Ucal Fuel Systems Ltd

1. OVERVIEW

While the growth prospects of the Indian automobile industry looked very good during2010-2011, subsequent events in the first quarter of 2011-2012 raises signs of a slowdownin the growth rate in India and abroad. SIAM has predicted that in 2011-12 the autoindustry in India will grow at a rate of 10-12% only. Some of the estimates of OEM alsoplace the growth rate of the 2 wheeler industry at around 12% only, a figure considerablylower than that of the previous year. The measures being taken by Government to controlthe inflation and the volatility in the international market may affect the growth ofdemand of the two wheeler industry. Besides the volatility in the prices of raw materiallike Aluminium, Zinc and Steel could erode the cost competitiveness of the auto componentindustry. Sluggish market, increased raw material costs and high interest rates will haveits impact on the business of the company this financial year. The management is howeverkeeping a close watch and will continue its endeavor to maintain a steady rate of growththrough aggressive marketing, increased in- house research for alternative cost effectivesolutions and stricter control over operations.

2. FUTURE BUSINESS STRATEGY

The future strategy of the management is to develop the company as a "Systemoriented and Product oriented" business concern. Thus complete systems like fuelinjection systems or products like pumps will be given high priority. Efforts willcontinue to identify international partners that would help the company enlarge itsproduct range and close the technological gaps required to meet the changing emissionstandards.

3. QUANTITATIVE ANALYSIS OF SALES

The quantitative growth in the sales during the financial year 2010-2011 has been asunder:

The two wheeler carburetor sales has grown by 56% to touch a record level of 33 lakhcarburettors up from a figure of 21 lakh carburettor sold in previous year. The sales ofpumps have also recorded a substantial growth of 54%. However sales of Multi Point FuelInjection Systems witnessed a decrease of 18% compared to previous year because of changeof product mix of some of the OEMs. The sale of Fuel Filter has also recorded a growth of26%.

4. UCAL FUEL SYSTEMS LIMITED (UFSL) VIS-A-VIS INDUSTRY

The 2 wheeler carburetors sales of UFSL has grown at much faster rate than the rate atwhich market has grown, thus improving the overall market share by 4.7% during financialyear 2010-2011. The market share in respect of pumps has grown to 24.5% as against 19.8%in the previous year. This has been possible due to substantial increase in capacities andpenetration into other new models with the help of a strong R&D. In case of airsuction valve, the turnover has increased by 25% during financial year 2010-2011 and thecompany has been able to retain its market share of 28% in this segment.

Strengths

• Maintaining mutually constructive relationship with customers

• Strong in-house R&D support

• Proficiency in pressure die casting process, rubber & plastic moulding

• Capability in "Frugal Engineering"

• Well disciplined work force

Weaknesses

• Weak supply chain

• Delay in filling the technological gaps

• Low IT penetration

Opportunities

• Access to a larger market share due to restructuring by customers

• Scope for increase in after market sales and greater scope for exports

Threats

• Cost push effect both from OEMs as well as from the suppliers where the marginsfor the products are likely to witness pressure.

• The inflationary trend together with the high interest cost.

• Fluctuating OEM volumes that require ramp up of capacities in short span of timeimpacting the profitability.

• Volatility in foreign currency.

6. R&D

• The company is working on extending the life of carburetor through continuousimprovements to meet the increasingly demanding emission norms successfully.

• The company is working with OEMs in development of direct and port injectionsystems.

• Continuous efforts are on to enlarge the range of pumps and new facilities arebeing created at Bawal for the same.

7. MANUFACTURING CAPABILITIES, FACILITIES AND OPERATIONS

From high pressure die casting to precision machined parts of micron level accuracy,the company is committed to manufacturing the best the industry needs. The company hasover 20 years of experience in high pressure die casting. It possesses end to end in-housedie casting capabilities from die design, development, testing and validation to massproduction. The company can handle multiple alloys in both aluminum and zinc and has afleet of advanced, automated hot and cold chamber die casting machines ranging from 185tonnes to 900 tonnes locking force capacity. The machining and assembly operations haveprecise and controlled processes to ensure minimal tolerances and superior finish. All themanufacturing facilities of the company are equipped with the right mix of machines forcritical processes. The company's machine base has significant flexibility to adapt tovariations in product design. The company has also set up a full-fledged testing andinspection facility. All facilities are supported by in-house precision measurement labsand advanced inspection equipments. The company strives for continuous productivityimprovements through automation and other cost effective engineering solutions.

The capacities were recently augmented for manufacturing higher quantities ofcarburetors and air suction valves. Changes were also made in the manufacturing facilitiesto provide an element of flexibility in the production lines for meeting the demands of VMand BS type carburetor. Considerable effort is being made to introduce automation in allareas to ensure consistent good quality components. With the commencement of operations atBawal and Mahindra City, the rationalization of production facilities among the variouslocations will commence in 2011-12.

8. TECHNOLOGY COUNCIL

The Technology Council met twice during the year. The council analyzed the emergingmarket opportunities, assessed the current status of the company's R&D and identifiedthe strategic priority areas to work upon. The council also gave a clear framework for theR&D to monitor and control the progress in each of these areas. The road map ofproduct development and the specific projects in R&D have suitably incorporated theserecommendations. Special emphasis is now being given on promising areas like the newgeneration of oil & vacuum pumps for diesel and petrol engine applications and alsoareas like two wheeler injection systems.

9. HUMAN RESOURCES AND INDUSTRIAL RELATIONS

The company continues to pursue fair personnel policies which is the hall mark of thisorganization. High rates of employee attrition are causing concern and the management istaking every effort to retain trained employees and to attain high levels of productivity.

During the year 2010-11, cordial industrial relations were maintained by the companywith the workers and various trade unions. The company has an effective mechanism ofredressal of employee grievances.

An Action Centred Leadership Programme (ACL) was organized for the senior levelmanagers. Management Development Programme (MDP) was conducted for middle level managersto equip them for the future. Various technical and non-technical training programmes havebeen conducted in the plants. To strengthen, upgrade and retain skill at the shop floor, atraining centre for the operators/apprentices has been launched at the Maraimalai Nagarplant with a dedicated trainer.

For the forthcoming year 2011-12, various training programmes have been planned toaddress the training needs of all levels of employees across the organization. Managementdevelopment programmes are planned for employees in executive and higher designations.Technical and non-technical training programmes are also planned and constantly upgradedbased on the employee needs which are sought after regularly. The company also monitorsthe pulse of the employees through feedbacks/surveys from time to time.

During the year voluntary retirement scheme was launched largely for the benefit ofageing woman workers. The long term wage settlement in respect of Plant 7 and Plant 9 hasbeen concluded in June 2011 and negotiations for long term wage settlement are beingcarried out in respect of Plant 1, 6 and 8.

10. CORPORATE SOCIAL RESPONSIBILITY

Joining hands with the Culture & Heritage Trust of Karuveli and The Academy ofHigher Education, Tiruchirappalli, the company is engaged in improving the quality of lifeof the most backward sections of our society. A detailed plan has been worked out toprovide sanitation facilities, better standards of drinking water and improved educationand health facilities for the under privileged in Karuveli. Work has commenced towardsthis end. The Academy of higher education manages the 93 year old National College atTiruchirappalli. The company jointly with the management of the Academy is engaged inimproving the infrastructure and quality of education of this institution. The companyplans to concentrate its corporate social responsibility efforts towards these two causesin the future years.

11. CONTROL SYSTEMS AND ADEQUACY

The company has an adequate internal control system commensurate with its size andnature of business to safeguard the assets of the company. Internal Audit is conducted onan ongoing basis by a team of internal auditors at all locations of the company across thecountry. The internal audit reports and necessary action taken reports are reviewed by theAudit Committee periodically. The scope of internal auditors is also reviewed by the auditcommittee and necessary changes are made as and when necessary.

12. CAUTIONARY STATEMENT

The statements in the Management Discussion and Analysis Report describing thecompany's objectives, projections, estimates, expectations may be "forward-lookingstatements" within the meaning of the applicable laws and regulations. Actual resultscould differ materially from those expressed or implied. Important factors that could makea difference to the company's operations include, among others, economic conditionsaffecting demand /supply and price conditions in the domestic and overseas markets inwhich the company operates, changes in the government regulations, tax laws and otherstatutes and incidental factors.