ECONOMIC OVERVIEW

In the report of UN ESCAP titled, ‘Economic and Social Survey of Asia and the Pacific 2015’ it is stated that "Indian Economy growth is forecasted accelerate to 8.1% in 2015 and 8.2% in 2016, benefiting from the acceleration of infrastructure projects, strong consumer spending due to lower inflation and monetary easing and gradual improvements in market sentiments.

Earlier projections released by the International Monetary Fund (IMF) and the World Bank, showed India’s growth at 7.5% for the current fiscal and the next. According to the projections by IMF "For the first time since 1999, India will outgrow China and its BRIC peers with a GDP growth of 7.5% this calendar year and the next". However, the Reserve Bank of India (RBI) has forecasted a growth rate of 7.6% forfinancial year 2015-16.

The Economic Survey 2014-15 indicates a clear political mandate for reform and a benign external environment have created a historic moment of opportunity to propel India onto a double-digit growth trajectory. Decisive shifts in policies controlled by the Centre combined with a persistent, encompassing, and creative instrumentalism in other areas and Make in India initiative could cumulate to Big Bang reforms.

The outlook for advanced economies is improving, while growth in emerging market and developing economies is the matter of concern as primarily reflecting weaker prospectus for certain large emerging market economies alongside oil and raw material exporting economies. The fall in oil price and the positive effects of the exchange rate movements will help the world economy to be on the path of recovery. Overall, global growth is forecasted at 3.5% in 2015 and 3.8% in 2016, broadly the same as last year.

India’s growth is likely to improve, fuelled by an important structural reform agenda for India to reap productivity gains. This includes removing infrastructure bottlenecks as well as reforms to education, labour, and product markets for raising labour force participation and productivity through "Skill India Programme".

The expected growth rate of 7.5% at lower side, down turn in inflation and interest rate, growth in other manufacturing & service sectors and confidence on stable government will contribute to improve consumer sentiment, which in turn contributes to an increase in automobile demand for commercial as well as passenger vehicles.

INDUSTRY STRUCTURE AND DEVELOPMENTS

One of the major sectors in India is the Automobile sector, an engine of Growth. The Auto Component industry is part of this sunrise industry of the Indian Economy, as this sector has witnessed tremendous growth, in a decade.

Automobile industry

Automobile industry is known for designing and manufacturing of the passenger as well as commercial vehicles which includes light, medium and heavy vehicles such as cars, buses, trucks, two wheelers etc.

Performance in 2014-15

The year 2014-15 was undoubtedly one of the most challenging ones for the automobile industry. Even in the recovery phase of the economy, the industry worked hard to pave its way to sustain, regain and grow in the market.

The Industry registered a growth of 8.68% over the same period last year in terms of production. Total of 23.36 Million vehicles including passenger vehicles, commercial vehicles, three wheelers and two wheelers were produced in April-March 2015 as against 21.50 Million in April-March 2014.

Domestic Market

The sales of Passenger Vehicles grew by 3.90% in April-March 2015 over the same period last year. Within the Passenger Vehicles segment, Passenger Cars and Utility Vehicles grew by 4.99% and 5.30% respectively, while Vans declined by 10.19% in April-March 2015 over the same period last year.

The overall Commercial Vehicles segment registered a de-growth of 2.83% in April-March 2015 as compared to same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) grew by 16.02% and Light Commercial Vehicles declined by 11.57%.

Domestic Market Share for 2014-15:

Particulars Share (%)
Passenger Vehicles 13
Commercial Vehicles 3
Three wheelers 3
Two wheelers 81
Grand Total 100

Export Market

In April-March 2015, overall automobile exports grew by 14.89% over the same period last year. Passenger Vehicles and Commercial Vehicles grew by 4.42% and 11.33%, respectively during April-March 2015 over the same period last year. Source: Society of Indian Automobile Manufacturers (SIAM)

Auto Ancillary Industry

The Indian Auto Components Industry is one of the largest automotive markets in the world. It was previously one of the fastest growing markets globally, but it is currently experiencing negative growth rates. As per the report of Automotive Component Manufacturing Association of India (ACMA) the industry recorded a decline of 2%, with overall turnover standing at Rs. 2.11 Lakh Crore (USD 35.13 billion) against last year’s Rs. 2.16 Lakh Crore (USD 35.96 billion). The compound annual growth rate (CAGR) for the industry has been 14% for the last six years.

Auto Ancillary Industry requires huge capital investment and organized structure and therefore putting economic barrier on unorganized players but its complete dependency on automobile industry is the point of concern and makes it slightly unattractive as it does not hold sizeable market independent from Original Equipment Manufacturers (OEMs).

In recent times, the slowdown witnessed by the Automobile Industry has certainly impacted the demand sentiments for the Auto Component Industry as well.

OPPORTUNITIES AND THREATS A) OPPORTUNITIES

The Economy has started moving on the path of recovery with industrial activity picking up gradually, investment activity is expected to gain further pace on account of the increased government expenditure especially in the infrastructure projects, Inflation and interest rate too is expected to remain within the RBI’s target range and significant decline in the crude oil prices as compared to last year will help automobile sector to recover and consequently it will help in strengthening the Indian economy.

1) "Make In India" is the call of the Government and can be heard all over the world. The formation of a stable government is something that the foreign investors have been looking for, coupled with the idea of ease of doing business, the Government is certainly taking steps to accelerate the domestic production by inviting MNCs to come and produce in India.

2) Gradual Improvement in FY16 in Auto Demand: The auto ancillary sector witnessed a slowdown over the Year 2013 and 2014, driven by weak sales of vehicles domestically. A revival in auto demand will benefit the auto ancillary industry. The outlook on the auto sector is expected to stay stable for the Year 2015 and 2016 from negative to stable, driven by the early signs of an uptick in volumes being witnessed in second half of financial year 2015 and on the bottoming out of sales decline.

3) Major Developments & Investments in India :

i. Investors, both domestic and foreign, have lined up investments of almost $10 billion or nearly Rs. 60,000 crore over the next few years. The expansion plans, renew the hope in the Indian market’s long-term prospects, besides exploiting its potential as an export market.

According to PwC, 10 car makers have invested around Rs. 31,570 crores, two-wheeler companies has invested nearly Rs. 8,555 Crores and tyre companies around Rs. 7,350 crore in the past 10-12 months to build additional capacity of three million vehicle. That works out to nearly a third of the current Indian automotive market.

ii. TATA Motors, in order to consolidate its presence in the region, is also looking at various measures, including modernising its dealerships and introducing semi-mobile workshops for its customers and expects that its medium & Heavy Commercial Vehicles (M&HCV truck) segment in India is likely to register a growth in fiscal 2016, driven by continuing trends toward replacement of ageing fleet vehicles and others. This will increase demand for the vehicles and ultimately increase the Company’s top and bottom lines.

iii. Japanese auto major Honda is investing Rs. 3,565 crore in its two wheeler and car business in India as it looks to increase its production capacity. The plan is to increase manufacturing capacity by 600,000 units for two- wheelers and by 60,000 units for cars by 2016.

iv. Mahindra & Mahindra, which lost its No. 3 position to Honda, is planning to raise Rs. 5,000 crore from the market for plant expansion, besides investing Rs. 3,500 crore in capex and new investment every year over the next three years.

v. Ford has already kicked in the process of getting approvals to export 90,000 units of Eco Sport to US, which is more than the numbers it sells in India.

vi. The vision of AMP 2006-2016 expects India, "to emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion; accounting for more than 10% of the GDP and providing additional employment to 25 million people by 2016."

References: Media Reports, Press Releases, Department of Industrial Policy and Promotion (DIPP), Automotive Component Manufacturers Association of India (ACMA), Society of Indian Automobile Manufacturers (SIAM), etc.

THREATS

Auto ancillary industry under which your Company operates is dependent completely on Original Equipment Manufacturers (OEMs) and therefore upward and downturn of automotive industry directly affect the auto ancillary industry. The automobile industry and the demand for automobiles are influenced by general economic growth, credit availability, growth in manufacturing and service sectors, agricultural growth which is dependent on monsoon condition, disposable income of consumers, interest rates etc. Negative trends in any of these factors could materially and adversely affect the automobile industry and there is a direct threat to the existence of auto ancillary industry.

Economic growth of foreign market also influences the Indian economy and automobile market and a slower than expected global economic recovery or a significant financial disruption could have a material adverse effect on the Company’s business and its operations.

Price of raw materials consumed in manufacturing of auto parts is volatile in nature and depends on various factors like oil prices, economic scenarios across the globe, exchange fluctuation and others which cannot be controlled by the Company. Additionally an increase in the price of raw materials could materially impact the bottom line of the Company if the Company could not pass on such increase in cost to its OEMs which also depends on the competition in the market.

High interest rates on auto loans are also acting as a deterrent to sales. For these rates to soften the Reserve Bank of India (RBI) would have to initiate rate cuts, which don’t appear imminent. The untimely occurrence of monsoon coupled with low estimation of rainfall by the Indian Meteorological Department (IMD) to as low as 88% is an indication of low agricultural output. This could in turn dampen rural demand for two wheelers and tractors.

The Company anticipates threats from existing as well as emerging competitors as the auto ancillary industry is highly competitive and there is strong possibility of further intense the competition in light of emergence of new domestic as well as global players to tap the robust growth prospects of Indian economy as well as government’s initiatives to attract foreign investors. Global players bring with them decades of international experience, global scale, advanced technology and significant financial resources. There is also a possibility that competitors consolidate or enter into other strategic agreement like merger/amalgamation, acquisitions etc., they may be able to take better advantage of economies of scale or enhance their competitiveness in other ways.

Increased competition might lead to price reductions of the final products, decreased sales, lower profit margins thus adversely affecting the business and financial condition of the Company.

Notwithstanding the various challenges, the industry’s long-term prospects remain bright. Growth will be driven mainly by healthy economic growth, changing consumer preferences, replacement demand and rising aspirations, increased spending on infrastructure development, thrust on rural economy and new product launches, among others.

KEY COMPETITIVE POSITIONING/STRENGTHS

Over the years, your Company has built a strong product portfolio and developed high end design and value engineering capabilities. Your Company is an integrated ‘Art to Part’ or ‘Concept to Delivery’ Company with capability right from Styling, Designing (CAD), Prototyping, Analyzing CAE (Computer Aided Engineering) for Crash Worthiness, NVH, CFD, etc., Tooling (Computer Aided Manufacturing) and finally Mass Manufacturing.

The Company has long standing and reliable relation with existing big players of automobile sector which in turn also help in developing new customers. Your Company operates through 07 manufacturing facilities and Design & Styling Center.

At the heart, diversification has been our innovative approach to not only produce new products but also improve our existing products and services through Value Engineering. Your Company endeavors to bring products which satisfy the end user requirements.

Today, the Company is able to provide basket of products with over 2500 products across different sizes and ranges that fit into a range of SUVs, MUVs, PVs, CVs and other vehicles. Your Company has added a varied range of products like foot control modules, exhaust systems, silencers, jacks, hinges, brake assemblies, automotive axles, etc. Your Company provides a wide range of engineering enterprise services, based on a combination of business consulting, product design, and IT skills with the support and help of its 100% subsidiary Autoline Design Software Limited and your Company’s proposition to its customers improved as a provider of engineering-design, tooling services and mass manufacturing capabilities that can continually innovate through process engineering, re-engineering and re-tooling to improve manufacturing efficiency. Your Company is continuously renewing technology and upgrading quality standards, keeping in mind international benchmarks. In the recent years, with a well-defined business strategy, your Company has won new contracts from various OEMs. Consequently, it has also led to improved and increased brand visibility and awareness for your Company. Due to excellent quality in work, cost competitiveness, timely deliveries and State of the Art Tool Room facility with latest CAD/CAE/CAM facilities, the Company has, in a short span, become well established brand in auto ancillary industry.

Using the power of collaborative visualization, your Company now facilitates collaborative decision making and multidisciplinary communications that enable companies to identify and resolve manufacturing design problems while in a virtual state (CAE) with significantly reduced developmental time and cost, for all the OEMs in the Automobile Industry around the world. These processes have been successfully applied while developing components/assemblies for General Motors, Daimler, Volkswagen, Ashok Leyland-Nissan, Renault-Nissan etc.

STRATEGIC PLANNING/ MOVING AHEAD

Your Company’s in-house designing team and infrastructure including its subsidiary, has introduced a number of new products over the years and it will enable it to expand product range, make it competitive with sound standing and extend the geographical reach. The Adjustable & Collapsible Pedal Assembly, High Deck Load Body, Park Brake Assembly and Jack Assembly are a result of our focus on driving growth through innovation, thus exemplifying the value engineering expertise of your Company. Efforts are also on to develop Accessories for 4 wheelers & 2 wheelers, which are in high demand with new & innovative designs, to improve profit margins.

Further, your Company earned recognition for its in-house Designing & Engineering capabilities team from Volkswagen and General Motors to provide cost efficient pedal and brake assemblies.

Your Company’s Dharwad plant (in Southern India) which is operating on rented premises is proposed to be shifted by end of calendar year 2015 to its owned premises as almost 80% construction work has been completed. This will help to cater to the growing needs of Domestic and International OEMs and particularly for the various models manufactured by Tata Motors Ltd. at Dharwad.

Your Company is also anticipating higher growth in stamping tool manufacturing business and overseeing the possibilities to develop the business with Bajaj Auto, Toyotetsu India Auto, JBM Auto System, Mahindra & Mahindra, TATA etc.

The recognition of your Company’s value engineering expertise by International OEMs like General Motors, Volkswagen, Daimler, Ashok Leyland - Nissan, Asia Motor Works, Tata Motors and Mahindra Navistar continues to propel your Company’s growth, by enabling the development of newer, high performance, value added and low cost products in your Company’s portfolio. This will help not only improve your Company’s business performance but also strengthen your Company’s relationships with the existing as well as prospective customers.

Your Company’s untiring efforts of adhering to global quality standards, enhancing production efficiency, upgrading to fast changing requirements of OEMs, customization of products and solutions, and a strong focus on product innovation and improvisation have yielded an overall improvement in qualitative performance.

FUTURE BUSINESS PLANS

Your Company is working on various business strategies to overcome from existing adverse situation such as:

i. Diversification

Moving towards diversification goal the Company is focusing to develop Non-Auto business such as Railways, Defense, Consumer Durable Goods, Earth Moving equipment etc.There is huge market and the Company has done preliminary feasibility study and found that the Company can grab the opportunities with existing infrastructure and manpower with minimal investments.

Accordingly the Company has demonstrated its capabilitiesand infrastructure to prospective customersand expects regular business from majority of them. Your Company is very close to achieve its one of the goals of diversification of business and confident that it will improve top as well as bottom line of the Company.

The Company is also working on diversification of customer base and contact has been established with various new customers such as Eicher, Nevystar, Isuzuu etc. where new customers penetration will reduce the dependency on one customer as well as it will give negotiation power and strength to the Company. Diversity of sectors and customers will enable the Company to improve margin in near future.

ii. Geographical expansions

The Company is also overseeing huge potential in Chennai for auto components as Chennai is emerging as automotive hub in India with a base of over 30% of India’s automotive industry and 35% of auto components industry. The Company can grab more business from various customers like Ford, Renault-Nissan, Ashok Leyland, Hyundai etc. and will help to achieve Objective of diversifying business and customer base.Your Company is also looking forjoint ventures which will benefit the Company in long term.

Your Company is aggressively taking initiatives to get new businesses from existing as well as new customers like Ford and is also in discussion with new customers.

iii. Developing Own Products Market

Considering the growing accessories market, the Company is likely to enter in to design, manufacturing and sales of four wheeler accessories on its own. Initially to start with, different front & rear guards for various automotive will be launched in the domestic market. Prototype samples of four front& three rear guards are in advance stage and after fitment trials on different vehicles, first saleable batch will be produced and released in the market.

iv. Fund raising / Cost Saving

Your Company is confronting with the financial problem which is adversely impacting the business operation of the Company. Recently sanctioned Debt Restructuring and Divestment have supported the Company to certain extent but the Company is looking for long term funds and whenever any concrete decision is taken by your directors the same will be communicated by way of outcome of meetings or other appropriate means.

The Company has dedicated a team for taking Cost Saving initiatives on regular basis with task of supplier rationalization, inventory management, system improvement, reviewing credit periods etc. and targeted 4% saving on all direct and indirect costs in FY 2015-16 by way of negotiation with existing/new suppliers or creating new suppliers. The efforts are also going on to improve credit periods.

RISKS AND CONCERNS

Liquidity Crisis: Decline in sales automatically brings in decline in liquidity. Even though the GDP growth has been 7.3%,

the recovery phase of the economy is going to take tad long. However, the positive side is that the inflation rates have started narrowing every quarter, falling to 5.2% in Quarter 2, 1.5% in Quarter 3 and finally to a minuscule 0.2% in Quarter 4. The challenge before the industry is to overcome this tight liquidity situation.

Significant reliance on key customers: 5 Customers contribute more than 90% revenue on standalone basis of the Company, out of above one customer i.e. Tata Motors Limited contributes more than 75%. Thus the performance of the Company is completely dependent on the performance of its customers and decline in demand of final products of the Company’s customerwill definitely adversely affect the Company’s performance financially and operationally.

Increase in competition: Competition is a part and parcel of business. It is increasing day by day not only from the local manufacturers but also from International Components Manufacturers setting up manufacturing facilities in India. Pressures in the highly competitive automotive manufacturing sector and over-capacity, particularly in vehicle assembly, means that most suppliers face unrelenting price pressure. What holds key for the survival of the Company is the drive to attain lower costs and a technical edge over the competitors.

Your Company is also considering to establish laser and plasma cutting machines to increase its capabilities and to explore heavy fabrication business in-house which will help to add new customers in this segment.

Growing Used Car Market: The Used Car Market has been a success story in recent times. According to estimates in the US, for every new car sold, around three used cars are sold. In Europe, this ratio is 1:2, while currently in India it is 1:1.1 and expected to become 1:1.3bythe end of2015

The used car market in India is expected to grow by a CAGR of 20% in the next five years, with the organized sector playing a big role in this growth story. The used-car business is 1.3 times bigger than the new-car market and growing at a faster rate. A large percentage (80%) of your Company’s products are ‘Commodity’ business i.e. large volume, low profit business. These are also replaceable by other Companies setting up similar facilities. Hence, your Company intends to scale up to more ‘proprietary’ products with own designs and ability to realize good margins from business in coming years. Auto Component manufacturers of this Category are caught between large OEMs (Vehicle Manufacturers) and large Steel Companies (raw material suppliers) with less or no elbow room for negotiations, unless new proprietary products with own design are launched in both Automotive and Non-Automotive Sectors.

In addition to above there are possibilities of further risks by change in economic and monetary policies of government adversely affecting business sentiments of the Company, risks associated with human resource, Force Majeure, occurrence of unforeseen events, and any other business risks.

BUSINESS OUTLOOK

The outlook of Auto Ancillary Industry is bright. An uptick in the domestic auto industry, besides a pick-up in replacement demand, will give a fillip to the auto ancillary industry.

The outlook on Company’s performance in the coming years is expected to be moving ahead from stable. This is based on the expectations of higher domestic demand in the auto sector, higher GDP growth, continued momentum in sector exports and a more favorable policy environment, which could also accelerate investments in the sector in the medium to long term. The Company expects the sector revenue to grow by 8%-10% and improve profitability in FY 2015-16.

‘Make in India’ to Act as Catalyst: The government’s recent focus to promote domestic manufacturing ("Make in India" campaign) could be the much needed driving force for the Company in the coming years as the new government is focusing to promote manufacturing in the country. India’s emergence as a major automotive market has already led to many of the global OEMs setting up production facilities in the country. Global auto brands such as Nissan, Ford, General Motors, Hyundai, Suzuki have announced plans to ramp up investments in India to cater to the domestic market as well as use India as an export/sourcing hub for global operations. It is important for the Company to tap these opportunities. As per the study by PwC the proposed investment by passenger vehicle makers is more than Rs. 30,000 Crores in near future.

Cost Saving Efforts to Boost Margins: The Company continues to pursue cost-reduction initiatives. The Company plans to reduce the cost to sales ratio, through effective cost management thereby improving margins. Revival in domestic demand along with a benign raw material environment will also support the same. Margins for your Company as well as the sector companies were largely unchanged over FY12-FY15 due to a muted demand environment. Your Company has focused on improving cost structures during the downturn and outcome thereofwill be visible in the current year 2015-16.

Revival in Domestic Auto Demand: Your Company expects the auto ancillary sector to benefit from recovery in the auto sector in FY16. Within the auto sector, volume growth in car, utility vehicle and medium & heavy commercial vehicle witnessed in April-November 2014 to continue in FY16. The passenger vehicle segment is likely to post yoy volume growth of 2%-5% in FY16 (FY14: negative 6%) supported by the car (3%-5% yoy) and utility vehicle segments (4%-7%). In case of the commercial vehicle segment, volumes in FY16 will be driven by MHCVs (13%-17% yoy growth, FY14: negative 25.3%).

Maharashtra’s Economic Growth: Your Company is situated in the State of Maharashtra which is always on the forefront for economic growth of the Nation. The State contributes significantly to country’s industrial output. Maharashtra Government is keen to make Maharashtra as the Preferred Investment Destination and therefore emphasizing on ease of doing business in Maharashtra as well as providing best infrastructure, power at competitive cost and improvement in government system to create business friendly atmosphere in Maharashtra. These initiatives are attracting to National and International Original Equipment Manufacturers and few of them have already planned for big investment in Maharashtra which will directly/indirectly open business opportunities to your Company.

Though more than 75% of the total consolidated Sales is to Tata Motors Ltd.,who is one of our major customers and the Company is supplying to both their CVBU (Commercial Vehicle Business Units) & PVBU (Passenger Vehicle Business Units) in the ratio of 70:30. Your Company has added majority of International OEMs and their growth will help us to grow.

Your Company is providing Value Added Engineering Services in terms of both cost reduction and adaptation to Indian conditions with considerable cost savings in India. Continuous R & D efforts in area of Automobile ‘Safety’ has helped in having various patents. We are expecting one Patent (Collapsible Pedal Systems) which has the potential to change the future of the Company.

BUSINESS PERFORMANCE

The year gone by was a tough one for the entire Automobile Industry with your Company being no exception. The standalone performance has been down due to slow down in auto industry, reduction in overall demand, lower volumes not covering fixed costs, high interest rate, inflationary trends, increase in input costs etc.

Segment - wise performance

Your Company is in the business of manufacturing of auto parts such as pressed sheet metal auto components and assemblies which is used in the manufacturing of the main product and in Design Engineering Services. All other activities of the Company revolve around the main business. The sales are primarily to Domestic Automotive Component Segment. However, the Company also has a small share in export segment.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has proper and adequate system of controls in order to ensure the optimal utilization of resources and the accurate reporting of financial transactions and compliance with applicable laws and regulations. The Company has put in place sufficient systems to ensure that assets are safeguarded against loss from unauthorized use or disposition and that transactions are authorized, recorded, and reported correctly. Audit Committee of Board of Directors comprising majority of Independent Directors, regularly reviews the significant audit findings, adequacy of internal controls, compliance with accounting policies, practices and standards as well as compliances. It reviews and reports efficiency and effectiveness of operations and the key process risk.

Your Company has implemented Microsoft Dynamics AX 2009, Enterprise Wide Solution, Enterprise Resource Planning (ERP) at all its plants covering all its businesses, planning and accounting processes. With the help of this, your Company will be in a better position to increase the operational efficiency and cost effectiveness of overall operational controls. M/s. CMRS & Associates, Chartered Accountants was t