Akar Auto Industries Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

The world experienced a crisis like no other and it is expected to continue in 2021. The World Bank estimated 4.3% contraction of the global economy in 2020. The pandemic has caused heavy toll on life and livelihood and pushed millions into poverty. This may impact economic activities and the income level for some time. Assuming success of the vaccine rollout, the World Bank indicated that the global economy will expand by 4% in 2021. However, the latest surge of Covid-19 infection in the leading economies may dent the expansion to some extent.

To control the spread of the COVID-19 pandemic, India had imposed severe lockdowns in April and May 2020 resulting in curtailment of economic activities. As a result of the lockdowns, Indias GDP contracted by 24.4% in the first quarter of FY 2020-21. As lockdown restrictions were gradually eased from June 2020, the economy witnessed a strong V-shaped recovery. Sector-wise, agriculture has remained the silver lining while contract-based services, manufacturing, construction were hit hardest, and have been recovering steadily. Government consumption and net exports have further provided support in the recovery. As per International Monetary Fund (IMF) projections in March 2021, Indian economic growth is estimated at 12.5% in FY 2021-22 and 6.9% in FY 2022-23.

The automobile industry recovered slightly in FY 2020- 21 due to the resurgence of the economy. According to data released by SIAM, in FY 2020-21, the Indian automotive industry recorded a 6.1% decline in domestic sales compared to a 20.3% decline in FY 2019-20. The Passenger Vehicle segment declined 2.0% in FY 2020- 21, compared to a 17.3% decline in FY 2019-20. While overall industry sales were lower than in FY 2019-20, the trend of preference towards personal mobility reduced the overall impact of the slowdown. The Commercial Vehicle industry in India registered a 21.7% decline in FY 2020- 21 compared to a 30.0% decline in FY 2019-20, because of the COVID-19 pandemic, lower freight utilizations, difficulties in obtaining financing and due to rising costs for BS VI vehicles.

The demand for Passenger Vehicles has grown in FY 2020-21 on the back of some growing demand but more importantly a structural shift in personal mobility preference arising out of an urge to break free in the aftermath of the restrictions in travelling during the COVID-19 pandemic situation as well as resurgence in the rural markets. Passenger car sales are dominated by small and mid-sized cars.

With the shutdown of all non-essential services accompanied by liquidity and cash crunch, the demand for Commercial Vehicles was severely impacted in the first half of FY 2020-21. While there are short term challenges on account of COVID-19 pandemic, Commercial Vehicle industry is likely to rebound and show recovery after witnessing two consecutive years of double digit de- growth. Demand for Commercial Vehicles, particularly Medium and Heavy Commercial Vehicles, is likely to also benefit from various government initiatives to help revive the economy.

The Government of India has encouraged foreign investment in the automobile sector and has allowed 100% foreign direct investment (FDI) under the automatic route. Focus is now shifting to electric vehicles to reduce emissions. Under union budget 2019-20, the Government of India has also provided an income tax deduction of Rs.1.50 lakhs on interest paid on loan taken for purchase of electric vehicles. Government of India has shown strong intent of driving EV adoption in last few years and have introduced several policy interventions.

IMPACT OF COVID-19 PANDEMIC:

India has been severely affected by a second wave of the COVID-19 and hospitals in several states are still reeling under the shortage of health workers, vaccines, oxygen, medicines and beds. Several states have introduced varying levels of curbs on economic activity and public movement to stop the spread of the virus, which are mostly being reviewed and extended on a weekly or fortnightly basis. The respective state governments are imposing restrictions as they are witnessing surges in the COVID-19 cases. We expect gradual sequential recovery as supply chain and COVID-19 situations improve.

The RBI announced rate cuts in FY 2019-20 to revive growth and mitigate economic impact of the COVID- 19 pandemic. The reporate remains unchanged at 4%. To provide liquidity support and strengthen public in general in their fight against COVID-19 pandemic, the RBI Governor announced on tap liquidity to the public in general. Considering the present situation of the medical infrastructure in the country, banks are encouraged to provide fresh lending support to a wide range of entities including vaccine manufactures, importers and suppliers of vaccines and priority medical devices, hospitals/ dispensaries, pathology labs, manufactures and suppliers of oxygen and ventilators, importers of vaccines and COVID-19 related drugs, logistics firms and patients for treatment. The RBI also announced certain relaxations in overdraft (OD) facilities of state governments to better manage their fiscal situation in terms of their cash-flows and market borrowings. Accordingly, the maximum number of days of OD in a quarter is being increased from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days will be available until September 30, 2021.

Companys manufacturing plants and offices had to operate under restrictions for a considerable period of time during the year and post year end. Restrictions have impacted the Company operations. More recently, the next wave of the pandemic has impacted India and the Company is monitoring the situation closely taking into account the increasing level of infections in India and across the world and directives from the various Governments. Management believes that it has taken into account all the possible impacts of known events arising from the COVID-19 pandemic in the preparation of the financial results including but not limited to its assessment of the Companys liquidity and going concern.

OPPORTUNITIES AND THREATS:

Opportunities:

One of the major announcements and much awaited policy introduction was Vehicle Scrappage policy. The policy is aimed at reducing the population of old and defective vehicles, bringing down vehicular air pollutants, improving road and vehicular safety. It will also help achieve better fuel efficiency, formalize the informal vehicle scrapping policy and boost the availability of low cost raw material for the automotive, steel and electronics industry. Vehicles would be required to go through fitness test failing which or failing to get renewal of its registration certificate may be declared as end of life vehicle. Vehicle owners will get scrap value for the old vehicle by the scrapping center, which is estimated at 4 to 6% of ex-show room price of a new vehicle. The state governments are advised to offer a road tax rebate of up to 25% for personal vehicles and 15% for commercial vehicles. In addition, registration fees may also be waived off for purchase of new vehicle against the scrapping certificate.

This initiative is believed to boost demand for automobiles in the coming years and will help the nation achieve its pollution emission targets.

Threats:

The auto industry, in general, is cyclical, and economic slowdowns in the recent past have affected the manufacturing sector in India, including auto industry. Deterioration of key economic factors, such as growth rate, interest rates and inflation, implementation of burdensome environmental and tax policies, work stoppages and increase in freight rates and fuel prices could materially and adversely affect Companys sales and operations.

In recent months, there has been a significant resurgence in COVID-19 cases in India. In order to curb the spread of infections, several states have imposed varying levels of travel restrictions, lockdowns of cities and wider provinces, business closures and strict social distancing measures. These new measures have already caused disruption to the Companys manufacturing operations. The Company expects sequential recovery during the financial year 2021-22 as COVID-19 pandemic subsides and COVID-19 pandemic related imposed restrictions are gradually eased.

SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE:

The information in this regard is given in Note No. 34 of the Notes forming part of the financial statements.

OUTLOOK:

The auto industry is supported by various factors such as availability of skilled labour at low cost, robust R&D centres, and low cost steel production. The industry also provides great opportunities for investment and direct and indirect employment to skilled and unskilled labour. The Indian auto industry is expected to record strong growth in financial year 2021-22, post recovering from effects of COVID-19 pandemic.

While there still seems to be uncertainty around the duration and the impact of COVID-19 pandemic, we anticipate demand situation to continue to improve despite ongoing COVID-19 related restrictions.

After witnessing a decline in past two years, it is anticipated that auto industry will see improvement. Management is focused on cash and cost savings initiatives and focus on sustained improvement in domestic and export business.

RISKS AND CONCERNS:

While there have been short-term challenges in demand as a result of COVID-19 pandemic and we anticipate recovery as economy unlocks, auto industry have been severely impacted with industry volumes reducing by more than 65% in FY 2020- 21. There is a risk that the industry may take longer to show signs of recovery, as schools and educational centers may take longer to reopen or return to pre-pandemic attendance levels, and an increasing number of office workplaces are extending work-from- home arrangements or other flexible work arrangements.

Company relies on third parties to source raw materials and some bought out parts. Company relies on smaller enterprises where the risk of insolvency is greater. Furthermore, for some parts, Company is dependent on a single source. Companys ability to procure supplies in a cost-effective and timely manner is subject to various factors, some of which are not within its control. In addition, there is a risk that manufacturing capacity does not meet the sales demand thereby compromising Companys business performance. While Company manages its supply chain as part of its supplier management process, any significant problems or shortages of essential raw materials in the future could adversely affect Companys results of operations.

While the Company continues to pursue cost reduction initiatives, an increase in commodity prices and the prices of input materials could severely impact its profitability to the extent such increase cannot be absorbed by the market through price increases and/or could also have a negative impact on demand. For example, in recent months, there has been significant increase in price of raw materials, especially Steel. In addition, because of intense price competition and fixed costs base, Company may not be able to adequately address changes in commodity prices even if they are foreseeable.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has an adequate system of internal controls in place. It has documented policies and procedures covering all financial and operating functions. These controls have been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls for ensuring reliability of financial reporting, monitoring of operations and protecting assets from unauthorised use or losses, compliances with regulations. The Company has continued its efforts to align all its processes and controls with global best practices.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE:

The Company recorded net revenue from operations of Rs. 18,805.70 Lakhs in FY 2020-21, 5.42% lower than Rs.19,882.67 Lakhs in FY 2019-20. The Loss Before Tax for FY 2020-21 was Rs. 209.46 Lakhs as compared to Loss Before Tax of Rs. 248.66 Lakhs for FY 2019-20. The Loss After Tax for FY 2020-21 was Rs. 283.88 Lakhs as compared to Loss After Tax of Rs. 306.13 Lakhs for FY 2019-20. The financial performance during the FY 2020- 21 was adversely impacted due COVID-19 pandemic.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATION:

The Company believes that the success of any organisation depends upon availability of human capital. Our assets are our people who work to innovate beyond and challenge established boundaries. Thus, employees are vital to the Company. We have favourable work environment that encourages innovation and meritocracy. We focus on attracting the best and brightest talent and the meritocracy is the sole criteria for selection. The Company firmly believes that manpower is the most important asset, above all. The Company has good cordial relation with trade union and employees representatives and views these relationships as contributing positively to the success of the business.

KEY FINANCIAL RATIOS, STANDALONE:

Particulars FY 2020-2021 FY 2019-2020
Debtors Turnover Ratio 5.35 5.76
Inventory Turnover Ratio 1.75 2.00
Interest coverage ratio 0.74 0.68
Current Ratio 1.18 1.13
Debt Equity Ratio 2.82 2.22
Operating Profit Margin 3.17% 2.60%
Net Profit Margin -1.58% -1.55%
Return on Net Worth -11.59% -10.79%

Explanation

The ratios for the financial year 2020-21 are negative as compared to financial year 2019-20, mainly due to economy slowdown as an impact of COVID-19 pandemic.

CAUTIONARY STATEMENT:

Statements in the Management Discussion and Analysis describing the Companys objective, projections, estimates, expectations may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include, among others, economic conditions affecting demand / supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.

For and on Behalf of Board
Sd/-
N K Gupta
Date: 14th August 2021 (Chairman)
Place: Aurangabad DIN. 00062268