sharda motor industries ltd Management discussions

Sharda Motor Industries Limited (SMIL), an illustrious heritage brand with a distinguished legacy spanning over 37 years, stands resolutely at the forefront of automotive technological advancement. Our unwavering commitment to pioneering automotive excellence empowers us to provide discerning customers with meticulously tailored solutions, achieved through the seamless integration of cutting-edge machinery and state-of-the-art equipment. Anchored in this relentless pursuit of innovation, our company is resolutely dedicated to furnishing unparalleled automobile components to both Indias and the global automotive titans.

The products emanating from SMILs manufacturing prowess have not only le3 an indelible mark on the automotive landscape but have also catapulted the company to a pedestal of global renown. Our sterling reputation serves as a resounding testament to our unwavering focus on delivering superlative customer satisfaction and providing services that are nothing short of commendable.

Outlook - Global Automobile Ancillary Market

The auto parts market is expected to increase at a CAGR of 3.62% between 2022 and 2027. The market size is expected to increase by USD 393.22 billion. The growth of the market depends on several factors, including the widespread adoption of vehicle parts, the convenience of purchasing automotive products online, and the growing demand for vehicle customization.

COVID-19 has had the most negative impact on the global automotive industry in recent years, resulting in a steep fall in demand and a large-scale disruption of the supply chain. It has exerted intense pressure on an already-stressed global automotive market. Yet, there are high predictions that few countries are bringing manufacturing facilities and production back on track, indicating that the supply side is on a restoration line.

The increasing need for transportation, tourism and commercial operations in the aftermath of the COVID-19 pandemic is set to drive the Automotive Market for another decade. Development in emerging markets, rise in new technologies, sustainability policies and changing consumer preferences shall support the rapid growth of this market.

Acting as pivotal accelerants, the markets core drivers, encompassing amplified vehicle production and sales, the digitalization of distribution networks, and the continuum of technological innovations, are all poised to be instrumental in steering the market toward growth.

As the market embarks on this transformative journey, its important to recognize the symbiotic relationship between the growth of the auto parts sector and the broader automotive ecosystem. The evolution of ancillary industries, such as electronic components and advanced materials, seamlessly intertwines with the expansion of the automobile market. This interconnectedness is expected to create a dynamic landscape, fostering collaborative innovation and propelling the entire automotive industry to new horizons.

* Source: https://www.technavio.com/report/auto-parts-market-industry-analysis [2023 Global Report]

Industry Structure & Developments

The size of Indias auto component industry is US$ 57 billion with exports of US$ 15 billion as on 31^st March 2023. The Indian Auto Component Industry registered a growth of around 23% in FY 2022-23. Higher localisation, increased export possibilities, and new EV opportunities, resulting in higher content per car, would equate to healthy development for auto component suppliers in the medium and long term. Industry body Automotive Component Manufacturers Association of India (ACMA) estimates total turnover in the industry to increase 10-15% in FY24. The auto components industry grew by 23% to report a turnover of $ 56.5 billion in FY2022-23. The industry expects to close the ongoing fiscal with a 15% growth in revenue.

As per Automobile Component Manufacturers Association (ACMA), the Indian auto component industry aims to achieve US$ 200 Billion in revenue by 2026 which is almost 4-fold growth from current levels. and automobile component export from India is expected to reach US$ 80 billion by 2026.

Key growth drivers: -

• Robust Demand: Growing working population and expanding middle class are expected to remain key demand drivers. India is emerging as a global hub for auto component sourcing and the industry exports over 25% of its production annually. Auto component exports are expected to grow and reach US$ 80 billion by FY26.

• Policy Support: 100% FDI is allowed under the automatic route for auto components sector. Production Linked Incentive (PLI) schemes on automobile and auto components are expected to bring a capex of Rs. 74,850 crore (US$ 9.58 billion) in the next five years.

• Competitive Advantage: A cost-e3 ective manufacturing base keeps costs lower by 10-25% relative to operations in Europe and Latin America. India is the second largest steel producer globally, hence has a cost advantage.

**Source: https://www.ibef.org/industry/autocomponents-india

Opportunities and Threats

a) Opportunity

The entire world is experiencing economic progress and changes in lifestyle are becoming increasingly prominent. Auto sales are increasing in tandem with the number of nuclear households. Many growing nuclear families are interested in private vehicles for a variety of factors, including comfort and safety. As a result of these changes, demand for two-wheelers and small vehicles would rise, paving the way for the global Auto Component market. The Government of India approved the Production Linked Incentive (PLI) Scheme for Automobile and Auto Component Industry in India with a budgetary outlay of Rs. 25,938 crores to improve Indias manufacturing capabilities for Advanced Automotive Products (AAT). The PLI Scheme for Automobile and Auto component industry proposes financial incentives to boost domestic manufacturing and attract investments in the automotive manufacturing value chain. Its primary objectives include overcoming cost constraints, creating economies of scale and establishing a robust supply chain.

In the Union Budget 2023, the government announced a slew of measures to give an impetus to the automobile industry, including reduction in basic custom duty rate from 21% to 13%, increase in rebate on personal income tax from Rs.5 lakh per annum to Rs. 7 lakh per annum, focus on greener mobility, and help of Central Government to scrap old vehicles. At the same time, with a focus on local production, the government raised the customs duty on fully imported luxury cars and EVs from 60% to 70%.

*Source: Budget 2023: Key takeaways for Indian auto industry : HT Auto (hindustantimes.com)

b) Threats:

However, the auto component sector, like any other, faces some threats and challenges. As more enterprises enter the vehicle industry, the market becomes more competitive. The more competitors there are, the more shares of the market there are, which results in di3 iculties in acquiring a bigger sum of funds.

The Indian governments concerted e3 orts to promote electric vehicles are catalyzing a major transformation in the countrys passenger vehicle market. In response to this growing demand, automakers are rolling out electric vehicles in the Indian market, according to a report published by the International Energy Agency, India is projected to emerge as the largest market for electric vehicles worldwide by 2030, highlighting the significant momentum in the countrys electric vehicle ecosystem.

The operating profitability has been influenced by the rise in input costs, particularly those of steel and aluminum. The majority of the rise in input costs has also, to some extent, been passed on to OEMs. Higher operating leverage and moderation in steel prices due to the recent imposition of export duty on many steel products (including automotive grade steel) will help buttress the impact of rising freight costs.

The war in Ukraine dealt a hammer blow to international confidence and economic stability, forcing us all to, once again, identify risks and focus on contingency planning and resilience. It exposes the fragility of the worlds economy and the automotive supply chains. The damaging war and severe sanctions against Russia have already impacted the energy prices, logistics and raw material costs.

Risks and Concerns

The Company has a robust risk management framework in place that identifies and evaluates business risks and opportunities. SMIL recognises that these risks need to be managed effectively and mitigated to protect the interest of the stakeholders, to achieve business objectives and create sustainable value and growth. The Risk Management Committee of the SMIL regularly monitors the risks and concerns associated with the business of the Company. It also proposes plans and courses of action implemented to the Board of Directors to mitigate such risks. The risks are regularly re-evaluated and monitored, with a focus on identifying and addressing emerging risks by including them in the risk management plan.

Segment-wise / product-wise performance

The Company is operating under a single segment since its primary business segment involves manufacturing, assembling and trading of automobile components. For detailed analysis of the financial performance of SMIL please refer financial statements forming part of this Annual Report.

Internal Control system and their adequacy

The Company has established internal control systems commensurate with the size and nature of the business. The Company has put in place systems and controls covering various financial and operational functions. SMIL has an Internal Audit Department which carries out periodical audits at various operating locations and functions based on the audit plan approved by the Audit Committee. Some of the salient features of the Internal control systems are: -

i. An integrated ERP system connecting various departments of the organization.

ii. Systems and procedures are periodically reviewed to keep pace with the growing size and complexity of the companys operations.

iii. Assets are recorded and a system put in place to safeguard against any losses or unauthorized disposal.

iv. Periodic physical verification of fixed assets and Inventories.

v. Key observations arising out of the Internal Audit are reviewed at the Audit Committee meeting and follow up action taken.

Discussion on Financial Performance with respect to Operational Performance

The financial statements have been prepared in accordance with the requirements of applicable Corporate Laws of India. The management of SMIL accepts the integrity and objectivity of these financial statements as well as various estimates and judgments used therein. The details of the financial performance of the Company appear in the Balance Sheet, Profit & Loss Account and other financial statements forming part of this Annual Report. For financial highlights please refer to the heading ‘Financial Summary of Board Report.

Material developments in Human Resources including number of people employed

At SMIL, we believe in fostering equal employment opportunities and make no discrimination based on race, gender, religion, ethnicity, color, age, disability, or other factors, with an opportunity to secure employment solely based on experience, merit, and other non-subjective factors. The Company places great emphasis on the health, safety and well-being of the employees and their families. The Company also undertakes frequent audits to evaluate ethical standards, which include fair labour practices, safe working conditions, and competent remuneration. SMIL strives to abide by all applicable health and safety requirements and constantly review and improve its procedures to reduce risks and hazards. In addition, SMIL provides employee benefit programs such as health insurance, post-employment benefits, and compensated absences. The Company also believes in fostering a culture of respect, inclusivity, and diversity across its workforce and value chains is critical to ensure long-term success and sustainability. The Company had 646 permanent employees as on 31^st March 2023.

A Statutory Compliance Certificate regarding compliance with the provisions of the various statutes, duly signed by the respective functional heads and countersigned by the Managing Director of the Company, is placed at every Audit Committee Meeting upon receiving confirmation from the various units of our Company that they have complied with all the statutory requirements. Further pursuant to Listing Regulations, the Company regularly obtains CEO declaration in respect of compliance with the Code of Conduct adopted by the Company. A certificate from the CEO and CFO is also adopted on a yearly basis certifying the compliances as stipulated in Listing Regulations.

Significant changes in Key Financial Ratios and Return on Net Worth

S. No.	Ratios	Unit of Measurement	As of March 31, 2023	As of March 31, 2022	Change in percentage	Remarks
1.	Debtors Turnover	Times	8.89	7.51	18%	NA
2.	Inventory Turnover	Times	16.10	16.71	-4%	NA
3.	Current Ratio	Times	1.87	1.84	1%	NA
4.	Net Profit Margin	Percent	7.61%	7.16%	6%	NA
5.	Debt Equity Ratio*	Times	0.03	0.02	52%	Movement in Debt-equity ratio is majorly due to increase in lease liability (New Plant)
6.	Operating Profit Margin	Percent	10.43	10.10	+0.33%	NA
7.	Return on Net Worth	Percent	26.27	26.90	-0.65%	NA
8.	Interest Coverage Ratio*	Times	145	145	-	NA

*Note: Pursuant to the Guidance Note issued by the ICAI in January 2022, company had considered lease liability as debt and the ratio has been calculated accordingly

Cautionary Statement:

Certain statements in the Management Discussion and Analysis describing SMILs views about the industry, expectations/ predictions, objectives, etc. may be forward looking within the meaning of applicable laws and regulations. Actual results may differ from those expressed or implied in these statements. SMILs operations may, inter-alia, be affected by the supply and demand situations, input prices and availability, changes in government regulations, tax laws, government or court decisions and other factors such as industry relations and economic developments etc. Investors should bear the above in mind.

* Source: https://www.crisil.com/en/home/newsroom/press-releases/2022/06/auto-component-makers-to-sustain-double-digit-revenue-growth.htm Source: https://swothub.com/automobile-industry-swot-analysis/