nrb bearings ltd Management discussions

Industry Structure and Development

The Company is in the ball and roller bearings business for the requirements of the mobility industry which has Indian Original Equipment Manufacturers (OEMs) and Tier I customers accounting for 65 per cent-70 per cent of the demand while the rest is supplied to the Aftermarket (12 per cent-15 per cent) and Exports (20 per cent-25 per cent). Exports is predominantly to OEMs and Tier I customers. Other than the Aftermarket, vehicle manufacturers comprise of the following broad segments:

• 2/3 wheelers comprising motor cycles, scooters, mopeds, auto rickshaws (passengers and goods) and industrial 4 stroke engines.

• Passenger cars from small cars hatchbacks to luxury models and utility vehicles

• Commercial vehicles from LCVs, MCV/HCV to buses

• Farm equipment and off highway vehicles including forklifts, trucks and construction equipment

• Railway locomotives

• Defense vehicles including gun carriers and tanks

• Aircraft and aerospace applications

Market growth in the Indian mobility industry has a very large potential given the geographical spread, size of population and the current low penetration. Growth in the goods mobility segment is being driven by the need to establish strong supply chains between producers and markets. Improvements in road infrastructure also assist this area of business. India has also strong potential to become export hub for all segments.

In the recent years the world has faced waves of challenges, from the pandemic to the invasion of Ukraine, to the unfolding bank liquidity challenges and the impact of such a lengthy period of uncertainty is being felt around the world. Against this backdrop, world output growth is projected to decelerate from an estimated 3 per cent in 2022 to only 1.9 per cent in 2023, marking one of the lowest growth rates in recent decades. Global growth is forecast to moderately pick up to 2.7 per cent in 2024, if, as expected, some macroeconomic headwinds begin to subside next year. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 per cent in 2022 to 1.3 per cent in 2023. Inflation has remained stubbornly persistent in many countries, directly impacting the lives of the population, and posing a significant challenge to central bankers around the world.

Rapid interest rate hikes, particularly by the Federal Reserve in the United States of America, have had global spillover effects, triggering capital outflows and currency depreciations in developing countries, increasing balance of payment pressures and exacerbating debt sustainability risks. Financing conditions have tightened sharply amid high levels of private and public debt, pushing up debt-servicing costs, constraining fiscal space and increasing sovereign credit risks. Rising interest rates and diminishing purchasing power have weakened consumer confidence and investor sentiment, further clouding near-term growth prospects for the world economy.

Source: UN Department of Economic and Social Affairs

Despite the global turmoil, the long-term growth story of the Indian economy remains the only bright spot in the dismal global growth scenario. This has helped attracting foreign investments in the country, with FDI inflow reaching an all-time high in 2021-22 at almost USD 85 billion. Indias emergence as the worlds fifth-largest economy, overtaking the United Kingdom in 2022 marks the beginning of the "India era" in the global growth story. It is set to surpass Japan and Germany to become the worlds third-largest economy by 2029. As per estimates Indias GDP growth in FY 2023-24 is expected to be 6.5 per cent. At this growth rate, India will continue to be the fastest-growing economy in the world. There are various reasons for India to surge ahead and lead the world economy - demographics of the population, low cost of labour, access to capital, investment in infrastructure, policy intervention and digital uptick. Finally, one needs to take into account the size of the domestic market in India. Given these, there is no doubt that globally, the bright spot in the dismal backdrop is a resurgent Indian economy.

Source: Economic Survey 2022-23; Observer Research Foundation

The automobile industry produced a total of 2,59,31,867 vehicles including Passenger Vehicles, Commercial Vehicles, Three Wheelers, Two Wheelers, and Quadricycles in 2022-23, as against 2,30,40,066 units in 2021-22. The Indian passenger car market was valued at USD 32.70 billion in 2021, and it is expected to reach a value of USD 54.84 billion by 2027 while registering a CAGR of over 9 per cent between 2022-27. The electric vehicle (EV) market is estimated to reach Rs. 50,000 crore (USD 7.09 billion) in India by 2025.

Indian Automobile Industry

• 100 per cent FDI allowed under automatic route

• 7.1 per cent Share in Indias GDP

• 37 million Employment generated

• 40 per cent Share in global R&D

• 4.7 per cent Share in Indias exports

Vehicle Production (Nos.)

Category	2021-22	2022-23	Growth %
Passenger Vehicles	36,50,698	45,78,639	25.42
Commercial Vehicles	8,05,527	10,35,626	28.57
Three Wheelers	7,58,669	8,55,696	12.79
Two Wheelers	1,78,21,111	1,94,59,009	9.19
Quadricycle	4,061	2,897	-28.66
Grand Total	2,30,40,066	2,59,31,867	12.55

Source: SIAM, IEBF

The Indian auto component industry, being a critical part of the OEM value chain, has grown at a healthy pace over the past few years. The production and demand of the auto component industry is directly proportional to that of the automobile industry. Although a sizeable portion of auto components production caters to OEMs, the aftermarket or the replacement markets have emerged as crucial sources of revenue for the auto components industry over the past few years. Historically, the automobile OEMs were concentrated in the developed nations and so did the ancillaries. However, in recent years, manufacturing of auto components is gradually gaining traction towards Asian countries such as China, India, and others due to the presence of higher market potential and low-cost manufacturing. The Indian auto-components industry has experienced healthy growth over the last few years. From FY 2016-FY 2022, the industry registered a CAGR of 6.35 per cent and was valued at USD 56.50 billion in FY 2022.

Due to the high development prospects in all vehicle industry segments, the auto component sector saw double-digit growth in FY 2023. The industry is expected to stand at USD 200 billion by FY 2026. A stable government framework, increased purchasing power, large domestic market, and an ever-increasing development in infrastructure have made India a favourable destination for investment. The industry can be broadly classified into organised and unorganised sectors. The organised sector caters to original equipment manufacturers (OEMs) and consists of high-value precision instruments while the unorganised sector comprises low-valued products and caters mostly to the aftermarket category.

Significant growth was witnessed across all segments including supply to OEMs, Exports as also the Aftermarket. In this backdrop the component industry sized-up to USD 56.5 billion registering a staggering 23 per cent growth. Auto Component sales to OEMs, in the domestic market grew by 22 per cent and stood at USD 45.8 billion. Enhanced raw material prices, consumption of increased value-added components and shift in market preference towards larger and more-powerful vehicles contributed to the increased turnover of the auto-components sector. Exports of auto components witnessed a robust growth of 43 per cent to USD 19.0 billion in 2021-22 in contrast to USD 13.3 billion in 2020-21.

As per the Automobile Component Manufacturers Association (ACMA) forecast, auto component exports from India is expected to reach USD 30 billion by 2026. The auto component industry is projected to record USD 200 billion in revenue by 2026. Strong international demand and resurgence in the local original equipment and aftermarket segments are predicted to help the auto component industry grow 20-23 per cent in FY 2023.

Growth drivers of the Auto comp industry:

• Robust Demand

Growing working population and expanding middle class are expected to remain key demand drivers

By 2025, 4 million of EVs could be sold each year and 10 million by 2030. The market is expected to reach USD 206 billion by 2030.

• Export Opportunities

India is emerging as a global hub for auto component sourcing and the industry exports over 25 per cent of its production annually.

Proximity to markets such as Middle East and Europe

• Policy Support

100 per cent FDI allowed and no restrictions on import-export

Government approved the PLI Scheme in automobile and auto components with an approved financial outlay over a five years period of Rs. 57,042 crores

• Competitive Advantage

A cost effective manufacturing base which keeps cost lower by 10-25 per cent relative to operations in Europe and Latin America

• Cost competitive

GST reduction in vehicles will spur demand GST on EVs reduced to 5 per cent from 12 per cent

Our innovative approach and focus on high-technology products, consistent quality, performance levels and cost competitiveness leads us to be an engineering differentiated company. This advantage further enhances the geographical and locational advantage. The cultural advantage of a less hierarchical, flatter organization with a collaborative working style is an additional distinct advantage which can be leveraged for global expansion as a strategy.

Financials

During the year under review Revenue from operations, net of levies, has increased by 12.1 per cent to Rs. 1,02,310 lacs from Rs. 91,244 lacs in 2022-23. Domestic sales increased by 19.86 per cent to Rs. 77,910 lacs from Rs. 65,001 lacs while exports have decreased by 7.02 per cent to Rs. 24,400 lacs from Rs. 26,243 lacs in 2022-23.

The table below sets forth the key expense items as a percentage of income for 2022-23 and 2021-22.

(Rs. in Lacs)

	% of Turnover
	March 31, 2023		March 31, 2022
		%		%
Revenue from operations (Rs. in lacs)	1,02,310	100	91,244	100
Other income (Rs. in lacs)	2,551	-	1,645	-
Expenditure:
- Material (Including change in stock)	47,469	46.46	39,006	42.68
- Employee Cost	11,893	11.62	12,181	13.33
- Manufacturing and Other expenses (Net)	27,617	26.99	27,201	29.77
Total Expenditure	86,979	85.02	78,388	85.78
Profit before Depreciation, Interest and Tax	17,882	17.47	14,501	15.87
Depreciation	3,597	3.52	3,262	3.57
Finance costs	1,852	1.81	1,544	1.69
Profit before Exceptional Items and Tax	12,433	12.15	9,695	10.61
Exceptional Item	(1053)	(1.03)	(393)	(0.43)

The details of significant changes in key financial ratios, along with detailed explanations thereof, including:

Ratio	FY 22-23	FY 21-22	% change	Explanation for change
Debt Equity Ratio	0.46	0.47	-2%	Decrease in debt
Return on Asset %	7.72%	6.96%	10.92%	Mainly due to increase in PAT (due to reduction in COGS, Operating expense and Tax rate)
Net Profit Margin %	8.39%	7.68%	9%	Mainly due to increase in PAT (due to reduction in COGS, Operating expense and Tax rate)
RONW %	13.37%	12.91%	4%	Mainly due to increase in PAT (due to reduction in COGS, Operating expense and Tax rate)

Economic Value Addition

Economic Value Addition (EVA) is residual income after charging the Company for the cost of capital provided by the lenders and shareholders. It represents the value added to the shareholder by generating operating profits in excess of the cost of capital employed in the business. EVA is negative in the current year resulting from the decline in operating profits and need for additional borrowings for the business.

(Rs. In Lacs)

	2022-23	2021-22
EBIT	13,810	10,846
Less: Adjusted Tax	2,800	2,288
NOPAT (Net Operating Profit less tax)	11,010	8,558
Equity	64,180	57,713
Debt	29,702	27,028
Total Invested Capital	93,882	84,741
Post Tax Cost of Debt %	3.85	4.67
Cost of Equity %	8.76	9.83
Weighted Average Cost of Capital % (WACC)	7.21	8.18
Weighted Average Cost of Capital (WACC)	6,766	6,933
EVA (NOPAT - WACC)	4,244	1,625

Notes: Tax calculation excludes deferred tax and is adjusted for tax shield on interest.

Cost of equity is based on cost of risk free return equivalent to yield on 10-year G-secs @ 7.32 % p.a. plus equity premium adjusted for Companys beta variant at 0.77.

Segment wise Performance

The Company has a single reportable segment of ball and roller bearings as the primary business segment for the purpose of IND AS 108. The assets and liabilities of the Company are all expended towards this business segment.

Outlook

Indias economic growth rate is projected stronger than many peer economies and reflects relatively robust domestic consumption and lesser dependence on global demand. The governments strong infrastructure push, logistics development, and industrial corridor development will contribute significantly to raising industrial competitiveness and boosting future growth. Improving labour market conditions and consumer confidence will drive growth in private consumption. The central governments commitment to significantly increase capital expenditure in FY 2023-24, despite targeting a lower fiscal deficit of 5.9 per cent of GDP, will also spur demand. Helped by recovery in tourism and other contact services, the services sector will grow strongly in FY 2023 and FY 2024 as the impact of COVID-19 wanes.

Globalizing has opened newer avenues for the transportation industry, especially a shift towards electric, electronic and hybrid cars, which are deemed more efficient, safe, and reliable modes of transportation. Over the next decade, this will lead to newer verticals and opportunities for auto-component manufacturers, who would need to adapt to the change via systematic research and development.

The automotive industry will remain vulnerable to global headwinds in 2023, including the energy crisis, slower global demand and continued supply-chain disruptions. The only bright spot will be the EVs market, with sales of fossil-fuel cars and commercial vehicles falling. Digitization, increasing automation, and new business models have revolutionized other industries, and automotive will be no exception. These forces are giving rise to four disruptive technology-driven trends in the automotive sector: diverse mobility, autonomous driving, electrification, and connectivity. EVs and hybrids provide a highlight; the sector is expected to grow by 29 per cent year-on-year in 2023, to reach an estimated 12.1 million units globally. However, the threat of an impending recession and ongoing supply chain issues could cast a shadow over the personal vehicle market.

Source: Statists; Automotive World

The USD 222 billion Indian Automobile industry is expected to reach USD 300 billion by 2026. Automobile contributes nearly 6 per cent of Indias GDP and 35 per cent of the manufacturing GDP. The EV market is expected to grow at CAGR of 49 per cent between 2022-30 and is expected to hit 10 mn annual sales by 2030. The EV industry will create 50 mn direct and indirect jobs by 2030. In addition, several initiatives by the Government of India such as the Automotive Mission Plan 2026, scrappage policy, and production-linked incentive scheme in the Indian market are expected to make India one of the global leaders in the two-wheeler and four-wheeler market. The Government of Indias Automotive Mission Plan (AMP) has come a long way in ensuring growth for the sector. Indian automobile industry is expected to achieve a turnover of USD 300 billion by the year 2026.

The AMP 2016-26 will help the automotive industry to grow and will benefit Indian economy in the following ways:

• Contribution of auto industry in the countrys GDP will rise to over 12 per cent

• Around 65 million incremental number of direct and indirect jobs will be created

• End of life Policy will be implemented for old vehicles

The Company along with its subsidiaries, with agility and speed has been steadily investing in and developing innovative process technology and building / customizing its machines for low volume, custom-designed products and high range production techniques and is leveraging its fast-paced, on-going investment approach has led NRB to become the first choice supplier for EVs and EVs agnostic friction solutions the world over. NRB is leading the way by supplying its global customers in 45 counties and is now a key supplier in advanced mobility applications that will revolutionize and propel the Indian auto component industry forward both domestically and internationally. NRBs focus and embracing of future technologies along with re-inventing and altering its capabilities has led to supplying the worlds foremost EVs, in Europe, America and Japan and Korea.

Critical trends

Willingness to pay for advanced tech remains limited

A majority of consumers are unwilling to pay more for advanced technologies in most global markets as they have been trained to expect new vehicle features as a cost of doing business for brands looking to differentiate themselves from their competitors.

Interest in EVs driven by lower running costs and better experience

Consumer interest in EVs centers on the perception of lower fuel costs, environmental consciousness, and a better driving experience. However, driving range and lack of available charging infrastructure remain barriers to adoption.

Personal vehicles continue as the preferred mode of transportation

Shared mobility services like ride-hailing and car sharing have been slow to return to their pre-pandemic pace of growth as people prefer using personal vehicles to satisfy their transportation requirements.

As the industry gears to ramp up performance in India and globally, the following are shaping the industry:

• Constantly shifting market dynamics due to changing manufacturing locales, customer demands, operating models and priorities.

• Changing needs of OEMs, who are likely to want different, and more agile component inputs. While demand, timelines and processes keep shifting.

• Technological improvements and discontinuities i.e. EVs, autonomous driving etc. that are already starting to change revenue pools, trigger new competition and invite new forms of co-operation.

• An evolving regulatory and trade environment.

Opportunities and Threats Opportunities

• Pursue export opportunities aggressively.

• Enhance import substitution.

• Offer premium features at lower costs at a rapid pace.

• Focus on component categories that could contribute more to vehicle costs.

• Enter new segments of aftermarket like aggregator of mechanics, small OEM for aftermarket, fleet owners.

• Offer components which could take off due to an increase in EV sales.

• Expand portfolio to serve adjacent industries.

Identifying which opportunity fits best, and working strategically to seize it could create a successful future for the Company. Challenges/Threats

• Constantly shifting market dynamics

Manufacturing locales, customer demands and operating models are all evolving, creating a dynamic market for auto component manufacturers.

The number of vehicle recalls has significantly increased in recent years, leading to a growing trend of quality consciousness and renewed focus on manufacturing excellence. The global supply chain is more connected than ever before. This amplifies the impact of any unexpected changes—from exchange rate fluctuations and price volatility to geopolitical tensions, natural disasters or pandemic. These factors and their impact on the industry are difficult to forecast, adding uncertainty to an already dynamic situation. Adding to the mix are rapidly changing customer preferences and the constant need to upgrade, which are constantly creating new paradigms.

• Changing OEM needs

The industry needs to keep pace with the changing needs of automotive OEMs, who in turn are coping with the dynamic expectations of the end customer, consolidation of platforms to reduce complexity and alterations in vehicle cost composition. The automotive manufacturers require simpler, more versatile components that are usable across multiple platforms.

• Technological improvements and discontinuities

Autonomous vehicles, Connected vehicles, Electrification and Shared Mobility (ACES) are very real, disruptive and technology-driven trends that could change the future of the mobility industry. India is making rapid strides in innovative ACES technologies across cars, two-wheelers and commercial vehicles. These technologies are gaining ground due to increasing customer acceptance, stricter emission regulations, lower battery costs and more widely available charging infrastructure.

• Evolving regulatory and trade environment

Rapidly evolving emissions and safety regulations as well as technological disruptions such as connectivity and e-mobility could underpin the demand for electronics at an OEM and customer level. It is expected that the implementation of BS- VI standards will lead to a spike in demand for components like catalytic convertors, electronic fuel injection systems, oxygen sensors and intelligent battery sensors.

• Spurious/ Counterfeit Products

Spurious / Counterfeit products continue to attract price sensitive Replacement Market which accounts for 20-25 per cent of total demand of bearing industry. These supplies, being of inferior quality, are unsafe in use and pose a risk to people, industry and to the economy by way of unexpected downtime and are safety hazards. In spite of industry wide efforts in educating customers and increasing awareness about the need to use safe sources of procurement, the problem continues owing to the slow legal process in punishing unscrupulous suppliers. There is an industry wide effort to control the same.

Your Company is working continuously to mitigate these threats - leveraging its wide range of products and its engineering capabilities and priming its sourcing and purchasing capabilities. The Company remains committed towards implementing TPM and investing in sophisticated technology to offer enduring and efficient solutions.

Risks and concerns

Risk management practices seek to sustain and enhance long term competitive advantage of the Company.

The Board of Directors along with the Risk Management Committee looks at risks which are mainly reputational and where the risk grid shows criticality. For the risk grid, the risks have been listed, then prioritised and ranked in terms of probability and impact- high/moderate/low. Wherever possible, triggers are being identified, even multiple triggers, which would help to decide when a risk has become critical - eg. Euro Dollar rate or USD INR rate exceeding a specified risk point.

The Board/Committee also approves the risk policies and associated practices of the Company, reviews and approves risk related disclosures. Otherwise in a normal situation, the operating team would be responsible for all operational risks. At the operating level the core group of the Executive Management team comprising the Managing Director and the functional heads review enterprise risks from time to time, initiate mitigation actions and identify owners for the action to be taken.

Early identification, risk assessment, formation of cross functional teams which worked in close collaboration and conservation of resources helped mitigating the risk and converting the crisis into opportunity and the Company was back on the profitability track by the end of the financial year.

The following broad categories of risks have been considered:

• Strategy: Choices and decisions we make to enhance long term competitive advantage of the Company and value to the stakeholders e.g. the Companys shift from bearing related products to becoming a friction solutions provider.

• Industry: Relates to the inherent characteristics of our industry including competitive structure, nature of market and regulatory environment e.g. adding to existing segments, the emerging segments of defense, aerospace and railways and improving its presence in the ASEAN region, thus spreading the risk in terms of geographies.

• Technology: Rapid strides in technology like EVs and autonomous driving.

• Counterparty: Risks arising from our association with entities for conducting business. These include customers, vendors and their respective industries.

• Resources: Risks arising from sub-optimal utilization of key organization resources such as capital and infrastructure

e.g. risks further broken up into equipment risk and people risk. With insurance covers in place for the equipment, the management of people risks by way of a cordial relationship with the employees and keeping motivation in the plants at a high level.

• Operations: Risks inherent to our business operations includes service and delivery to customers, business support activities like NPD, TPM, Quality management, IT, Legal, Taxation e.g. plants having detailed plant maintenance and tool manufacturing programs, dedicated teams for managing risks relating to information security (data leakage) and technology disruption risks and constantly researching how new technologies are changing the applications and products. Disruption in operations due to a natural calamity or a pandemic.

• Regulations and compliance: Risks due to inadequate compliance to regulations and contractual obligations violations leading to litigation and loss of reputation.

Management of financial risks such as interest rates risk, currency risk and liquidity risk, have come in for increased focus. During the year under review, various measures were deployed to continuously monitor risks and take appropriate actions to mitigate the same. The Board of Directors has constituted a Risk Management Committee for driving the effectiveness of the Enterprise Wide Risk Management Framework.

Internal Control Systems and Adequacy

Based on the nature of the business and size of operations the Company has in place adequate systems of internal control and documented procedures covering all financial and operating functions. These controls have been designed to provide for:

- Accurate recording of transactions with internal checks and prompt reporting

- Safeguarding assets from unauthorized use or losses

- Compliance with applicable statutes, and adherence to management instructions and policies

- Effective management of working capital

- Monitoring economy and efficiency of operations

Processes are also in place for formulating and reviewing annual and long term business plans; for preparation and monitoring of annual budgets for all operating plants and the service functions.

A reputed external audit firm carries out periodical audits at all plants and of all functions and brings out deviations from laid down procedures. The audit firm independently tests the design, adequacy and operating effectiveness of the internal control system to provide a credible assurance to the Audit Committee. The observations arising out of audit are reviewed, in the first instance by the respective HODs and plant/functional heads and compliance is ensured. Further corrective action plans are drawn up to build business processes which will eliminate repetition of deviations. Business risks are managed through cross functional involvement, facilitated by internal audit and the results of the assessment are presented to senior management.

The Audit Committee reviews the recommendations for improvement of the business processes and the status of implementation of the agreed action plan.

Human Resource and Industrial Relations

Overall relations with the workmen at all plants have been cordial during the year and the Company has contained its employee costs, benefiting from the wage settlements which have linked incentive payments to increase in overall production volumes (net of rework) and reduction in rejection rates.

Process reengineering, automation and digitization with a view to improve operations and match NRBs global standards of manufacturing excellence, went on as planned. Automation and digitization are a big focus area for your Company. Many activities have been digitized especially in processes like sales, purchases, production, inventory/stores, assets, payroll etc. We are committed to educate workmen to accept the changes laid down due to automation at the same time we are also assuring ourselves and to the workmen that there should be no jobloss as outcome for automation. The main intention behind automation is to enhance efficiency, safety and better impression on global customers about capabilities so new business possibilities arise.

The primary focus of IR during the current year will continue to be on engaging, motivating and improving the productivity while ensuring improved productivity and product quality at the plants without any interim work disruptions, so that overall workforce requirements are controlled to an optimal level. For speedy recovery from the pandemic during the year under review, IR is working on this people approach while encouraging teamwork by way of Cross Functional Teams (CFTs) to enable its achievement. Besides developing knowhow, building managerial and technical capabilities to align with career aspirations, they also serve as a platform to interact with peers from diverse backgrounds and spread the values of togetherness, positive thinking and mutual respect. All of these should enable a more collaborative work culture across plants post Covid-19 restrictions.

SPEED : System of Performance Evaluation and Employee Development, the framework for Individual Development Planning, Career and Succession Planning maps employee competence with current and future needs of the organization and forms the basis for developmental interventions. As part of its plan to build a bench strength of talented future leaders of tomorrow, the Company has campus recruited engineering trainees from reputed engineering colleges and Indo German Toolroom, and other interns from Ashoka University, IIT, Mumbai, etc. who are deployed on efficiency improvements and cost control exercises throughout the company.

Permanent employees directly employed by the Company currently total 1341 nos.

Cautionary Statement

Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may constitute forward looking statements within the meaning of applicable laws and regulations.

Actual results may differ materially from those either expressed or implied.

	For and on behalf of the Board of Directors NRB Bearings Limited
Place: Mumbai	Harshbeena Zaveri	Satish Rangani
Date: May 30, 2023	Vice Chairman & Managing Director	Executive Director