Ucal Fuel Systems Ltd

BSE: 500464 | NSE: UCAL FUEL | ISIN: INE139B01016 
Market Cap: [Rs.Cr.] 179.75 | Face Value: [Rs.] 10
Industry: Auto Ancillaries

Management Discussions
MANAGEMENT DISCUSSION AND ANALYSIS REPORT

1. OVERVIEW

In 2012-2013 the domestic passenger car segment and the three wheeler segment declinedby 4% while the two wheeler segment grew by 2%. The global economic slowdown continued in2012-2013 and consequently affected the Indian economy as well. The efforts by theGovernment and RBI to revive the economy have not yielded the desired results and theeconomy continues to be in a state of uncertainty. The slowdown in the economy had aconsequential effect on the auto industry which also witnessed a slowdown. Low demand,expensive borrowing, rising input costs, weakening rupee and uncertain economic scenariohave led the auto manufacturers to consolidate their existing operations and to defertheir expansion plans. Auto manufacturers have taken to shrinking their organizations interms of people and have resorted to shutdown of operations to remain financially viable.The auto component industry is also witnessing a slowdown as the auto manufacturers arestreamlining their production to meet the decreased demand. Low customer offtake,increased cost of production, costlier imports, have eroded the cost competitiveness ofthe auto component industry. The steps being taken to stimulate the economy have shownvery little results and the growth prospects during the current year also appear bleak.Increased exports will help the auto and the auto component sector to take advantage ofthe falling rupee but then the international markets are also showing a recessionarytrend. The management is gearing up for a difficult 2013-2014 as growth in the autocomponent sector is expected to be only marginal. With high inflation, high vehiclefinance rates and increasing fuel prices the first half of 2013-2014 has seen very lowcustomer offtake and this is expected to continue. The company understands that increasedprofitablity in 2013-2014 will be possible only through increased operational efficienciesand effective cost control measures.

2. FUTURE BUSINESS STRATEGY

With carburettors continuing to remain the most economical solution in the two wheelersegment the company intends to concentrate its development efforts on the carburettors andtake advantage of the huge market available for it world wide through intensifying itsmarketing efforts. The company's efforts on developing fuel injection systems for twowheelers and three wheelers will however continue and the company hopes to become a onestop shop for the engine management requirements of the two wheeler industry. The companyplans to remain on cutting edge with carburettors and injection systems to meet emissionand cost targets through improvements in its manufacturing operations, VA/VE activitieswith R&D.

The company's efforts in the vacuum and oil pumps have yielded good results and thecompany is now working to develop new generation pumps for new applications. The companyis planning to enter into the defence sector to harness adjacent technology capabilitieslike lightweight engine development for unmanned aerial vehicles and promoting use ofcarburetion and injection technology /products in unmanned aerial vehicle operations. Thecompany is also planning to enter into powertrain engineering and testing services. Theseengineering services will lead to new technology products to be manufactured in thecompany. The company is in the last stages of negotiation with Orbital AustraliaProprietary Limited for a joint venture with them for engineering and testing services.Efforts will also continue to update existing technology and obtain new technology to meetthe ever changing market demands and also to diversify into other areas beyond autocomponents.

3. QUANTITATIVE ANALYSIS OF SALES

The quantitative sales during the financial year 2012-2013 is as under:

Quantity (Number in thousands)

2012-13 2011-12 Growth %
Two Wheeler Carburettors

3,566

3,861

(8)

Air Suction Valve

4,200

4,362

(4)

Pumps

960

822

17

Multi Point Fuel Injection 400 492 (19)
Fuel Filter 655 676 (3)

The sales of two wheeler carburettor and air suction valves has shown a decline of 8%and 4% respectively due to market sluggishness resulting in customers slowing down theirproduction. The sales of pumps have recorded a significant growth of 17% in 2012-2013 dueto market choice to shift to diesel segment from petrol. Sales of multi point fuelinjection systems and fuel filter witnessed a decrease of 19% and 3% in the financial year2012-2013 respectively compared to that of financial year 2011-2012 due to change in theproduct mix of some of the customers.

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

Quantity (Number in thousands)

2012-13

2011-12

Market Size UFSL Sales Market Share in % Market Size UFSL Sales Market Share in % Growth in Market Share %
Two wheeler carburettor

15,721

3,566

23

15,454

3,861

25

(2)

Air Suction Valve

15,721

4,200

27

15,454

4,362

28

(1)

Pumps

3,234

960

30

3,123

822

26

4

Multi Point Fuel Injection 2,974 400 13 3,123 492 16 (3)

Market share of two wheeler carburettors and air suction valves of UFSL has gone downby 2% and 1% respectively compared to the financial year 2011-2012. UFSL market share inpumps has grown by 4% compared to the financial year 2011-2012. The pumps have come to bewidely accepted in the market and in the financial year 2013-2014 the company hopes to dobusiness with some leading multinationals in the area of pumps. Market share of UFSL inmulti point fuel injection system has gone down by 3% compared to financial year 2011-2012due to change in the product mix of customers.

5. SWOT ANALYSIS

Strengths

• Proprietory products

• Technology independence

• A growing market for its products

• Good brand image

• Capability to meet changing customer requirements

• Emphasis on R&D

• Network of trusted suppliers

• Capability in "Frugal Engineering"

• An empowered environment

• Highly trained and disciplined work force

Weaknesses

• Anemic growth despite opportunities

• Slow pace of indigenisation in certain areas inspite of high import costs

• Inadequate efforts in capturing export market

• Limited offering of products to diesel segment

Opportunities

• Large untapped markets for the existing products

• Availability of numerous adjacent technology and products for future growth

Threats

• Slowdown in the auto industry

• Threat of cheaper low quality imports

• Inability to predict market trends correctly and its consequent impact onoperations and profitability

• Increasing finance, power, wage and input costs

6. RESEARCH AND DEVELOPMENT (R & D)

The company believes in owning technology and continues its emphasis on R&D. Inline with the vision of the organization to be ready with the technology for the futurefuel management system and pumps, the R&D facilities have been upgraded with thecalibration tool software and motorized engine dynamometer to meet specific performancerequirements.

With major automotive manufacturers establishing their manufacturing facilities inIndia, they are focusing on local supplier developments close to their manufacturinglocation. The challenge for the original equipment manufacturers is to validate theirengines with the system/parts from local sources. They are looking for sources, which arecapable of carrying out these testing activities closer to their manufacturing location.Hence R&D is trying to establish a testing facility in collaboration with Orbital withthe existing facilities available with UCAL and Orbital covering the engine and componentlevel testing. This will eventually lead the company to be in direct touch with themanufacturer's product engineering and development division for their testingrequirements. This will also enhance the company's capability in the engineering ofproducts for the customer requirements keeping in view the emission factors, customerpreference leading to a potential business of engineering services and productdevelopment.

Further considering the requirements of the defence segment in the area of un-mannedaircrafts (UAV) in terms of design, development of components, engineering services,manufacturing, maintenance, there seems to be a good business opportunity. The R&D istherefore working towards securing an entry into this segment.

Work on the two stroke fuel injection system and four stroke port injection systemcontinues and the company hopes to commercialize the product this year. R&D isrelentlessly continuing its efforts to reduce the import content in the material cost.

R&D engineers continue to present and publish papers in the National andInternational Conferences and the R&D continues to enjoy the recognition from theDepartment of Scientific and Industrial Research, Ministry of Science and Technology.

7. MANUFACTURING CAPABILITIES, FACILITIES AND OPERATIONS

The company has strong capabilities in pressure die casting of Aluminum / Zinc Alloycastings; design and manufacture of die/mould for high pressure die casting; machining ofcast part in CNC vertical Machining centre, CNC turning centre, special purpose machines;precision turning of parts in Swiss type CNC bar feed automatic lathes; Broaching inpneumatic press, spin rivetting, cylindrical, centre less grinding of carburettor parts;assembly of products using special presses, air flow testing equipments gasolene testequipment and the surface treatment process like anodizing, Electro less, nickel plating,continuous copper Brazing of joints in conveyorised furnace. The manufacturing facilitiesare of the highest standard and comply with all safety requirements.

The company is slowly phasing out some of its old machineries in favour of newsophisticated ones and also re-furbishing some of the machineries to increase the output.The Bawal facility that is equipped with sophisticated machinery will require a highlytrained workforce and that has become a challenge. Automation continues company widealbeit on a small scale. The company has sufficient manufacturing capacity to meet thecurrent demand of air suction valves and carburettors. New manufacturing lines were set upfor pumps with the latest POKE YOKE techniques. The company is concentrating its effortsin creating additional capacity using existing infrastructure and equipments with minimalcapital expenditure. The company will be setting up a new facility for its engineering andtesting services in the R&D premises. The rationalization of the vendor base iscontinuing. The company believes that the manufacturing systems in place must beperiodically evaluated and during this financial year it plans to review its manufacturingsystems through a systematic appraisal to ensure that best practices are followed. Thespecific areas it plans to concentrate include, shop floor management, production andprocess systems, inventory and quality management, VA/VE activities and automation.

8. HUMAN RESOURCES AND INDUSTRIAL RELATIONS

The company's personnel policies continue to be fair and transparent. Industrialrelations continue to be cordial with the workers and various trade unions. All employeegrievances have been addressed. One of the concerns has been matching the increasedemployee cost with a corresponding improvement in productivity. It is proposed to achievethis through imparting continuous technical training to employees, close monitoring andthrough constant communication with them. Because of the general slowdown attrition ratethough less than the financial year 2011-2012 continues to be a concern. The company ishowever taking various initiatives to build a strong and committed workforce.

Training programmes continued to be modest last year. However in 2013-2014 the companyhas planned a comprehensive training programme for its employees across all levels. Thecompany continues to sponsor deserving candidates to pursue higher courses of education.Consultants from diverse fields continue to be hired to improve the skills of itsemployees and to improve the operations. Employee deputation to Amtec continues though ona smaller scale. The company is in the process of strengthening its performance appraisalsystem.

The Human Resource Management System (HRMS) launched in the financial year 2011-2012has been fully operationalised and this has ensured a more reliable and accurate dataprocessing and reporting. The long term wage settlement have been completed for both plant1 and plant 2 and with this, the wage negotiations for all the plants with trade unionshave been completed.

9. CORPORATE SOCIAL RESPONSIBILITY

Rural Development and education to the underprivileged continues to be main emphasis ofthe corporate social responsibility The company continues its work with the Culture andHeritage Trust of Karuveli and with the management of the Academy of Higher Education atTiruchirapalli. The projects at Karuveli are moving at a slow pace. The company is in theprocess of selecting an agency that will help in the design and implementation of theprojects especially those relating to establishment of self help groups for women. Thecompany with the help of the local agencies is trying to introduce the farmers in the areato new types of plantations that will involve low cost and maintenance but yield goodprofits in short term like tree plantations etc.

As regards National College, the company has helped the management complete theinfrastructure projects in the college. The library block has been completed and willstart functioning in the current year. The indoor and outdoor stadium are also in processof completion. The company continues to guide the management in the running of theinstitution. Apart from National College, the Academy of Higher Education runs a schoolcalled the Sesha Iyengar Memorial Higher Secondary School. This school too caters to thelowest strata of the society. After completion of the projects at National College thecompany intends to concentrate on strengthening the infrastructure at this school. Thecompany is proposing to join hands with Academy of Higher Education to start a CBSE schoolat Tiruchirapalli with an emphasis on craft education and vocational training. Asmentioned earlier the company's corporate social responsibility efforts will be restrictedto projects at Karuveli and those with the Academy of Higher Education, Tiruchirapallionly.

10. 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 ona quarterly basis by a team of internal auditors and the reports together with the actiontaken reports are reviewed by the audit committee periodically. The existing scope hasbeen widened and the internal auditors from this year onwards will cover a wider area ofoperations. Mr. V. Kalyanaraman has been appointed cost auditor of the company for thefinancial years 2013-2014 and 2014-2015 and the cost audit report will be filed within thestipulated period of 180 days from the close of the financial years. The company is in theprocess of reimplementation of oracle across the organization. This will improve thetransparency of operations and ensure accurate data and more control on the financialoperations of the company.

11. CAUTIONARY STATEMENT

The information and opinion expressed in this report describing the company'sobjectives, projections, estimates, future business developments, and expectations couldcontain certain "forward-looking statements" within the meaning of theapplicable laws and regulations. Actual results could differ materially from thoseexpressed or implied in this report. Important factors that could make a difference to thecompany's operations include, among others, economic conditions affecting demand/supply,price conditions in the domestic and overseas markets in which the company operates,changes in the government regulations, tax laws and other incidental factors.

   
Futures & Options Quote
Future Data Not present
Key Information

Key Executives:

Jayakar Krishnamurthy , Chairman & Managing Director

V Sumantran , Director

S Natrajan , Director

M S Ananth , Director


Company Head Office / Quarters:

Raheja Towers 177 Anna Salai,
Delta Wing-Unit 705,
Chennai,
Tamil Nadu-600002
Phone : Tamil Nadu-91-044-42208111 / Tamil Nadu-
Fax : Tamil Nadu-91-044-28605020 / Tamil Nadu-
E-mail : investor@ucalfuel.co.in
Web : http://www.ucalfuel.com

Registrars:

Integrated Enterprises (I) Ltd
Kences Tower,2nd Floor No 1,Ramakrishna Street,Chennai - 600 017

 
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