MANAGEMENT DISCUSSION AND ANALYSIS REPORT A. ECONOMY OVERVIEW I. GLOBAL ECONOMY The worldwide automotive industry has been enjoying a period of relatively strong growth and profitability and annual sales have reached brrecession levels in some regions. Yet considerable uncertainty about the future remains. The Indian automotive industry comprises of a number of Indian-origin and multinational players with varying degrees of brsence in different segments. Today, nine out of top ten global automotive manufacturers have brsence in India which clearly points to its importance as a strategic market. II. IAN ECONOMY During the Financial Year 2014-15, the Indian Economy saw a cyclical upswing and forward-looking indicators which suggested that the domestic demand is gathering momentum. During F.Y. 2014-15 growth picked up, inflation remarkably declined and the current account deficit was comfortable, helped by positive policies of government and lower global oil prices. The Government endeavored to move steadily to tackle politically difficult structural issues that have hindered the economic development in recent years. The estimate indicates that the GDP grew by 7.3% YOY in the fiscal year 2014-15, which is higher than 6.9% of the brvious year. The BJP government's first full-year budget, for the financial year 2015-16, envisions a boost to infrastructure spending, an improved business environment and a wider social security net, but details of the plans are missing. Move towards brighter economy Within the next 15 years, India will have the largest, and among the youngest, workforces in the world, and will need to create jobs for roughly one hundred million young Indians who will enter the job market in the coming decades. Raising India's growth rate and ensuring it begins to generate sufficient jobs requires deeper structural reforms. The Indian government's efforts to improve the business climate has gained momentum and in order to attract investment, it launched a mission of 'Make in India' with a vision to make India a global hub for manufacturing. Further, other initiative of the government like 'Digital India' programme will transfer India into an electronically empowered and self-reliant economy. The government has made strong efforts to put its public finances on solid footing, with the central government's iscal deficit falling to 4.1 percent of GDP in 2014-15, helped by lower oil prices. By creating space for higher infrastructure spending, fiscal reforms can have a major impact on economic growth. B. INDUSTRY STRUCTURE AND DEVELOPMENT From the ground level, three powerful forces are rolling the auto industry: shifts in consumer demand, expanded regulatory requirements for safety and fuel economy, and the increased availability of data and information. These trends offer huge risks but equally provides growth opportunities for auto sector. To address them in a way that results in real competitive advantage, it's critical to understand the specific ways that these trends are already affecting companies in the industry. The Indian auto industry is one of the largest automotive markets in the world. Further India is becoming the auto hub for various multinational companies in auto sector. Out of the total production, the export made by International OEMs is 15% (approx). Therefore, India is manufacturing not only for domestic market but for export also. C. THE AUTOMOBILE PRODUCTION, DOMESTIC SALE AND EXPORT: During the financial year 2014-15, the automobile production has increased by 8.68% as compared to the brvious financial year 2013-14. While domestic Sales Volumes increased by 7.22%, the export increased by 14.89%. The breakup of volume in different category is summarized below . OPERATAL HIGHLIGHTS The Company witnessed a marginal sales growth of 7.62% in the financial year 2014-15 in comparison to the brvious year. The same is due to reduction in the price of Raw Material as compared to the brvious financial year and consequently reducing the selling price. However, the profit before exceptional and extraordinary item grew by 27.66% and profit after tax by 142.05%.The increase in net profit is primarily due to the absence of any exceptional items during the year and low finance cost & debrciation E. WORKING CAPITAL MANAGEMENT The Company has tied up with various banks for credit facilities including factoring/ invoice & discounting to bridge the working capital gap. The terms of borrowings are structured in a manner that it doesn't entail into a fixed liability and at the same time maintaining competitive rates. The Company focuses on timely receivable, realization and low inventory level considering JIT supply to customer which helps in reducing the working capital requirement. The Company is exposed to external and internal risks associated with the Business. The operations are directly dependent on the growth of the Indian Automotive industry. General economic conditions impact the automotive industry and in turn the operations of the Company as well. The Company has in place the Risk management Policy which brscribes the methodology for Risk Mitigation of regular operational risk associated with the Company. Various Risks are identiied, categorized based on their severity & probability/ likelihood of their occurrence. These operational risks are managed through an enterprise risk management system with periodic review and control mechanism. Continuous efforts are made towards Mitigation of Risk arising due to external factors or unforeseen circumstances by way of having adequate Insurance coverage and exploring the possibilities of obtaining coverage wherever possible Apart from the regular operational risks that are managed through an enterprise risk management system with periodical review and control mechanism there are some key strategic risks that the Company is exposed to: i Economy Slowdown: Despite of the stable government at the center, the overall economic condition of the country is yet to gain momentum. Moreover, delay in policy reforms, decision making as well as high interest rates and low growth of GDP, affects the profitability of the Company. ii Interest rate risk: Given the capital intensive nature of the business and partly funded through debt, any movements in interest rates increases the cost of refinance and also affect the cost of working capital. iii Manufacturing Inputs and Cost Inflation: The Company is dependent on factors affecting the manufacturing costs viz. power & fuel, consumables, packing and forwarding, which are external factors and where the Company has minimal control. Such cost escalation may affect our profitability. However, the increase / decrease in cost of raw materials is primarily passed through to the customers. iv Currency Debrciation: Risk arising from the potential change in the exchange rate of foreign currency in relation to INR. The management is taking appropriate action as hedging. v Stiff Competition: The Company operates in a highly competitive market and customers have started adopting de-risking strategies to maintain more than one source for a product. vi Regulatory Risk: The Change in Tax laws, government policies and regulatory requirements might affect Company's business. vii Credit and default risk: Prevailing liquidity tightness and subdued ultimate Consumer demand could lead to rise in receivables. However, Company is closely monitoring these risks and is continuously taking appropriate action. RISK MITIGATION MEASURES: i Implementation of cost reduction measure through budgetary control of operating expenses, VA/VE, yield improvement, etc. ii Retain and motivate talent by focused employee developments programs. iii Process improvement projects in both manufacturing and administration areas to sustain growth for future so as to increase business competence. INTERNAL CONTROL SYSTEMS AND ITS ADEQUACY The Company has adequate internal control systems for assessment and eliminating various kind of risks, which include strategic, operational, inancial, environmental and reputation risk. Such risks are reviewed at various meetings like internal audit committee meetings, Business review meetings where members of senior management are involved. The Board also reviews such risks procedures periodically. To have robust internal financial controls the Company has in place Standard Operating procedures for all business process. To further strengthen the Internal control in routine transactions the Company has reviewed its segregation of duties in ERP and is in the process of creating standard Roles for all modules and the assigning of authorization in ERP shall be based on such standard roles. The Company has effective and reliable internal control system. M/s Sahni Natarajan & Bahl, Chartered Accountants has been appointed as an Internal Auditors to conduct internal audit across all locations of the company aimed at promoting effective & eicient operations while emphasizing the compliance of policies, applicable laws & regulations to achieve business objectives including performance and profitability goals and safeguarding of resources. This ensures the control and safeguarding of the company's asset against loss through incipiency, waste, negligence or fraud. The Company is well structured and policy guidelines are well documented with br-deined authority. Their report on internal control and its adequacy are regularly discussed with the management and corrective measures, wherever required, are taken and continuously monitored. Experienced team of Internal Auditors which carries out Internal Audit across all locations. The Audit Committee of the Company is reviewing the internal controls including the internal audit reports, financial result of the Company on quarterly basis and provides their support to all operational and finance functions of the Company through regular monitoring and suggestions. The Company has an effective budgetary control system. The senior management team reviews on monthly basis, the actual performance with reference to budget. H. HUMAN RESOURCE The Company's HR process ensures the availability of a competent and motivated team of employees. The Company continuously endeavors to provide a fair compensation amongst industry of like nature, a clear career path, reward for performance and regular training and development for each level of employee. To enhance the productivity, the Company has developed their people by providing innovative and professional environment. It has an eicient recruitment policy and human resource management processes, which enables to attract and retain competent & talented employees. While hiring people, the company looks for positive attitude and exemplary behavior so that they can imbibe the value system. The Company regularly assess the competencies which is important for the development of business and arrange for appropriate training and development programmes to cater different learning needs of employees in the areas of technology, management, leadership, cultural and other soft skills. During the financial year 2014-15, the Company has received the following brstigious awards & certification: i. Certificates of Tier -2 Upgradation ii. Certificates of Yield Improvement The Company has organized various training programmes/ award scheme/open house sessions for general discussion/ game competition, Cricket Tournament, etc. from time to time. The Company observed Annual Day, World No-Tobacco Day, Pollution Check & Environment Day and Quality month. Apart from these, the Company has various celebrations such as Diwali Celebration, Clean JBM, Vishwakarma Puja, to name a few. These help the employees to pursue their interest and have balance between work life and personal life. The brmises of the Company is full of energy, vitality, enthusiasm and passion. To harness the leadership skills of the employees, the Company has extended the "DRIVE III" Leadership Development Programme, which is conducted in association with the Global Management Consulting firm - 'Hay Group'. By this process, the Company is able to develop a team of young employees at middle management level as the prospective leaders. The journey of the Company has been challenging since inception but its values has always guided it and made it possible to achieve its height. The DNA of the Company comprises of Integrity, Safety and Quality ("ISQ") which is imbibed right from the grass root level to the top level in the Organization. The Company had 736 permanent employees as on 31st March, 2015. The industrial relations have been peaceful and cordial throughout the year. I. CORPORATE SOCIAL RESPONSIBILITY The Company's Social responsibility is embedded in the long term business strategy of the Company. Business priorities co-exist with social commitment to drive holistic development of people and community. The Company's community outreaches the programme encompasses initiatives for the empowerment of rural communities by working towards their economic independence, improving social infrastructure and social upliftment. The Company has also adopted Ekal Vidyalyas in remote villages of the country. Besides this, the Company support to NGOs actively involved in the field of education, character building, health and sports. J. ENVIRONMENT, HEALTH AND SAFETY (EHS) The Company is committed to provide high quality products without adversely affecting the natural resources, environment, health and safety of all the stakeholders. The Company is committed to: i. establish, measure, monitor, assess and continually improve health, safety and environmental performance through control of hazards and encouragement of innovation. ii. comply all environmental, occupational health & Safety (OH&S) and other statutory / regulatory requirements. iii. regularly upgrade knowledge & skill of employees through professional development & training. The Company has established, implemented and is maintaining an Information security Management system. During the year, ISO 14001 surveillance was carried out by M/s American System Registrar, LLC and the auditors recommended the continuation of the ISO 14001. The Quality management System of the Company is certified against ISO/TS 16949 (Quality Management System) Standard. Re-assessment of the quality systems and re-certification assessments are done at the regular intervals by an accredited third party agency. Also, the Company has an internal assessment mechanism to verify and ensure adherence of defined quality systems across its plants. (a) OPPORTUNITY The automotive sector in India, comprising of the automobile and auto component sub sectors, is one of the key segments of the economy having extensive forward and backward linkages with other key segments of the economy. The Indian auto component industry is one of the India's sunrise industries with tremendous growth prospects. From a low-key supplier providing components to the domestic market alone, the industry has emerged as one of the key auto components center in Asia and is today seen as a significant player in the global automotive supply chain. The Opportunities can be lined as under: i Market Size: The Indian auto component industry is one of India's sunrise industries with tremendous growth prospects. From a low-key supplier providing components to the domestic market alone, the industry has emerged as one of the key auto components centers in Asia and is today seen as a significant player in the global automotive supply chain. ii Investment: The country is witnessing a favourable investment environment in all the sectors including automobile after the formation of new government under the leadership of hon'ble Prime Minister Shri Narender Damodar Modi. iii Government Policies: The Indian government encourages foreign investment in the automobile sector and allows 100% FDI under the automatic route. The government has not laid down any minimum investment criteria for the automobile industry. Besides offering a liberal FDI regime, the government has made successive policy changes that allow for stronger growth in the automotive sector. The government of India has identified the automotive industry as a focus industry for Foreign Direct Investment (FDI) giving its importance from employment generation perspective. The Government plans to promote eco-friendly cars in the country i.e. CNG based vehicle, hybrid vehicle, electric vehicle and also made mandatory of 5 per cent ethanol blending in petrol. The government has formulated a Scheme for faster adoption and manufacturing of Electric and Hybrid Vehicles in India, under the National Electric Mobility Mission 2020 to encourage the progressive induction of reliable, affordable and efficient electric and hybrid vehicles in the country. iv Road Ahead: The rapidly globalizing world is opening new avenues for the transportation industry, generating the need for more efficient, safe and reliable modes of transportation, which is subsequently adding to the auto component industry's growing opportunities. According to a report by the Confederation of Indian Industry (CII), the Indian auto component industry is set to become the third largest in the world by 2025. Despite of opportunities, the threats revolving around the automotive industry are highlighted as under: Shifts in consumer demands: The consumers appear to be rethinking their individual automobile brands and viewing cars more as transportation machines. Although this is not likely to have a major impact on sales volume, it is afecting how much people are willing to pay for automobiles. That willingness is also afected by product differentiation, partly due to general increase in vehicle quality throughout the industry. Expanded regulatory requirement: Regulatory brssures to reduce overall fleet emissions are steadily adding to automakers' costs. Tighter corporate average fuel economy regulations in the country as well as the rest of the world are more expensive for automotive component manufacturers to comply with, requiring higher volume to amortize increasing costs. Regulators are also mandating more safety-related features, such as backup cameras, be included as standard equipment on new models, adding further to the costs. Only a minority of auto buyers are willing to pay for more environment friendly choices such as electric vehicles, so the cost brssure falls largely on the auto component manufacturers. Unbrdictability of new technologies: The unbrdictability of new technologies makes it hard to plan for disruptive changes such as e-vehicles, connectivity and autonomous driving. However, an evolving mobility culture, which eschews traditional car ownership in favour of more flexible options, means that automotive companies must brpare for 'black swans' on the horizon. As the mobility eco-system broadens, automakers can no longer rely on organic growth, and will have to build strategic alliances crossing sector boundaries, and think 'out of the box' to find ways to intelligently expand value chains and diversify. A unique brand becomes even more critical, to differentiate yourself in a market teeming with new competitors from other sectors and offering customers a wider range of products and services. Increase in input material costs & fuel prices: In the recent years, costs of the majority of the key raw materials (especially metals) required in the automobile industry have gone up considerably, leading to rise in the automobile products. The constant increase in fuel prices are significantly affecting automobile demand. OUTLOOK With fortunes of the Indian auto components industry directly linked to those of the OEM industry, prospects of the Industry for 2015 look better, as accelerated vehicle demand would translate into increased revenues for the components industry. At the same time, auto component manufacturers are expected to increase their thrust on venturing into non-auto sectors as a means to reduce their over-dependence on the vehicle market. Further, with foreign OEMs sourcing vehicles as also auto parts from India, with several of them making India their sourcing hubs, overall growth prospects of the components industry looks better |