avtec ltd Management discussions

AVTEC LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS 1. Business Overview: Year 2009-10 began as a difficult one with challenges for the Indian economy. The significant deceleration in the second half of 2008-09, brought the real GDP growth down to 6.7%, from an average of over 9% in the preceding three years. The policy makers took a calculated risk in providing substantial fiscal expansion with liberal monetary policy support to counter the negative fallout of the global slowdown. India was among the first few countries to respond swiftly to the global slowdown. The effectiveness of these policy measures became evident with fast paced recovery. Though the economy stabilized in the first quarter of 2009-10, it registered a strong rebound in the second quarter, when the growth rate rose to 7.9%. The estimated real GDP growth for 2009-10 is 7,1%, with all three broad sectors of the economy (industrial, service and agriculture) doing well. At global level, following one of the deepest downturns in recent times, economic growth took root and extended to advanced economies in second half of 2009. The pace and shape of recovery, however, remains uncertain, The rapid rebound in the world output has been driven by the extraordinary amount of the policy stimulus, monetary as well as fiscal. However, the concern about the recovery losing momentum, once the stimulus is withdrawn, remains high. 2. Industry Structure and Development: The Company manufactures Automobile Powertrains and Automatic / Powershift Transmissions aiong-with their components forming part of Heavy Duty Powertrains. A substantial portion of its products are sold to Original Equipment Manufacturers (OEMs), locally and globally. Industry, especially manufacturing, is one of the key drivers of the transformation in the growth trajectory of the Indian economy witnessed during post 2000 period. Automobile Industry is one of the major industrial sector of the economy. Both, automobile sector and auto component sector grows in direct proportion, depending upon demand and supply position in the economy. CSOs estimate places industrial sector growth for 2009-10 at 8.2% as against 3.9% in 2008-09. The IIP industrial growth is reported at 7.7% for the period April-November 2009-10 - significantly up from 0.6% during second half of 2008-09. Indian auto components industry has emerged as one of Indias fastest growing manufacturing segment and globally competitive too. Auto majors like Toyota, Honda, Ford, General Motors, Volkswagen, Daimler and Renault have set up offices / plants in India and are vigorously pursuing sourcing of components from India for their global requirements. During first three quarters of 2009-10, there was a lull in the activity of the global majors, with projects being put on hold or deferred due to sluggish market conditions. In the last quarter of 2009-10, there have been signs of revival in their activity, albeit slowly. The continued lack of growth (slow rebound) of global markets did not dampen the Indian automotive market which showed a growth of 26.41% in 2009-10 over 2008-09 (represents a low base). As per SIAM report, the highlights of the auto industrys performance, in segments relevant to the Company, for the year 2009-10 are as under; * Production ; Cumulative production data shows a growth of 25.76% over 200809, with Passenger Vehicles registering a growth of 27.88% and Commercial Vehicles registering a growth of 35.92%. * Domestic Sales : Passenger Vehicles segment grew at 25.57%, while Passenger Cars grew by 25.10 percent. The overall Commercial Vehicles segment registered positive growth at 38.31%, while Medium &. Heavy Commercial Vehicles (M&HCVs) registered growth at 33.55%; Light Commercial Vehicles grew at 42.67%. However, Medium & Heavy Commercial Vehicle sales is still lower than 2006-07. * Exports Sales : Overall automobile exports registered a growth rate of 17.90%. Passenger Vehicles and Commercial Vehicles segment grew by 32.89 % and 5.59% respectively. In the case Off-Highway equipments end user segment, the mining segment showed a growth of 7.1% in 2009-10, with the construction segment showing higher growth. The anticipated growth in this segment in 2010-11 is expected to be at 10% over 2009-10 levels. 3. Opportunities and Threats: The success of Government of Indias Automotive Mission Plan (AMP 2016), which aims at making India a global hub of automotive industry, is reflected in the growth of the industry, even under recessionary conditions worldwide. Combined with the stimulus from the Government and increasing power of the growing middle-class, the demand for automotive products is projected to increase at a rapid rate of 15% per annum. The advent of the NANO has also made other international automotive manufacturers to look at small car program, with India as a hub. In recent times, the rural market has been playing an important role for the automotive sector and increased allocation for rural development, including NREGA, will have positive impact on automobile industry. Also, if banking license is granted to private players and NBFCs by Reserve Bank of India, it will result in increased reach and penetration. Based on the above, the Company is well poised to exploit such opportunities in the future. While, withdrawal of recessionary trend is a positive indicator, the reappearance of spiraling input costs may subdue the growth of the industry. Commodity prices have risen again and some are edging back to pre 2008-09 high levels. Inflationary trends are likely to be met by monetary and fiscal policy actions by the RBI and Government of India, resulting in higher cost of capital which may make the business climate volatile. Competition from China continues to remain a threat in several areas. The aforesaid concerns are being addressed, externally, by Industry Associations, which discuss policy measures on a continuous basis with Government. Internally, the Company addresses such issues through its robust business planning process, with focus on new business, skill development, capacity augmentation, improved operational efficiency and various risk mitigation strategies. 4. Financial Performance: Please refer financial results and review of operations in the Directors Report. 5. Risks & Concerns: In normal course of business, the Company is continuously exposed to external risks, such as overall demand fluctuations in the industry in which it operates, relative market share for its products due to impact of competition, as well as, internal risks such as variation in operational efficiency and cost structure. The Company is also exposed to financial risks in the form of foreign exchange fluctuation and interest rate variation. The Company takes appropriate steps to guard itself against these risks, including but not limited to, a suitable product positioning strategy, product improvement, derivatives contracts, etc. In order to manage the interna! risks, the Company has, inter alia, a performance measurement system to encourage operational efficiency. The Company has a robust business planning model. Regular review meetings are conducted for identifying areas where we are lagging, corrective action plans are developed and monitored for implementation thereof. 6. Internal Control Systems and their adequacy: The Company has established suitable Internal Control Systems, which provide reasonable assurance with regard to safeguarding the Companys assets, promoting operational efficiency and ensuring compliance with various legal and regulatory provisions. The Internal Auditor reviews systems of various business processes and also verifies compliance with statutes and laid down Companys policies & procedures. Reports of the Internal Auditor and findings of the Statutory Auditors are reviewed by the Audit Committee of the Board of Directors. 7. Outlook: The growth of global economy is expected to return to 2008 levels in the year 2010. Output is expected to expand between 7% to 9%, The long - term picture also remains very positive. For 2010, various international agencies forecast GDP growth of 4% globally. USA and Europe are expected to register 2.2% and 1.3% growth, respectively. China and India lead the global economies in terms of GDP growth, at 9.7% and 7.9%, respectively. The general outlook of automotive manufacturers, as conveyed through SIAM, indicates a trend of growth. However, the effect of inflationary trend on input costs may dampen the growth pattern. For 2010-11, the Company targets sales growth in the range of 25 to 30%. Expansion and diversification in all lines of businesses, coupled with focus on improvement in operational efficiency, cost reduction and value engineering and value addition activities will help to meet the targets. 8. Human Resource and Industrial Relations: The Company has put in place an integrated performance management system through which the objectives and key action plans of the Company are linked with those of the senior level employees. The Company has adopted a suitable system of executive profiling for the purpose of developing individuals, identifying training needs, succession planning and mufti skilling through job rotations. In order to remain competitive, the Company continuously focuses on manpower rationalization efforts and building -up the core competencies / capability to take up the organization forward. Though there was some disruption of work at Pithampur Plant for a short period due to agitation by some of the workmen and their Union to pressurize for their charter of demands on wage settlement, the Company effectively managed the same. Operations were maintained and there was not significant loss of revenue as the production was managed by the supervisors, officers and managers. Finally, the Company has signed productivity-linked long term wage settlement (for three years) with the Union of the Pithampur Plant (in the month of December 2009). The company had also signed a long term wage settlement (for three years) with the Union of the Hosur Plant (in the month of June 2009). After the wage settlement, the Industrial Relations remained peaceful in all the plants and there has been greater degree of commitment on the part of the workmen to increase productivity and adopt the lean manufacturing practices. 9. Cautionary Statement: Statements in this Report with respect to projections and estimates have been made in good faith. Many unforeseen factors may come into play and affect the actual results, which could be different from what the management envisages in terms of performance and outlook. Market data and other information have been gathered from various published and unpublished reports and their accuracy, reliability and completeness cannot be assured. Management reserves the right to revisit any of the predictive statements to decide the best course of action to maximize the Shareholders value apart from meeting social and other obligations. For and on behalf of the Board of Directors Place: New Delhi C.K. Birla Date : 29th April, 2010 Chairman