MANAGEMENT DISCUSSION According to the latest estimates released by the Central Statistical Organization,India’s GDP growth is pegged at 6.5% in the FY 2011-12, down from 8.4% during theprevious year. Industrial growth in particular was severely affected. Significantdepreciation of the currency led to costlier imports and higher domestic input costs. Highlevels of interest rates with continuing inflation adversely impacted growth. Thesovereign debt crisis in the Eurozone is putting the world’s largest economic blockinto recession. The US economic outlook is uncertain as the prospect for recovery isweakening and no amount of quantitative easing is really working. To make the mattersworse, the Chinese economy is slowing down, putting at jeopardy the outlook of theemerging market economies. For our own economy the basic problems are that of fallinggrowth and high inflation. Actually, it is a deadly trio at work i.e. falling growth,continuing high inflation and large current account deficit, amidst high fiscal deficit.
INDUSTRY STRUCTURE AND DEVELOPMENT
Economically and demographically, India’s automotive industry is well positionedfor growth, servicing both domestic demand and increasingly export opportunities. Apredicted increase in India’s working-age population is likely to help stimulate theburgeoning market for private vehicles. Rising prosperity, easier access to finance andincreasing affordability is expected to see four-wheelers gaining volumes, although twowheelers will remain the primary choice for the majority of purchasers, buoyed by greaterappetite from rural areas, the youth market and women.
The components sector is in a strong position to cash in on India’scost-effectiveness, profitability and globally recognized engineering capabilities. As thebenefits of collaborations become more apparent, super-specialties may emerge in which theautomobile is treated as a system, with each specialist focusing on a sub-system, akin tothe IT Industry. Though this approach is radical, it could prove an important step inreducing complexity and investment requirements, while promoting standardization andmeeting customer demands.
Manufacturers are already planning for the future; early advocates of technological anddistribution alliances have yielded generally positive results, enabling domestic OEMs toaccess global technology and experience, and permitting them to grow their ranges withfewer financial risks.
This exciting outlook for the industry is set against a backdrop of two potentiallygame changing transportation trends – the gradual legislative move towards greener,gas based public transport vehicles, and a greater requirement for urban mass mobilityschemes to service rapidly expanding cities.
In a price conscious economy such as India’s, the shift towards green vehicleswill be slow unless spurred by government mandates. Although the major players are alreadyequipped with the necessary capabilities to develop cleaner vehicles, they do not see muchmerit in commercializing these technologies until the green revolution gains momentum– most likely through changes in political legislations – and it achieves themarket scale required for commercial viability.
Manufacturers are placing greater faith in dual-fuel technologies than inbattery-powered alternatives because the necessary support infrastructure, such asrecharge stations, is not yet in place for the widespread adoption of the latter. Thelaunch of electric motorcycles could have a significant impact on the market, given thatmotorcycles account for the majority of two wheeler sales in India.
The Indian Automobile industry has emerged stronger from the recent global downturn,and sales across all segments have seen record breaking numbers in the recent past.
While the Indian industry has much to look forward to, by way of steady growth in bothdomestic and export markets, there are some clear challenges accompanying theopportunities in greener vehicles and alternative mobility.
In order to capitalize on these opportunities, the industry needs to develop or acquiretechnologies and capabilities to produce vehicles that meet future market needs.
The government for its part has much to do to ensure the growth trends are maintained,and encourage the development of greener vehicles, while also improving compliance to evenexisting environment standards.
OPPORTUNITIES, CHALLENGES, RISK & CONCERN
The Indian automotive market is evolving as the next big opportunity and players fromacross the world see it as a natural extension of their business domain. And Indianplayers in the automotive component sector are now viewing the entire global market as anopportunity. With high skill levels and a competitive environment, they are no longerrestricted to viewing India alone.
Some of the emerging trends and concerns facing the Indian auto component industry are:
1. Industry structure is fragmented.
2. Original Equipment Manufacturers (OEMs) are the major source of demand.
3. Healthy demand prospects prevail in both domestic and export markets.
4. Indian auto component manufacturers are ramping up production capacities to matchgrowing domestic as well as export demand.
5. Increased focus on developing R&D and design & engineering skills.
6. Raw material costs surging, hence, margins are under pressure.
7. More mergers and acquisitions are taking place.
8. Industry’s thrust is on increasing export turnover.
9. Competition is intensifying.
10. Companies are diversifying their businesses.
The industry has been successful in maintaining its operating efficiencies due tovarious cost reduction strategies adopted by players like entering into long termcontracts with raw material suppliers. The companies have been focusing on procuring bulkorders for higher volumes of sales.
Financial performance of the industry is expected to be average in the coming years andgrowth is likely to be volume driven rather than realization driven. Exports turnover isexpected to augment much faster than domestic turnover, as rising raw material prices,which has the largest share in net sales, will continue to squeeze industry margins inspite of handsome growth in net sales.
OUTLOOK
The overall prospects look bright for the Indian auto component industry, consideringgovernment support, aggressive investment plans, capacity expansions, surging demand,global footprint, and opportunities from international and domestic markets.
The auto component companies are adopting different strategies to increase theirproduct range, get access to improved technology, to acquire proximity with theircustomers and to expand operations in lucrative markets.
The industry is, however, vulnerable to certain concerns and challenges that are likelyto erode its competitiveness. Even though competition has intensified over the years, itsseverity has increased ever since global automobile manufacturers have started consideringIndia as an outsourcing destination. The industry’s own fragmented nature and lowentry barriers for international players have stepped up the situation. Besides thesefactors, pricing pressure faced by component manufacturers from OEMs and raw materialsuppliers have also contributed substantially to rise in competition.
The company’s main customer Hero MotoCorp Limited continues to be the marketleader and has grown by 15% in terms of volume in the year 2011-12 by selling around62,35,205 two wheelers in the year 2011-12. This augurs well for our company also goingforward. The company is now also concentrating on adding new products and new businessesand is confident of growing further in the coming years.
CAUTIONARY STATEMENT
Certain Statements in the Management Discussion and Analysis describing thecompany’s objectives, projections, estimates and expectations or predictions may be‘forward looking statements’ within the meaning of applicable laws andregulations. It cannot be guaranteed that these assumptions and expectations are accurateor will be realized. Actual results could differ materially from those expressed orimplied. Important factors that could make a difference to the Company’s operationsinclude economic conditions affecting demand / supply and price conditions in the domesticand overseas markets in which the Company operates, changes in the Government regulations,tax laws and other statues and incidental factors.