Autoline Industries Ltd Management Discussions.
World economic activity gained momentum in the year of 2016-17 forced by cyclical recovery in investment, manufacturing and trade. As per the forecast of International Monitory Fund (IMF) world growth is expected to rise from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018, slightly above the October 2016 World Economic Outlook (WEO) forecast. After several quarters of lackluster growth in advanced economies, growth picked up as a result of strong domestic demand, consumer confidence, recovery in the production of both consumer durables and capital goods and cross-sector cooperation and growth.
Stronger activity and expectations of more robust global demand, coupled with agreed restrictions on oil supply, have helped commodity prices recover from their troughs. Higher commodity prices have provided some relief to commodity exporters and helped lift global headline inflation and reduce deflationary pressures. Financial markets are buoyant and expect continued policy support in China and fiscal expansion and deregulation in the United States.
Economic performance across emerging market and developing economies has remained mixed. Global growth forecast is expected to increase marginally beyond 2018, reaching 3.8 percent by 2022. This pickup in global activity comes entirely from developments in emerging market and developing economies, where growth is projected to increase to 5 percent by the end of the forecast period.
In emerging and developing Asia, growth is projected to remain robust and in India, the growth forecast for 2017 has been trimmed by 0.4% to 7.2%, primarily because of the temporary negative consumption shock induced by cash shortages and payment disruptions from the recent demonetization initiative. Indias growth prospects are favorable, with growth forecast to rise to about 8% by the end of 2020 due to the implementation of key reforms, loosening of supply-side bottle- necks and appropriate fiscal and monetary policies.
Forecast of good monsoon throughout the country again this current year is and will be a driver of Indias economic growth. India witnessed an above normal rainfall during the year 2016-17, thus rural economys base strengthened. According to the Economic Survey of India 2017-18, India registered a robust growth of 7.1 per cent in the year 2016-17, the year which is impacted of demonetization initiatives of Government of India and the same trend of increase is expected to continue in the upcoming year, i.e. 2017-18, projected at 7.5 per cent; thus becoming the fastest growing major economy in the world.
Indias exports appear to be recovering, based on an uptick in global economic activity. This is expected to continue in the aftermath of the US elections and expectations of a fiscal stimulus. Consumption is expected to receive a boost from two sources: catch-up after the demonetisation-induced reduction in the last two quarters of financial year 2016-17; and cheaper borrowing costs, which are likely to be lower in financial year 2017-18.
INDUSTRYSTRUCTURE AND DEVELOPMENTS
Your Company operates in the automotive sector. It manufactures a range of sheet metal components and assemblies/sub-assemblies for the Automobile Industry and is a Tier One auto components supplier. Being an interlinked sector, it is more prone to demand fluctuations and economic problems. In the year under review, the demonetisation move by the Government and then the ban on sale of BS III engines and vehicles by the Apex court shocked the automobile sector. Several automobile companies loaded with big inventory; which in turn resulted into low production. The Indian auto industry is one of the largest in the world. The industry accounts for 7.1% of the countrys Gross Domestic Product (GDP). The Two Wheelers segment with 81 % market share is the leader of the Indian Automobile market owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV) segment has 13% market share.
India is also a prominent auto exporter and has strong export growth expectations for the near future. In April-March 2017, overall automobile exports grew by 1.91%. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the Two Wheeler (2W) and Four Wheeler (4W) market in the world by 2020.
Indian Automobile Industry (Performance during FY 2016-17) Production
The industry produced a total 25,316,044 vehicles including passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycle in April-March 2017 as against 24,016,599 in April-March 2016, registering a growth of 5.41 percent over the same period last year.
The sales of Passenger Vehicles grew by 9.23% in April-March 2017 over the same period last year. Within the Passenger Vehicles, Passenger Cars, Utility Vehicles and Vans grew by 3.85%, 29.91% and 2.37% respectively during April-March 2017 over the same period last year.
The overall Commercial Vehicles segment registered a growth of 4.16% in April-March 2017 as compared to the same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) grew by 0.04% and Light Commercial Vehicles grew by 7.41% during April-March 2017 over the same period last year.
Three Wheelers sales declined by 4.93% in April-March 2017 over the same period last year. Passenger Carrier sales declined by 8.83% and Goods Carrier sales grew by 12.75% in April-March 2017 over April-March 2016.
Two Wheelers sales registered a growth at 6.89% during April-March 2017 over April-March 2016. Within the Two Wheelers segment, Scooters, Motorcycles and Mopeds grew by 11.39%, 3.68% and 23.02% respectively in April-March 2017 over April-March 2016.
In April-March 2017, overall automobile exports declined by 4.50%. While Passenger Vehicles and Commercial Vehicles exports registered a growth of 16.20% and 4.99% respectively, exports of Three Wheelers and Two Wheelers declined by 32.77% and 5.78% respectively in April-March 2017 over April-March 2016.
Your Companys prime customers performance
Tata Motors Limited (TML): Commercial vehicle segments of TML witnessed muted demand due to weak replacement demand, subdued freight demand from industrial segment, which took further hit post demonetization, and lower than expected buying ahead of the implementation of BS IV. M&HCV segment witnessed a fall of 2.2% Y-o-Y and LCV segment witnessed a fall of 6.1% Y-o-Y. Passenger vehicles segment grew by 44.3% Y-o-Y with Car segment growth of 42.8% Y-o-Y and UVs (including Vans) segment growth of 51.7% Y-o-Y, on the back of continued strong response to the Tiago and the launch of Tata Hexa and Tata Tigor. Exports de-grew by 8.7% Y-o-Y.
The Cumulative sales (including exports) of Tata Motors Ltd. for Financial Year 2016-17 were 542,323 nos. (All vehicles), higher by 5.98% over 511,712 vehicles, sold last year. Contribution to the sales by commercial vehicles i.e. LCV is 38.69% and M&HCV is 32.31%.
Auto Ancillary Industry:
The Indian auto-components industry can be broadly classified into the organised and unorganised sectors.
The organised sector caters to the 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 and Tier One, Tier Two and Tier Three auto components supplier to some extent. The Indian auto-components industry has experienced healthy growth over the last few years. Some of the factors attributable to this include a buoyant end-user market, improved consumer sentiment and adequate liquidity in the financial system.
OPPORTUNITIES & STRENGThS
Indias automotive industry is one of the most competitive in the world. Although automotive Sector is reaching towards accounting for 40% of Indian manufacturing still India remains one of the most under-penetrated markets for Automobile, with passenger vehicle ownership of less than 15 per 1000 people. Therefore there is huge latent demand for mobility and there are millions of Indians aspiring to own their first car, or motorcycle.
By 2026, India is expected to be the third largest automotive market by volume in the world. The emergence of large automotive clusters in the country: Delhi-Gurgaon-Faridabad in the north, Mumbai-Pune-Nashik-Aurangabad in the west, Chennai- Bengaluru-Hosur in the south and Jamshedpur-Kolkata in the east gives multiple location choice to the national as well as multinational OEMs to set up their project.
Major Developments and Investments in India
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 initiatives taken by Government of India such as highway development, progressive regulations and tax reforms including proposed implementation of GST are ensuring the growth for Automobile sector.
Government of India aims to make automobiles manufacturing the main driver of Make in India initiative, as it expects passenger vehicles markets growth to triple to 9.4 million units by 2026, as highlighted in the Auto Mission Plan (AMP) 2016-26.
A strong support from the government in the setting up National Automotive Testing and R & D Infrastructure Project (NATRiP), the largest and one of the most so far, significant represents a unique joining of hands between the Government of India, a number of State Governments and Indian Automotive Industry to create a state of the art Testing, Validation and R&D infrastructure in the country. The Project aims at creating core global competencies in Automotive sector in India and facilitate seamless integration of Indian Automotive industry with the world as also to position the country prominently on the global automotive map.
In the Union budget of 2015-16, the Government has announced plans to provide credit of Rs. 850,000 crore (US$127.5 billion) to farmers, which is expected to boost sales in the tractors segment.
The Government of India plans to introduce a new Green Urban Transport Scheme with a central assistance of about Rs. 25,000 crore (US$ 3.75 billion), aimed at boosting the growth of urban transport along with low carbon path for substantial reduction in pollution, and providing a framework for funding urban mobility projects at National, State and City level with minimum recourse to budgetary support by encouraging innovative financing of projects.
The deregulation of FDI in this sector has also helped foreign companies to make large investments in India.
The Government plans to promote eco-friendly cars in the country i.e. CNG based vehicle, hybrid vehicle, and electric vehicle and also made mandatory of 5 per cent ethanol blending in petrol.
The government has formulated a Scheme for Faster Adoption and Manufacturing of Electric and Hybrid Vehicles in India, under the National Electric Mobility Mission 2020 to encourage the progressive induction of reliable, affordable and efficient electric and hybrid vehicles in the country.
Investments in India: Global car majors have been ramping up investments in India to cater to growing domestic demand. These manufacturers plan to leverage Indias competitive advantage to set up export-oriented production hubs. During the year under review, Automobile sector received USD 1453 Millions in FDI Equity inflows. In order to keep up with the growing demand, several auto makers have started investing heavily or in the investing process in various segments of the industry. Few of them are as under:
Electric car maker Tesla Inc. is likely to introduce its products in India sometime in the mid of 2017.
South Koreas Kia Motors Corp is close to finalising a site for its first factory in India, slated to attract US$1 billion (Rs. 6,500 crore) of investment. It is deciding between Andhra Pradesh and Maharashtra. The target for operationalising the factory is the end of 2018 or early 2019.
Several automobile manufacturers, from global majors such as Audi to Indian companies such as Maruti Suzuki and Mahindra & Mahindra are exploring the possibilities of introducing driverless self-driven cars for India.
BMW plans to manufacture a local version of below-500
CC motorcycle, the G310R, in TVS Motors Hosur plant in Tamil Nadu, for Indian markets.
Chinas biggest automobile manufacturer, SAIC Motor, plans to invest US$ 1 billion in India by 2018 and is exploring possibilities to set up manufacturing unit in one of three states Maharashtra, Andhra Pradesh and Tamil Nadu.
Suzuki Motorcycle has started exports of made-in-India flagship bike Gixxer to its home country of Japan, which will be in addition to current exports to countries in Latin America and surrounding countries.
FIAT Chrysler Automobiles has recently invested
US$280 million in its Ranjangaon plant to locally manufacture Jeep Compass, its new compact SUV which will be launched in India in August 2017.
References: Media Reports, Press Releases, Department of Heavy Industries, Department of Industrial Policy and Promotion (DIPP), Automotive Component Manufacturers Association of India (ACMA), Society of Indian Automobile Manufacturers (SIAM), Economic Survey & Union Budget 2016-17, Indian Brand Equity Foundation (IEBF) etc.
Impact of Government policy and regulatory changes
The Country recently seen that the Honble Supreme Court imposed a total ban on sale of vehicles under all segments having engines not compliant to BS IV Emission standards. The ban on sale of BS III vehicles and demonetization shocked the automobile sector. Several automobile companies are now loaded with big inventory due to the above; which in turn resulted into low sale especially in rural area given the higher cash transactions in rural areas than urban areas and consequently low production. The change in government policies, taxes and regulatory restriction etc. may have some impact on sales figures for certain time span.
Impact of foreign markets
Economic growth of foreign markets also influences theIndian economy and automobile market, a slower than financial expected global economic recovery or a significant disruption could have a material adverse effect on the Companys business and its operations. Any fluctuation/ change in the Foreign policies is a threat which cannot be ignored.
Threats from Competitors
The presence of multinational players in the Automobile sectors lead to extensive competition. Our competitors include automotive component manufacturing companies, sheet metal suppliers and other medium sized units and they might be able to adversely affect our growth and financial results depending on their geographical presence, strong financials, longer operating histories etc.
Increase in input prices and other factors
The Company also faces threat of not being able to cope with the changes in the prices of raw materials, exchange fluctuation, growth in other manufacturing, service and agricultural sector etc.
Fall in the performance of any of its Subsidiary/ Joint venture Companies may have an impact on the Companys operations
The Company has made substantial investments in its subsidiary companies/associates. Any deterioration in the performance of such subsidiary companies/associates may have an impact on the Companys financial performance.
Notwithstanding various challenges, the industrys long-term prospects remain bright and threats can be mitigated to certain extent by adopting latest technology, well financial planning, upgrading to cope with the expected change in policies, contributing in electric and hybrid vehicles market and its manufacturing eco-system.
OUTLOOK AND STRATEGY
In most of advanced economies, the pace of activity is expected to accelerate on account of continued demand support and well-targeted structural reforms to lift supply potential in most of the countries and leading further by broaden economic opportunities across the globe. Indias economy has grown at a strong pace in recent years owing to the implementation of critical structural reforms, favorable terms of trade, and trust on stable Government.
The rapidly globalising world is opening up newer avenues for the transportation industry, Indian auto-component makers are well positioned to benefit from the globalisation of the sector as exports potential could be increased by up to four times to US$ 40 billion by 2020.
The Indian Automotive Industry has made great strides over the past two decades, sufficient to be noticed at a global level to be counted as major auto manufacturing hub. In terms of global rankings in manufacturing output, it is presently second largest in two wheelers, eighth largest in commercial vehicles, sixth largest in passenger cars and largest in tractors. With an annual production of 25.31 million vehicles of which 3.47 million were exported in FY 2016-17. Indian Auto market has the potential to dominate the Global auto industry, provided, a conducive environment is created for potential innovators to come up with new pilot projects. Prospect of the auto components industry for 2017-18 looks better as increased vehicle demand would convert into increased revenue for the components industry. Automotive Mission Plan: 2016-26 is collective mission of Government of India and the Indian Automotive Industry on where the Vehicles, Auto-Components and tractor industries should reach over the next ten years in terms of size, contribution to Indias development, global footprint, technology, competitiveness, institutional structure and capabilities. It further envisages that the government and the Indian Automotive industry will work together to address all the key issues to take India to its rightful position in the global auto industrys sweepstakes. AMP 2026 will help Indian Automotive industry to focus on its strengths and improve its competitiveness in select segments and establish its Right to Win on the global stage. By 2026, India could stand first in the world in production/sale of small cars, two-wheelers, tractors and buses, third in passenger vehicles and heavy trucks, all adding up to 12 % contribution to National GDP.
Ramp up of Capacity Utilisations
The Company is targeting optimum utilization of its installed capacity since the domestic market has recovered and export demand continues to trend upwards. Parallely your company is working meticulously to diversify its business and exploring possibilities to enter into joint venture to capture the global market in auto as well non-auto sector.
Over the years, your Company has built a strong product portfolio and developed high end design and value engineering capabilities. Your Company is an integrated Art to Part or Concept to Delivery, Company with capability right from Styling, Designing (CAD), Proto typing, Analyzing CAE (Computer Aided Engineering), Crash Worthiness, NVH, CFD, etc., Tooling (Computer Aided Manufacturing) and finally Mass Manufacturing. The above accomplishment out-turn your Companys ability to manufacture and supply approx. 250 parts to a single customer.
Fund Raising/Cost Saving
In the recent past negative cash flow has led to lack of availability of liquid funds. As such, for the purposes of expansion and diversification customer wise as well as product wise, operational repayment of term loans and overall improvements, low cost funds need to be infused in the Company. Your Companys efforts fructify in the year of 2016-17 wherein your company has raised Rs. 16.80 Crores by way of allotment of equity shares on preferential basis to promoters and investors including foreign investors. Now, your Company is exploring possibilities to raise debt as well as equity funds in organic and inorganic manner for working capital requirements, expansion, diversification, loan repayments and other general corporate purposes. The Cost saving initiatives are being taken on regular basis and the Company has been able to achieve satisfactory cost savings with the task of supplier rationalization, inventory management, system improvement, revising credit periods etc. In the year under review, the Company has focused more on overall cost reduction and value creation. The company has availed services of external agency for reduction in manufacturing costs. This has proved to be a good solution on cost reduction and thereby increasing revenue. Redundant, unnecessary expenditures were discovered and eliminated.
RISK AND CONCERNS
Raw Material Prices: Availability of raw materials at reasonable price is challenge for Auto ancillary industry and higher rate of custom duty lead to increase the domestic price of raw materials. This makes the inputs expensive for the domestic component manufacturers. For your Company, increase in the price of raw materials especially steel are passed through so there is a limited impact on the profitability.
Disruption of Global Trade, Capital Flows: Disruption of demand/ trade and capital flow in the advance economies and emerging countries will impact on the performance of other economies in the highly interconnected international trade and financial system. A failure to complete the global reform agenda and allowing regulatory fragmentation across borders would also hurt countries in particular emerging market economies. Direct risk to your Company is very miniscule since your company has very low overseas exposure financial as well as trade.
Liquidity crunch: Auto Ancillary Industry requires high amount of capital and for which a proper cash flow is required to be maintained in order to perform the operations efficiently and effectively. Negative growth, increased cost of borrowed funds, declined sales, volatile markets, increased fuel and oil prices have resulted into a severe liquidity crunch in the auto ancillary and automotive industry in past and this risk cannot be avoided in future.
Technological Changes: New technology is arriving every day. To be successful, one has to be updated and well versed with the latest manufacturing technologies. The changing technologies have led to a shortening of the life cycle of new vehicles. The government is entrusting for faster adoption and manufacturing of Electric and Hybrid vehicles in India. The Company has to install automated machines and robots to cope with demand, new advent electric and hybrid vehicles and also to compete. The Company continues to invest in new technologies and capacities to address such risks. The performance of the Company is completely dependent on the performance of its few key customers/OEMs and decline in demand of final products of the companys customer will definitely adversely affect the companys performance financially and operationally.
In addition of above there are possibilities to intensify risks by change in economic and monetary policies of government adversely affecting business sentiments of the company, risks associated with human resource, Force Majeure, occurrence of unforeseen events, growing used car market may create obstacle to the rapid growth of Automotive Industry and any other business risks.
Risk Management: Strategic, operating and financial business risks are reviewed by the Board and its committees on a regular basis. In addition to the above risks, the committee monitors any potential new risks that may arise due to changes in the external environment. While the possibility of a negative impact due to one or more of such risks cannot be totally avoided, the Company proactively takes reasonable steps to pre-empt and mitigate these.
SEGMENT WISE PERFORMANCE
At present your Company operates mainly in single segment i.e. manufacturing of auto parts such as pressed sheet metal, auto components and assemblies which is used in the manufacturing of main product and in Design Engineering Services. All other activities of the Company revolve around the main business. The sales are primarily to Domestic Automotive Component Segment. However, the Company also has a small share in export segment.
INTERNAL CONTROL SYSTEMS AND ThEIR ADEQUACY
The Company has proper and adequate system of controls in order to ensure the optimal utilization of resources, the accurate reporting of financial transactions and strict compliance with applicable laws and regulations. The Company has put in place sufficient systems to ensure that assets are safeguarded against loss from unauthorized use or disposition and that transactions are authorized, recorded and reported correctly.
Audit Committee of Board of Directors comprising majority of Independent Directors, regularly reviews the significant audit findings, adequacy of internal controls, compliance with accounting policies, practices and standards as well as statutory compliances. It reviews and reports efficiency and effectiveness of operations and the key process risk. Your Company has implemented Microsoft Dynamics AX 2009, Enterprise Wide Solution, Enterprise Resource Planning (ERP) at all its plants covering all its businesses, planning and accounting processes. Your Company is working towards replacement of existing ERP with SAP thereby your Company will be in a better position to increase the operational efficiency and cost effectiveness of overall operational controls. SAP based new ERP system will provide various benefits such as material traceability and reporting as per customer expectation, costing and account based profitability analysis, enhanced reporting and analytics and better, real-time decision making etc., the Company might start using SAP based new ERP system in the financial year 2018-19.
Your Company had appointed M/s. Ketan H. Shah & Associates, Pune, Chartered Accountants as Internal Auditors during financial year 2016-17. The Audit Committee reviews internal audit reports and the adequacy of internal controls from time to time.
DISCUSSION ON FINANCIAL PERFORMANCE WITh RESPECT TO OPERATIONAL PERFORMANCE
Your Companys performance in the last financial year is a reflection of the challenges faced by the automotive industry in India and in certain other regions internationally. In FY 2016-17, the consolidated revenue of the Company was Rs. 3,552.86 million, an increase of 14.20% over the previous year (Rs. 3,111.16 million). Increase was mainly due to the reason that your Management remained focused on cost optimisation and value enhancement during this period. Consolidated EBIDTA for the year decreased by 49.52 % to Rs. 38.51 million from Rs. 76.30 million in previous year. Decline is mainly due to negative contribution from non-operating items and shortage of working capital.
Consolidated loss after tax for Financial Year 2016-17 is Rs. 703.98 million.
Rs. in million except EPS data
|Income from Operations (Net)||3552.86||3111.16|
|Employee Benefit Cost||352.77||336.81|
|Profit Before Interest, Depreciation & Taxes (EBIDTA)||38.51||76.30|
|Profit Before Tax but before Exceptional Items||(525.09)||(443.50)|
|Extra Ordinary Items||(110.33)||(16.11)|
|Profit After Tax but before deducting minority interest||(703.98)||(390.33)|
|Profit/(Loss) for the year||(697.49)||(388.46)|
|Earnings per share (Rs.) Basic||(49.25)||(31.00)|
|Earnings Per Share (Rs.) Diluted||(49.25)||(31.02)|
During the year under review, your Company has invested Rs. 50.43 million towards capital expenditure mainly in plant and machinery and other miscellaneous fixed assets. The capital infusion will continue in a planned manner to further improve, enhance, automate and modernize plants and designing & development activities in the current year 2017-18.
Your Company had a total strength of 1185 employees as on March 31, 2017. During the year under review your Company has taken various steps for the betterment of the employees and cohesive working atmosphere in the Company. Your Company believes in people and acknowledges its employees as most valuable asset and therefore human resource management is an ongoing activity in the Company which work for providing tools and methods to the Company for moving forward.
Human resources are an organizations biggest asset. The Company aims to retain its talent pool from separation with the Company and for the same the Company introduced employee retention programme. A policy for Streamlining and realigning of grades across all levels of the organization, Policy on Death Benevolent Fund, Rewards and Recognition Policy have also been implemented. The Company also sponsors/organizes programme and activities for betterment of its employees such as Annual Health Check-up, Sports events etc. in addition of already started self-funded Mediclaim known as Autoline Employees Health Benefit Scheme.
The Company is having a well-equipped human resource department and a team of able and experienced professionals. New recruitments at various levels are being made to adequately manage various segments/functions of growing operations of the company. The company provides training to its employees on a continuous basis for skill building, management skills, innovation, creativity and developing quality manpower.
A cordial Industrial Relations environment prevailed in all the manufacturing units of the Company during the year under the review.
The statements forming part of this Annual Report including Directors Report and Management Discussion and Analysis report may contain certain forward looking statements within the meaning of the applicable securities laws and regulations. Forward-lookingstatementsarebasedoncertainassumptions and expectations of future events. Many factors could cause the actual results, performances or achievements of the Company to be materially different from any future results, performances or achievements that may be expressed or implied, since the Companys operations are influenced by many external and internal factors beyond the control of the Management. The Company cannot guarantee that these statements, assumptions and expectations are accurate or will be realized. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events.