Faze Three Autofab Ltd Management Discussions.

ECONOMIC AND BUSINESS OVERVIEW

India is ranked the seventh largest economy and third largest in terms of Purchasing Power Parity (PPP). The Indian economys GDP is pegged at $ 2.9 tn. While the single-party majority mandate has set the foundation for a stable central government for another five years however significant headwinds potentially lie ahead in terms of growth slowdown and automotive sector consolidation. Financial year 2018-19 (FY2019) began with an expectation of higher growth as the economy seemed to have overcome the teething troubles of the nation-wide roll out of the Goods and Services Tax (GST). However, a rise in the current account deficit (CAD), concerns relating to rising non-performing assets (NPAs) and decline in liquidity coupled with hardening interest rates become hurdles for higher GDP growth rate. Annual growth for FY2019 was 6.8 percent year over year compared to 7.2 percent year over year in FY2018. Private domestic demand performed even poorly at 6.4 percent year over year, indicating government spending helped boost growth last year.

India continues to remain the fastest growing major economy in the world in 2018-19, despite a slight moderation in its GDP growth from 7.2 per cent in 2017-18 to 6.8 per cent in 2018-19. On the other hand, the world output growth declined from 3.8 per cent in 2017 to 3.6 per cent in 2018. The slowdown in the world economy and Emerging Market and Developing Economies (EMDEs) in 2018 followed the escalation of US China trade tensions, tighter credit policies in China, and financial tightening alongside the normalization of monetary policy in the larger advanced economies. On the industry side, construction and manufacturing registered better growth than in FY2018, but growth in agriculture and allied activities as well as in mining declined significantly, resulting in poor rural income. Services, the biggest contributor to GDP, grew by 7.5 percent, half a percentage point slower than last year.

Indian banking sector has been dealing with twin balance sheet problem, which refers to stressed, corporate and bank balance sheets. The increase in Non-Performing Assets (NPA) of banks led to stress on balance sheets of banks, with the Public Sector Banks (PSBs) taking in more stress. Consumption has always been a strong and major driver of growth in the economy. Although the share of private consumption in GDP remains high, the pattern of consumption has undergone some changes over time- from essentials to luxuries and from goods to services.

TECHNICAL TEXTILES / AUTOMOTIVE FABRICS

India has the advantage of having a strong raw material (fiber) base – of cotton, manmade fiber, silk, wool and jute. Moreover, India possesses excellence in the entire value chain extending from fiber to fabric to garments. Despite achieving a high growth rate, the per capita consumption of technical textiles in India is 1.7 per kg vis-a-vis 10-12 kg in developed countries. Globally, the technical textiles sector accounts for approximately 27% of the aggregate textile industry, and in some of the advanced nations, the contribution is as high as 50% of the aggregate; however, the share of technical textiles in the aggregate textiles market is low in India (13%). Currently, technical textiles contribute approximately 0.7% to the countrys GDP and constitutes nearly 13% of the aggregate textile market in the country.

Technical textiles as a segment is directly proportional to the stage of industrialization and economic growth of any country. Developing countries undergoing large scale industrialization fuel the demand for technical textile products. The usage may range from infrastructure, agriculture, health, defense, automobiles, aerospace, sports, protective clothing, packaging, etc., With transformation of the Indian economy post liberalization in the early 1990s, the demand and consumption of technical textiles products in India has been consistently increasing. The growth of technical textiles has also helped growth and innovation of conventional textile products, owing to significant value addition across the textile value chain. All major players in India have started developing technical textiles products as they provide better margins in comparison to conventional textiles.

It is estimated that Asia would continue to be the leading market for technical textiles in 2019, accounting for approximately 37.8% of the world demand. Within the Asian region, the Chinese market is anticipated to account for 46.4% share, followed by India at 15.5%. The potential industry earnings in the North American and Caribbean region is anticipated to be at nearly US$ 50 billion, holding nearly 21.1% of the total pie.

The performance automobile industry which supports the steel, chemicals, textiles etc. directly is main driver behind the growth of automotive textile industry and any slowdown will impact the broader economy. In FY19, commercial vehicles recorded the fastest pace of growth in domestic sales at 17.55 per cent year-on-year. It took India around seven years to increase annual production to ~four million vehicles from ~three million including all types of vehicles. However, the next milestone—five million—is expected in less than five years. Indian Automobile makers have concluded 2018-19 on a weaker note as compared to previous year. However, Industry body, the Society of Indian Automobile Manufactures (Siam) continues to expect passenger vehicle sales to grow at a high single-digit going forward. The Automotive Fabrics industry is directly linked to the growth in passenger car segment and its consumption of fabrics. Other than Automotive fabrics which are consumed in majority, low cost car variants use Vinyl (PVC) for cost reduction and high end variants use Leather / Leatheriest and value added fabrics, both of the aforesaid segment is estimated to form at least 20-25% of the total consumption and the same is growing by the day. Key aspects of success in this industry are continuous innovation without adding costs, quality performance & timely execution, long term cost competitiveness, capacities, etc. The company operates in the limited area of automotive fabrics only whereas Technical Textiles as such has a wide gamut of applications.

COMPANY OVERVIEW AND OUTLOOK

The Company is engaged in designing, development and manufacturing automotive textiles (specialized in car seat cover fabric). It is also engaged in manufacturing fabrics used in auditoriums and railway coaches (with minimal contribution to revenue). The Company caters to Original Equipment Manufacturers (OEMs) and are largely concentrated in the domestic market. The Company derives more than 90% of its revenue from the domestic market. The Company currently has a market share of over 35-40% in the automotive fabrics business in India and (as per company estimates) aims to increase its market share with existing OEMs. The company is also actively looking to grow its exports business.

The company had growth in volume of fabrics supplied during the current year by over 10% from the previous year. Company has an in-house research and development department to develop new designs as per the market trends. Further, Company works closely with its existing customers for development of latest designs and regular upgradation of technologies and knowhow of its product enable it to continuously evolve technologically and remain competitive. The Long term presence in the industry and consistent performance in terms of reliable & innovation helps the company in getting regular orders as a preferred supplier.

The Company has continuously evolved in development planning and execution strategy to align with specific product needs and standardization of processes. There is constant interaction taking place with OEMs to showcase innovative capabilities which are in sync with the themes / vision of the OEMs for the future launches. The other set of factors that drive all new developments towards Aunde is QDS (Quality, Delivery & Service). Quality levels were drastically improved and 100% compliance to delivery schedules followed with all OEMs. Since all OEMs are Just in Time customers, the inventory flow management is key to gain QDS points.

OPPORTUNITIES AND CHALLENGES

Technical textiles is the emerging area for investment in India. The potential of technical textile in India is still untapped. Technical textiles represents a multi-disciplinary field with numerous end use applications. The production of different items of technical textile industry has been slowly but steadily increasing in the country. India accounts for just 3 per cent of global technical textile production. As compared to countries like Germany where technical textile contributes 50-60 per cent, in India, the contribution is only 12 per cent. A recent report by Future Market Insights projects that the worlds largest market for technical textiles will be Asia-Pacific during the forecast period, 2017-2027. While the global market for technical textiles is projected to grow at a value CAGR of 4.6%, the Asia-Pacific market will experience a value CAGR of 6.8%. The demand is likely to be highest in countries such as India and China.

The technical textiles are being promoted at the highest level by the government in order to realise the full potential of the critical segment. The government is also offering subsidy for domestic players, who want to set up machinery. Though the use of Technical textiles is expanding globally, India comprises only fraction of the global technical textiles exports. The technical textiles industry is import-intensive. In the last few years, the industry has witnessed a rise in imports. Though the country currently spends a significant amount on imports, the dependence can eventually be reduced by further investing in technology-heavy products. This presents a huge scope for import substitution. To this extent the inputs in the industry are directly affected by global price trends which is risk to the industry. Technical textiles is a highly varied subject and comprises of multiple processes to manufacture different products. These processes require different and high level of skill sets from workers which is currently absent in the domestic industry. Majority of the government schemes for manpower training are focused on core textiles such as spinning, weaving & garmenting. There are no such specific curriculum developed for technical textiles. In order to curb this issue, there is an immediate need to organize specific forums for interaction between industry and academia so that specific curriculum could be developed for technical textiles. Also, government can modify their manpower development schemes to align with the requirements of the technical textiles industry. Technical textiles is an innovation intensive field and to excel in it, focus on product research & development is a must. Prospects of the Indian Textile Industry look promising and many efforts are being made by the Government for the progress of the sector as the country still lacks innovations. The automotive fabrics segments faces threat / challenges from the PVS / synthetic leather in terms of cost efficiency and artificial leather in terms of acting as a substitute to the automotive fabrics. Also with growing disruption towards electric vehicles might bring unforeseen challenges to the entire automotive value chain. Furthermore, trend towards low cost fabrics has led to shrinking margins and lesser room for investment in R&D and new initiatives which drive innovation. Also technical textiles suffers from raw material price volatility owing to Crude Oil prices and USD / INR.

HUMAN RESOURSES/ INDUSTRIAL RELATIONS

Your Company is committed to create an environment of engagement, transparency and meritocracy while also being performance oriented and balanced by responsibility towards the community it impacts. To the Company, its people are a very valuable resource. In an increasingly competitive market for talent, Your Company continues to focus on attracting and retaining right talent. It is committed to provide right opportunities to employees to realise their potential.

Your Company continues to enhance employee experience while listening and acting on feedback received through the employee engagement. Your Company has continued to maintain amicable industrial relations by focusing on increased worker level engagement through formal and informal Communication and training forums.

POLLUTION AND ENVIRONMENTAL CONTROLS

Your Company continue to monitor and ensure the highest standards of environmental, health and safety norms. Ensure compliance with applicable pollution and environmental laws at the Companys works / factories / locations by putting in place effective systems in this regard and review the same periodically.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Companys objective, projections, estimates, expectations or predictions may be forward looking statements within the meaning of the applicable corporate laws and regulation. It may be noted that the actual results may differ from that expressed or implied herein.

On behalf of the Board of Directors
Place : Mumbai
Date: 30th May, 2019
Ajay Anand
Managing Director