MATRIX PVT. LTD.

AND WORKING CAPITAL CHALLENGES

In January 2012, Arpit Chandara, managing director of chemical manufacturing company MATRIX P t! "td!, #a$ contemplating the alternati e$ that he could e%plore &efore the company proceeded #ith it$ plan to $ign a contract #ith Indian Rail#ay$ 'IR(! Chandara had &een a leading mem&er of MATRIX $ince it$ &eginning$ in 200)! MATRIX no# had an ad ance acceptance document confirming it$ contract #ith IR, yet the company #a$ $uffering from a lac* of #or*ing capital due to a com&ination of e%tending li&eral credit to it$ cu$tomer$ and repaying de&t$ too +uic*ly! Therefore, Chandara #a$ not $ure #hat the company,$ ne%t $tep $hould &e!

MATRIX

MATRIX P t! "td! #a$ an Indian chemical manufacturing company e$ta&li$hed in 200)! The company,$ regi$tered office #a$ in -angalore and it$ manufacturing plant #a$ in "uc*no#! MATRIX #a$ managed &y t#o director$, Chandara and .i*ram /umar! /umar #a$ a $cience graduate and Chandara had a degree in management! MATRIX #a$ categori0ed a$ a $mall1$cale indu$try under the domain of chemical manufacturing! It produced and $old $ta&le &leaching po#der u$ing the ra# material li+uid chlorine! 2ince &oth the ra# material and the end product #ere highly to%ic MATRIX #a$ al$o cla$$ified a$ a ha0ardou$ indu$try!1 A licen$e from the 3o ernment of India,$ 4epartment of Indu$trial Policy 5 Promotion #a$ re+uired in order to $tore the cylinder$ of li+uid chlorine! The company u$ually procured it$ ra# material from the 2one&hadra di$trict in 6ttar Prade$h! The price of thi$ ra# material could fluctuate #ildly, from a$ lo# a$ I7R10 per tonne to a$ high a$ I7R10,000 per tonne! Thi$ #ide price range #a$ &a$ed upon $upplier$, capacity to $tore and $ell li+uid chlorine #ithin the limitation$ of licen$ed +uantitie$! Any ra# material e%ceeding the$e licen$ed +uantitie$ had to &e $old at lo#er a price!

2ta&le &leaching po#der could &e manufactured through one of t#o techni+ue$8 a&$orption or a&$orption! The product manufactured &y the a&$orption techni+ue #a$ of &etter +uality than the product manufactured &y the ad$orption techni+ue! MATRIX u$ed ad$orption, #hich meant that it$ product #a$ of an inferior +uality compared to the product$ of it$ competitor$! The company,$ main competitor$ #ere indu$try giant$ li*e the Aditya -irla 3roup, the 4CM 3roup, 3ra$im Indu$trie$ "imited, etc!9 ho#e er, the$e companie$ #ere al$o MATRIX,$ $upplier$ of li+uid chlorine! -ecau$e of the more afforda&le '&ut lo#er +uality( ad$orption techni+ue u$ed in production, MATRIX #a$ a&le to reduce it$ operating co$t$ #ith re$pect to in$tallation of e+uipment, maintenance and electricity e%penditure! 4e$pite producing a &leaching po#der of inferior +uality, the u$e of ad$orption allo#ed the company to en:oy a fa oura&le mar*et $hare due to the co$t ad antage MATRIX #a$ a&le to pa$$ on to it$ cu$tomer$! MATRIX,$ cu$tomer$ could &e di ided into t#o &road categorie$8 go ernment account$ and pri ate account$! The go ernment placed order$ #hene er there #a$ a demand in any of it$ department$! Pri ate contract$ #ere negotiated according to indu$try factor$ $uch a$ the reputation;$tanding of the in ol ed party, pa$t dealing$, $i0e of the order, etc! <rder$ from pri ate cu$tomer$ #ere u$ually $maller than go ernment order$ and the MATRIX,$ cu$tomer &a$e #a$ largely compri$ed of pri ate account$! The company en:oyed a credi&le po$ition #ith it$ &an*er$! It$ main &an* #a$ 6nion -an* of India, a nationali0ed &an*! MATRIX had a ca$h credit limit of I7R2!= million, #hich had &een fully utili0ed! 4uring a meeting #ith the &an* manager regarding the IR contract, Chandara could $en$e the manager,$ reluctance to e%tend a fre$h line of credit to MATRIX! The &an* manager mentioned that the intere$t on the loan re+uired to complete the contract #ith IR #ould &e 1)!= per cent9 the offer #a$ again$t a pledge of $hare certificate$ for an e%i$ting loan #ith the &an*, in light of the fact that MATRIX #a$ carrying e%i$ting un$ecured loan$ that re$ulted in intere$t payment$ of more than I7R>00,000 annually!

WORKING CAPITAL MANAGEMENT

MATRIX had &een follo#ing a con$er ati e approach to #or*ing capital, a$ reflected in it$ high le el of net #or*ing capital ? more than I7R)!2 million in fi$cal year 2010;11 '$ee @%hi&it 1(! The net #or*ing capital of the company had al#ay$ remained po$iti e, a$ reflected in it$ &alance $heet '$ee @%hi&it 1(! MATRIX,$ a$$et$ #ere more than 10 time$ it$ lia&ilitie$! The$e a$$et$ #ere mo$tly in the form of in entorie$ and account$ recei a&le! Ao#e er, trade credit of the firm had &ecome a ma:or lia&ility! The company,$ management had &een ery con$er ati e and traditional #ith re$pect to repaying loan$ &efore the credit period9 from 200B to 2011, MATRIX,$ li+uid1a$$et1to1total1a$$et ratio ranged &et#een >2 and >> per cent ? #herea$ the indu$try &enchmar* #a$ C0 per cent! MATRIX,$ in entory could &e categori0ed into three group$8 ra# material$, fini$hed good$ and pac*ing material$! Drom 200B to 2011, in entory in all three of the$e categorie$ had ri$en $ignificantly, increa$ing the total in entory &y almo$t E= per cent! Ra# material and pac*ing material #ere alued at co$t on a fir$t1in1fir$t1out 'DID<( &a$i$! Dini$hed good$ #ere alued at co$t or at net reali0a&le alue ? #hiche er #a$ le$$! Although $uch high le el$ of in entory eliminated the po$$i&ility of di$ruption$ in manufacturing due to a $toc*out, it had led to #a$tage of MATRIX,$ #or*ing capital! A large $toc* of fini$hed product $tored in the company,$ premi$e$ had long &een a cau$e of concern for Chandara '$ee @%hi&it 2(! Ae *ne# that the company,$ $ale$ had gradually decrea$ed! Immediate action #a$ re+uired a$ decrea$ed $ale$ #ould negati ely affect the profita&ility of the company and MATRIX,$ return on capital employed in the future!

MATRIX,$ de&tor$ had remained more or con$tant #ith minor fluctuation$! The credit period$ on the loan$ ranged from 1= day$ to almo$t t#o year$! The large$t amount due on a $ingle account #a$ I7R) million! 4e&tor$;recei a&le$ turno er ratio of the company had ranged from 2!B to C!2 time$ for the la$t three financial year$! 4e$pite thi$, MATRIX continued to e%tend li&eral credit to ne# account$! The company had &een maintaining ade+uate le el$ of ca$h &ut the$e le el$ #ould not &e $ufficient for additional order$ li*e the propo$ed contract #ith IR! The ca$h and &an* &alance in MATRIX,$ &alance $heet #a$ inclu$i e of a fi%ed depo$it maintained #ith the &an*! The company al$o indulged in future commodity trading! The profit$ from the$e acti itie$ #ere apparent in MATRIX,$ profit and lo$$ $tatement '$ee @%hi&it C(! MATRIX had &een too +uic* in paying &ac* it$ creditor$! Thi$ had affected the company,$ li+uidity8 the longer the repayment period, the lo#er the net pre$ent alue of the payment and the higher the alue to the firm! The company al$o maintained a ca$h credit limit of I7R2!= million #ith 6nion -an* of India!

THE CONTRACT WITH INDIAN RAILWAYS

<peration$ #ere running relati ely $moothly at MATRIX &ut Chandara *ne# that there #a$ an urgent need to upgrade the company in order to ma*e it a truly competiti e mar*et player! The IR contract could pro e to &e $uch an upgrade, and it had therefore &een an a$piration of Chandara,$ $ince 2011! Ae had regi$tered hi$ company for all three di i$ion$ of Indian Rail#ay$ in the northern part of India '7orthern Rail#ay$, 7orth @a$tern Rail#ay$ and 7orth Central Rail#ay$(! Thi$ contract #ould open the gate$ &et#een MATRIX and IR for long1term &u$ine$$, and could potentially act a$ a $tepping $tone for MATRIX to &ecome the preferred $upplier of &leaching po#der for other &ig player$ in the indu$try a$ #ell9 ho#e er, the contract #ould &e a challenge and #ould re+uire a profe$$ional team #or*ing to ma*e MATRIX eligi&le! Chandara de$perately needed a manager #ho could handle the admini$tration and official corre$pondence of thi$ account efficiently, a$ #ell a$ monitor operation$ along #ith

the floor $uper i$or! A$ part of the contract, IR #a$ demanding an on$ite office, a #arehou$e and a #or*$hop #ithin the MATRIX factory premi$e$! In addition, the document of ad ance acceptance clearly outlined propo$ed +uarterly on$ite in$pection$! The$e in$pection$ #ould ha e to &e conducted at the factory premi$e$ &efore any lot #a$ di$patched to IR! Durthermore, e$ta&li$hing an on$ite IR office #ould co$t a onetime e%penditure of appro%imately I7R200,000, a$ #ell a$ an increa$e in admini$trati e co$t$! The company had to put it$ $toc* in a ne# #arehou$e a$ part of the propo$ed contract! A$ of January 2012, MATRIX did not ha e any #arehou$e that met the re+uired $afety norm$! All material$, including $pare part$, ra# material, pac*aging material and fini$hed product$, #ere *ept in a $emi1co ered $torage area #ithin the factory premi$e$9 thi$ often led to lo$$e$ due to deterioration in the +uality of material! The appro%imate co$t of &uilding a ne# #arehou$e #ould &e I7R=00,000! There #a$ al$o an urgent need to create a $eparate #or*$hop #ithin the factory for $afety and maintenance! 2ince MATRIX,$ manufacturing proce$$ in ol ed ariou$ ha0ardou$ chemical$, maintenance of the e%i$ting machinery #a$ a crucial acti ity! The #or*$hop could &e u$ed to repair ru$ted or #orn1out machine part$ that #ere employed in the manufacturing! Certain critical part$ had to &e repaired regularly! Aa ing a $eparate #or*$hop e%clu$i ely for $uch acti itie$ #ould &e ery helpful in daily operation$ of the factory! The company e$timated an e%penditure of appro%imately I7R=00,000 for e$ta&li$hing $uch a #or*$hop! A&o e all, MATRIX needed to maintain ade+uate ca$h re$er e$ to meet all of it$ payment$ and continue it$ u$ual production acti itie$ #ithout any interruption! The total amount re+uired for the upgrade ? I7R1!2 million ? #a$ &eginning to #orry Chandara! MATRIX had already reached it$ ca$h credit limit of I7R2!= million and it$ reco era&le$ #ere &loc*ed in the form of either in entorie$ or recei a&le$! In financial year 2010;11, the company had to pay more than I7R>)0,000 in financial charge$ and intere$t! Chandara regretted hi$ pre iou$ deci$ion to a oid putting MATRIX,$ money in $hort1term in e$tment$, #hich could ha e &een a $ource of funding for the upgrade that the IR contract #ould re+uire! Retro$pecti ely, he reali0ed that MATRIX had &een $hort$ighted in e%tending li&eral credit to it$ cu$tomer$ and &eing more prompt in repaying de&t$ than &u$ine$$ demanded!

THE WAY FORWARD

MATRIX #a$ a&le to attain many order$ and manufacture it$ product at a co$t much lo#er than it$ competitor$9 thi$ fact rea$$ured Chandara, although he *ne# that there #ere i$$ue$ that needed immediate action! Chandara #a$ a#are that MATRIX,$ gro$$ &loc* #a$ continuou$ly decrea$ing and the company #a$ therefore $hrin*ing ? rather than gro#ing ? at a rapid rate! Chandara *ne# that in order to complete the contract #ith IR, MATRIX #ould re+uire a $ignificant upgrade &y 4ecem&er 2012! Ao# could the finance$ re+uired for thi$ upgrade &e $ecuredF 2hould Chandara $ee* to impro e MATRIX,$ #or*ing capital management or pur$ue complete financial policy re$tructuringF
Exhibit 1 MATRIX BALANCE SHEET !!"# !11
!11 S$%&'() $* *%+,) Shareholders funds Share capital Reserve & surplus Loan und !1! !!"

950,000 439,990

950,000 370,841

950,000 307,736

Secured loan "nsecured loan T$t-. A44.i'-ti$+ $* F%+,) i#ed assets $ross %loc& Less' (epreciation N(t B.$'5 )ssets, Loans & )dvances *nventories Sundr+ de,tors -ash & %an& %alance Loans & )dvances T$t-. Less' Lia,ilities Lia,ilities .rovisions T$t-. N(t A))(t) T$t-.

180,345 5,018,!!1 /01220113

1,!84,!37 4,603,476 30 !2011/

1,!37,475 4,!!3,011 /03120

!,6!1,861 !70,798 06110!/7 870,146 !,948,850 453,079 !5!,199 701 70 37

!,944,618 3!4,757 0/1"02/1 740,749 !,936,73! 815,640 356,636 7027"0313

3,103,368 355,!9! 03720!3/ 3!!,848 3,355,773 554,800 !7!,!11 701!10/6

130,166 156,615 2/0321 70 6307"6 /01220113

135,348 1!5,715 /10!/6 701220/"7 30 !2011/

363,486 17!,000 161072/ 70!73017/ /03120

Exhibit VAL8ATION OF INVENTORIES !!"# !11 !1 870,146/ 43!,07 85,915/ 35!,16 !1 740,74 166,57 87,97 486,!0 !! 3!!,84 149,9! 5,6! 167,30

*nventories Ra0 1aterials .ac&in2 1aterial inished $oods

Exhibit 6 MATRIX PROFIT AND LOSS STATEMENT !!"# !11 !11 I+'$9( Sales 3ther inco4e *ncrease5 (ecrease in Stoc& T$t-. !1! !!" 1!,539,108 !50,!96 6133,8!7 10 /10133
2:15 - 3:30

Ex4(+,it%&( Week Day Date 9:30 - 10:45 Ra0 1aterial Thursday -onsu4ed 9/ 26/ 13 MVW 1 Friday 9/ 27/ 13 AC F/ IHRM 1anufacturin2 7#penses S a urday 9/ 2!/ 13 AMR u#day 9/ 29/ 13 (irectorsSRe4uneration M$#day 9/ 3%/ 13 AS P 3ther 7#penses Tu&sday 1%/ 1/ 13 IF/ MIS W&d#&sday 1%/ 2/ 13 (epreciation 2 Thursday 1%/ 3/ 13 F" 1%/-har2es '/ 13 M&A/ TME E *nterest &Friday inance
S a urday S u#day M$#day Tu&sday W&d#&sday Thursday 1%/ (/ 13 1%/ 6/ 13 1%/ 7/ 13 1%/ !/ 13 1%/ 9/ 13 1%/ 1%/ 13 AS P IF/ MIS AMR MVW

9,544,409 8,5!9,838 60!,873 176,603 6134,040 335,549 1!0!160 7 "0!710""1 ./01 .A+L 1 - .120 2 - P"D0 12-14
10:55 - 12:10 MS PFP AC F/ IHRM C R M

4,98!,486 3,41!,916 SO/ CSMERB MS PFP Placement Act ! ty 3,434,866CRM 3,699,344 F" S unday 360,000 43!,000 AS P AC F/ IHR M AC F/ IHR M !!3,791SO/ CSMERB 451,05! M&A/ TMEE MVW H(l day - "and) 3 ayant !70,798SO/ CSMERB 3!4,757 F" C R M MVW Placement Act ! ty 641,!5! 6!8,315
C 4N51 21 NC 1 S unday AC F/ IHR M M&A/ TME E S O/ CS ME R B MS PFP S O/ CS ME R B E R )) C R M IF/ MIS

12:20 - 1:35

1:35:2:15 L UNC H

5,340,943 S &S 4,765,355 F" 360,000 S &S 935,404 AMR 355,!9! IF/ MIS 674,905
M&A/ TME E S &S MS PFP S &S

3:40 - 4:55

AC F/ IHRM F" MVW C R M

T$t-. P&$*it B(*$&( T-x P&$*it A*t(& T-x )dd' 8ransfer fro4 previous +ear %alance Sheet .rovision for *nco4e 8a# %alance carried to %alance Sheet
.

"0"1601"7 100,048 370,841 30,900 439,990

20"720621 93,605 307,736 30,500 370,841

1 076102"" !!3,676 163,044 57,000 307,736