, Japanese Yen, Euro at the rates indicated, at any other rates or at all. USD - INR Year ended March 31 Period End (in `) Average* (in `) High* (in `) Low* (in `) 2012 51.16** 47.95 54.24 43.95 2011 44.65 45.58 47.57 44.03 2010 45.14 47.42 50.53 44.94 Month ended Period End (in `) Average* (in `) High* (in `) Low* (in `) November, 2012 54.53 54.78 55.70 53.66 October, 2012 54.12 53.02 54.17 51.62 September, 2012 52.70 54.61 55.97 52.70 August, 2012 55.72 55.56 56.08 55.15 July, 2012 55.81 55.49 56.38 54.55 June, 2012 56.31 56.03 57.22 55.15 1. Source: RBI website at www.rbi.org.in 2. *Note: High, low and average are based on the RBI reference rate 3. ** As on March 30, 2012 100 JPY Yen INR Year ended March 31 Period End (in `) Average* (in `) High* (in `) Low* (in `) 2012 62.43** 60.81 69.49 51.75 2011 54.02 53.30 57.14 46.93 2010 48.44 51.12 54.38 48.12 Month ended Period End (in `) Average* (in `) High* (in `) Low* (in `) November, 2012 66.17 67.60 69.13 66.17 October, 2012 67.99 67.23 68.22 65.83 September, 2012 68.00 69.91 71.39 68.00 August, 2012 71.04 70.68 71.68 70.01 July, 2012 71.35 70.28 72.12 68.40 June, 2012 70.90 70.67 71.93 69.42 1. Source: RBI website at www.rbi.org.in 2. *Note: High, low and average are based on the RBI reference rate 3. ** As on March 30, 2012 viii
EURO INR Year ended March 31 Period End (in `) Average* (in `) High* (in `) Low* (in `) 2012 68.34** 65.90 71.08 62.26 2011 63.24 60.21 63.98 56.07 2010 60.56 67.08 71.06 60.52 Month ended Period End (in `) Average* (in `) High* (in `) Low* (in `) November, 2012 70.89 70.37 72.35 69.24 October, 2012 70.15 68.75 70.17 67.17 September, 2012 68.15 70.13 71.62 68.15 August, 2012 69.66 68.87 69.92 68.03 July, 2012 68.45 68.25 70.43 67.15 June, 2012 70.91 70.31 71.57 68.86 1. Source: RBI website at www.rbi.org.in 2. *Note: High, low and average are based on the RBI reference rate 3. ** As on March 30, 2012 ix
FORWARD LOOKING STATEMENTS Certain statements in this Draft Letter of Offer are not historical facts but are forward-looking in nature. Forward looking statements appear throughout this Draft Letter of Offer, including, without limitation, under the chapters Risk Factors and Our Business. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or financial performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and the political and legal environment, and geographical locations, in which we operate, and other information that is not historical information. Words such as aims, anticipate, believe, could, continue, estimate, expect, future, goal, intend, is likely to, may, plan, predict, project, seek, should, targets, would and similar expressions, or variations of such expressions, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. By their nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. These risks, uncertainties and other factors include, among other things, those listed under Risk Factors, as well as those included elsewhere in this Draft Letter of Offer. Prospective investors should be aware that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited, to: increase in the interest rates with respect to our borrowings; financial instability in Indian financial markets; significant competition in markets could have a material adverse effect on our business, financial condition and results of operations; seasonality of the nature of our business; regional hostilities, terrorist attacks or social unrest in India; adverse political, social and economic developments in India. and any adverse outcome in the material legal proceedings in which we are involved. For a further discussion of factors that could cause our actual results to differ, please see the chapters Risk Factors and Our Business on pages XI and 60 respectively. By their nature, certain market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses could materially differ from those that have been estimated. Neither we nor the Lead Manager nor any of their respective affiliates make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario. Neither we nor the Lead Manager nor any of their respective affiliates or advisors have any obligation to update or otherwise revise any statements reflecting circumstances arising after the date hereof or to reflect the occurrence of underlying events, even if the underlying assumptions do not come to fruition. In accordance with SEBI/ Stock Exchanges requirements, we and Lead Manager will ensure that Investors in India are informed of material developments until the time of the grant of listing and trading permissions by the Stock Exchanges for the Equity Shares allotted pursuant to this Issue. x
SECTION II - RISK FACTORS An investment in equity and equity related securities involves a high degree of risk and you should not invest any funds in this offer unless you can afford to take the risk of losing your investment. You should carefully consider all of the information in this Draft Letter of Offer, including the risks and uncertainties described below, before making an investment in the Equity Shares. The financial and other implications of material impact of risks concerned, wherever quantifiable, have been disclosed in the risk factors mentioned below. To obtain a complete understanding, you should read this section in conjunction with the sections titled Our Business and the section titled Financial Information beginning on page 60 and 72 respectively, as well as the other financial and statistical information contained in this Draft Letter of Offer. For taking an investment decision, investors must rely on their own examination of the Issuer and the Issue including the risks involved. The occurrence of any of the following events could have a material adverse effect on our business, results of operations, financial condition and prospects and cause the market price of the Equity Shares to fall significantly, and you may lose all or part of your investment. Additionally, our business operations could also be affected by additional factors that are not presently known to us or that we currently consider as immaterial to our operations. The following factors have been considered for determining the materiality: 1. Some events may not be material individually but may be found material collectively; 2. Some events may have material impact qualitatively instead of quantitatively; 3. Some events may not be material at present but may have material impact in future. RISKS ASSOCIATED WITH OUR BUSINESS 1. We are involved in certain legal and regulatory proceedings that, if determined against us, could have a material adverse impact on our business, financial conditions and results of operations. There are outstanding material legal proceedings involving our Company, which may adversely affect our business and operations. These legal proceedings are pending at different levels of adjudication before various courts and tribunals. Should any new developments arise, such as a change in law or rulings against us by courts or tribunals, we may need to make provisions in our financial statements, which could adversely impact our reported financial condition and results of operations. Furthermore, if significant claims are determined against us and we are required to pay all or a portion of the disputed amounts, there could be a material adverse effect on our business and profitability. For further details of the legal proceedings, please see the section Outstanding Litigations and Defaults on page 122. 2. The loss or shutdown of operations at any of our manufacturing facilities or any accidents or damage to our manufacturing equipment, plant and machinery or information technology systems may have a material adverse effect on our business, financial condition and results of operations We operate two manufacturing facilities for finished products across India at Kadi in Gujarat and in Jammu. These manufacturing facilities are subject to operating risks, such as breakdowns or accidents or failure of equipment, power supply or processes, performance below expected levels of output or efficiency, obsolescence, labour disputes, strikes, lock-outs, natural disasters and industrial accidents. Our manufacturing facilities are also subject to operating risk arising from compliance with the directives of relevant government authorities. Recently, there was a major fire at unit 2 Kadi facility due to which it has become non-operational. The occurrence of any of these risks could significantly affect our operations by causing production to shut down or slow down. Furthermore, we are dependent on our information technology systems for managing key business processes such as product design and development, customer and dealer management, transaction processing, accounting and production. Any failure in our information technology systems may adversely impact our ability to manufacture our products, manage our dealers and provide service to our customers, any of which may have a material adverse effect on our xi
reputation, business, financial condition and results of operations. 3. Demand for our products is affected by global and national economic conditions. Any development which decelerates the demand for our products would have an adverse impact on our Company. The air conditioning industry in India in general and our business and results of operations in particular are affected by various global and national economic conditions. Changes or a downturn in the global or national economy could add uncertainty to currency inflation or deflation, interest rates, taxation, stock market performance, consumers' confidence and consumers' perception of economic conditions, which in turn may affect the consumers' willingness to purchase our products. As we sell a majority of our products to the domestic market, continued financial weakness amongst corporates or exceptional circumstances like bankruptcy etc. in any large company, would exacerbate the negative trend in market conditions and would result in protracted declines in demand for our products. Any global or national economic distress would cause a material adverse effect on the demand for our products and hence on our business and results of operations. There can be no assurance that the air conditioning industry in India and our Company can sustain growth in business and operations if the global economic conditions continue to be fragile. 4. We face significant competition in the air conditioning industry. Any failure to compete effectively may have a material adverse effect on our business and operations. The air conditioning industry in India is highly competitive with several other domestic and foreign brands present in the market and we expect that competition will continue to increase with entry of new companies (both domestic and international) in this industry. In such a competitive environment, our brand may face considerable pressure to sustain customer loyalty and brand equity. With number of domestic and international brands entering Indian air conditioning industry, the industry is witnessing substantial change in dynamics. Many of our competitors have access to considerable financial and technological resources with which they are able to compete aggressively, including by funding future growth and expansion and improving on the product quality and in acquisitions. We face a variety of competitive challenges including: anticipating and quickly responding to changing consumer demands and preferences; maintaining favourable brand recognition; developing innovative, high-quality products that appeal to consumers; pricing our products effectively and achieving customer perception of value; and providing strong and effective marketing support; Our competitors may expend financial and other resources to improve their market share to compete more aggressively. With increase in competition, we may inter alia witness lower demand for our products, pressure on pricing, loss in market share, which may impact our business and results of operations. Our inability to withstand competitive pressures and respond to changing business dynamics may have a material adverse effect on our business prospects, financial condition and results of operations. 5. We rely on our distribution network for marketing, sale and distribution of our products and underperformance of our distribution network may adversely affect our sales and results of operations Our products are sold and serviced through a network of distribution system consisting of 5 regional offices, 21 branch offices, over 200 exclusive sales and service dealers and over 1,500 sales points and we rely on this network of distribution system for marketing, sale and distribution of our products and providing after sales service. Any failure on the part of our distribution and service network in performing their functions and providing high quality service to customers could adversely affect our reputation, sales and results of operations. If we do not succeed in maintaining the stability of our distribution network and xii
expanding our distribution network, our market share may decline, which may affect the results of our operations and financial condition. 6. Our business and results of operations depends on consumer spending patterns could be adversely affected by the impact of economic conditions in India. Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as recessionary environments, the levels of disposable consumer income, consumer debt, interest rates. Declines in consumer spending on air conditioners or home appliances could have an adverse effect on our operating results. Purchases by consumer of our products generally decline during recessionary periods and other periods in which disposable income is adversely affected. While adverse economic and business conditions are harmful to all companies, companies such as ours are particularly sensitive to them, particularly declining levels of disposable consumer income, higher consumer debt, higher interest rates, higher taxation, increase in unemployment because of their direct impact on discretionary consumer spending. Unfavorable changes in business and economic conditions affecting our consumers could result in decrease in demand for our products or lower our profit margins, and have a material adverse effect on our financial condition and results of operations. 7. We are dependent on certain technology collaboration agreements for the technology and consulting agreements to manufacture our products. Termination or alteration of the terms of these agreements would materially affect our total income and operations. In the past we have relied upon, and in the future will continue to rely upon, the provision of technology from certain technology collaboration agreements and consulting agreement which we have executed for our manufacturing business with our Promoter. Through these agreements, we have been granted a nonexclusive, non-transferable and non-sub-licensable right and license to design, manufacture, use and/or sell our products in India during the term of such agreements. Most of these agreements are valid for a period of ten years. For the year ending, March 31, 2011 and March 31, 2012, we incurred expenses (towards royalty, technical knowhow, consultancy fee) in foreign currency aggregating to ` 1,902.19 lakhs and ` 2,708.92 lakhs, respectively. While, we try to maintain amicable business relationships with our Promoter to ensure access to future technology and to ensure support from them when needed, we cannot assure you that these agreements will not be terminated or that we will be able to obtain access to such future technologies. If any of these agreements are terminated, we may not be able to manufacture our products or if the terms of the license of these technologies are altered, there can be no assurance that we would be able to comply with all the conditions of the license or we may not be able to manufacture such products in a commercially viable manner. If our ability to use such technology was restricted, our total income and operations would be materially affected. Further, most of our technology collaboration agreements and consulting agreement have not been stamped and hence may face certain deficiencies such as inadequate stamping. The effect of inadequate stamping is that the document is not admissible as evidence in legal proceedings, and parties to that agreement may not be able to legally enforce the same, except after paying a penalty for inadequate stamping. In event, in future there is dispute in relation to brand value agreement, we may not be able to produce the same in legal proceedings without paying penalty which may have a material adverse effect to our business. 8. Significant increases in prices of key raw materials or our inability to continue to procure raw materials from our suppliers at favourable terms could have an adverse effect on our Company's results of operations and financial position. We are dependent on external suppliers for the timely supply of raw materials. We purchase compressors, metal like copper, steel, aluminum and plastic material, wooden packaging boxes etc. from third party suppliers, and have to depend on them to procure these raw materials. Accordingly, our profits are sensitive to changes in raw material prices. Volatility in the prices of raw materials, including mismatches between xiii
trends in prices for raw materials and our products, as well as limitations on or disruptions in the supply of raw materials, could adversely affect our results of operations. Our inability to procure these raw materials terms more favourable, or at all, may constrain our raw material supply, resulting in an adverse effect on our business, financial condition and results of operations. Further, we do not have exclusive arrangements with our suppliers and they can supply raw materials to our competitors, which may increase competition for us and may result in an adverse effect on our financial condition. Further, any substantial delay in supply or non-conformance to quality requirements by our suppliers can impact our ability to meet our customer requirements and thus impact our business and results of operations. In case we fail to correctly analyse our product requirement or non-availability of required raw materials or any other item of production in desired quantity and quality at the right time, it may impact our sales commitments resulting in having adversely effect on our business and results of operations. 9. We do not have long term contracts with our dealers and our revenues are dependent on the sales made to and orders booked by our dealers. The loss of our major dealers or a decrease in the volume of products they source from us may adversely affect our revenues and results of operations. As there are no arrangements for sale of a minimum quantity of our products to the distributors, the number of products procured by our dealers varies from month to month. There are a number of factors that impact customer demand from these dealers, which may not be predictable. Our dealers may decide to reduce the quantity of products sourced from us because of changing market conditions and other factors, internal and external, relating to their business. Further, with increased competition, the dealers now have increased choice of entities from whom to source products. Some of our competitors may have advantages that enable them to offer products similar to ours at a lower price, respond more quickly and effectively than we do to specific demands of the dealers, which may lead to dealers entering into tie-ups with our competitors, forcing us to reduce prices and hence lower our margins and limit our growth potential, in which case our business, financial condition and results of operations will be harmed. The loss of any of the major dealers or a decrease in the volume of the products they source from us or reduction of price of our products may adversely affect our revenue and results of operations. 10. We are dependent in part on production we outsource to third parties on non-exclusive basis and any significant loss or disruption of production from our third party manufacturers for any reasons could adversely affect our business, results of operations and financial conditions. We outsource manufacture of certain products to third parties with whom we do not have exclusive arrangements. As a result, such vendors may manufacture products similar or identical to ours for our competitors or manufacture entirely for such competitors, which may have an adverse effect on our business and results of operation. Production at facilities of these third party manufacturers are beyond our control and any significant loss or disruption of production at these facilities for any reasons may adversely affect our business, results of operations and financial conditions. 11. Our Company faces exchange rate fluctuation risk, which may adversely affect our business, results of operations and financial condition. For the year ended March 31, 2011 and March 31, 2012, our consumption of imported raw material was to the extent of 54.80% and 58.75% respectively of our total raw material cost. The fluctuations in foreign xiv
exchange rates might have an impact on the financial performance of the Company. If the Indian rupee value moves in unfavorable direction it will make an adverse impact on our import cost and may adversely affect our business, results of operations and financial condition. While we use forward exchange contracts to hedge our exposure in foreign currency, as on March 31, 2011, the value of foreign exchange contracts remaining outstanding are USD 197.08 lakhs and JPY 292.63 lakhs and as of March 31, 2012, the value of foreign exchange contracts remaining outstanding are USD 66.92 lakhs. Our inability to hedge this foreign exchange exposure may result in an adverse impact on our financial condition. 12. Our success depends upon our ability to sustain effective implementation of our business and growth strategy. The success of our business depends greatly on our ability to effectively implement our business and growth strategy. Whilst we believe that we have successfully executed our business strategy in the past, there can be no assurance that we will be able to execute our strategy on time and within the estimated budget, or that we will meet the expectations of targeted customers. We expect our growth strategy to place significant demands on our management, financial and other resources and require us to continue developing and improving our operational, financial and other internal controls. Our inability to manage our business and growth strategy could have a material adverse effect on our business, financial condition and results of operations. 13. Our business is seasonal in nature. Any substantial decrease in our sales during this period can have a material adverse effect on our financial performance. The sale of our products is seasonal in nature. This unevenness in seasonal sales is largely due to the buying cycles of the customers and weather cycles of locations to which we cater. The sales of the Company are higher during the summers and festival seasons. Any disturbances/disruptions in production during this period may lead to reduction in sales and have an impact on the financial performance of the Company. 14. Sales and profitability of our business depend on our ability to develop new products that appeal to consumers, and any failure to do the same could have a material adverse effect on our business. We compete in home appliance industry characterised by continual change, product introductions, changes in consumer demands and evolving industry standards. While we continually endeavor to cater to the changing preferences of consumers, we cannot guarantee that we will be successful in these efforts. Additionally, lack of innovation in developing new products could adversely affect our business. Our ability to successfully develop new products is also subject to numerous uncertainties, including our ability to anticipate and successfully respond to rapidly changing consumer preferences. Any failure to develop new products which appeal to customers could have a material adverse effect on our business and financial condition. 15. We do not own our logo as mentioned on the cover page of this Draft Letter of Offer and our ability to use the trademark, name and logo may be impaired. Our trademark, name and logo as mentioned on the cover page of this Draft Letter of Offer do not belong to us. The Hitachi trademark belongs to Hitachi Limited which has licensed it to our Promoter Hitachi Appliances Inc. We have entered into a brand value agreement dated April 01, 2010 with our Promoter under which we have obtained the usage rights to brand Hitachi, logo and trademark for period of five years ending on March 31, 2015. If the Hitachi Limited or our Promoter withdraws, refuses to renew or terminates this arrangement, we will not be able to make use of our trademark, name or logo in connection with our business and consequently, we may be unable to capitalize on the brand recognition associated with the Hitachi Group. Further the brand value agreement executed by us with our Promoter, Hitachi Appliances Inc. has not been stamped and hence may face certain deficiencies such as inadequate stamping. The effect of inadequate stamping is that the document is not admissible as evidence in legal proceedings, and parties to that xv