Divgi Torqtransfer Systems Ltd Management Discussions

Global economy

OverView: Global economic growth declined from 3.5% in 2022 to an estimated 3.1% in 2023. A disproportionate share of global growth in 2023-24 is expected to come from Asia, despite the weaker-than-expected recovery in China, sustained weakness in USA, higher energy costs in Europe, weak global consumer sentiment on account of the Ukraine-Russia war and the Red Sea crisis resulting in higher logistics costs. A tightening monetary policy translated into increased policy rates and interest rates for new loans.

Growth in advanced economies is expected to slow from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as policy tightening takes effect. Emerging market and developing economies are projected to report a modest growth decline from 4.1 percent in 2022 to 4.0 percent in 2023 and 2024. Global inflation is expected to decline steadily from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024, due to a tighter monetary policy aided by relatively lower international commodity prices. Core inflation decline is expected to be more gradual; inflation is not expected to return to target until 2025 in most cases. The US Federal Reserve approved a much-anticipated interest rate hike that took the benchmark borrowing costs to their highest in more than 22 years.

Global trade in goods was expected to have declined nearly US$ 2 trillion in 2023; trade in services was expected to have expanded US$ 500 billion. The cost of Brent crude oil averaged US$ 83 per barrel in 2023, down from US$101per barrel in 2022, with crude oil from Russia finding destinations outside the European Union and global crude oil demand falling short of expectations.

Global equity markets ended 2023 on a high note, with major global equity benchmarks delivering double-digit returns. This outperformance was led by a decline in global inflation, slide in the dollar index, declining crude and higher expectations of rate cuts by the US Fed and other Central banks.

Regional growth (%)	2023	2022
World output	3.1	3.5
Advanced economies	1.69	2.5
Emerging and developing economies	4.1	3.8

Outlook: Asia is expected to continue to account for the bulk of global growth in 2024-25. Inflation is expected to ease gradually as cost pressures moderate; headline inflation in G20 countries is expected to decline. The global economy has demonstrated resilience amid high inflation and monetary tightening, growth around previous levels for the next two years (Source: World Bank).

Indian economy

OverView: The Indian economy was estimated to grow 7.8 per cent in the 2023-24 fiscal against 7.2 per cent in 2022-23. India retained its position as the fifth largest economy. The Indian rupee has demonstrated resilience compared to the preceding year, outperforming many other Asian currencies. Since April 2023, it has experienced a 0.6% depreciation against the dollar, indicating its relative stability. This resilience is underpinned by the robust

growth anticipated for the Indian economy, expected to reach 7.6% during the fiscal year 2023-2024 according to

government projections. The rupees stability is strengthened by the countrys surplus in balance of payments.

In the 11 months of FY 2023-24, the CPI inflation averaged 5.4 percent with rural inflation exceeding urban inflation. Lower production and erratic weather led to a spike in food inflation. In contrast, core inflation averaged at 4.5 percent, a sharp decline from 6.2 percent in FY 23. The softening of global commodity prices led to a moderation in core inflation.

The nations foreign exchange reserves surged to a record high of US$ 645.6 billion as of March 2024 surpassing the previous high of US$ 642.49 billion recorded in March 2023. The credit quality of Indian companies remained strong between October 2023 and March 2024 following deleveraged Balance Sheets, sustained domestic demand and government-led capital expenditure. Rating upgrades continued to surpass rating downgrades in H2 FY24. UPI transactions in India posted a record 56 per cent rise in volume and 43 per cent rise in value in FY24.

Growth of the Indian economy

	FY 21	FY 22	FY23	FY24
Real GDP growth (%)	-6.6%	&7	7.2	8.2

Growth of the Indian economy quarter by quarter, FY 2023-24

	Q1FY24	Q2FY24	Q3FY24	Q4FY24E
Real GDP growth (%)	8.2	8.1	8.4	7.8

Indias monsoon in 2023 hit a five-year low, with August marking the driest month in a century. Despite receiving only 94 per cent of its long-term average rainfall from June to September, wheat production estimated recorded 114 million tonnes in the 2023-24 crop year due to higher coverage. Rice production was anticipated to decrease to reach 106 million metric tons (MMT) in comparison to 132 million metric tonnes in the previous year. Total kharif pulses produced in 2023-24 stood at an estimated 71.18 lakh metric tonnes, which is lower than FY 2022-23 due to climatic conditions. As per the first advance estimates of national income released by the National Statistical Office (NSO), the manufacturing sector output is projected to have grown 6.5 per cent in 2023-24 compared to 1.3 per cent in 2022-23. The Indian mining sector experienced an estimated growth of 8.1 per cent in 2023-24 compared to 4.1 per cent in 2022-23. Financial services, real estate and professional services grew a projected 8.9 per cent in 2023-24 compared to 7.1 per cent in FY 2022-23.

Real GDP or GDP at constant prices increased from to Rs 160.71 lakh crore in 2022-23 (provisional GDP estimate released on 31^st May, 2023) to an estimated Rs. 173.82 lakh crore in 2023-24. Growth in real GDP during 2023-24 stood at 8.2 per cent compared to 7.2 per cent in 2022-23. Nominal GDP or GDP at current prices was estimated at Rs 295.36 lakh crore in 2023-24 as compared to the provisional 2022-23 GDP estimate of Rs 269.50 lakh crore. The gross non-performing asset ratio for scheduled commercial banks improved from 4.1 per cent as of March 2023 to 2.8 per cent as of March 2024.

Indias exports of goods and services were expected touch US$ 900 billion in 2023-24 compared to US$ 770 billion in the previous year despite global headwinds. Merchandise exports were expected to expand between US$ 495 billion and US$ 500 billion, while services exports were expected to touch $400 billion during the year. Indias net direct tax collection increased 17.7 per cent to H19.58 lakh crore in FY24. Gross GST collection amounted to Rs 20.2 lakh crore, marking an 11.7% increase, with an average monthly collection of Rs 1,68,000 crore, surpassing the previous years average of Rs 1,50,000 crore.

The agriculture sector was expected to see a growth of 1.8 per cent in 2023-24, lower than the 4 per cent expansion recorded in 2022-23. Trade, hotel, transport, communication and services related to broadcasting segment are estimated to grow at 6.3 per cent in 2023-24, a contraction from 14 per cent in 2022-23. The Indian automobile segment was expected to close FY 2023-24 with a growth of 6-9 per cent, despite global supply chain disruptions and rising ownership costs.

The construction sector was expected to grow 10.7 per cent year-on-year from 10 per cent in 2023-23. Public administration, defence and other services were estimated to grow by 7.7 per cent in 2023-24 compared to 7.2 per cent in FY2022-23. The growth in gross value added (GVA) at basic prices was pegged at 6.9 per cent, down from 7 per cent in 2022-23.

India reached a pivotal phase in its S-curve, characterized by acceleration in urbanization, industrialization, household

incomes and energy consumption. India emerged as the fifth largest economy with a GDP of US$ 3.6 trillion and

nominal per capita income of Rs. 123,945 in 2023-24.

Indias Nifty 50 index grew 30 percent in FY2023-24 and Indias stock market emerged as the worlds fourth largest with a market capitalization of US$ 4 trillion. Foreign investment in Indian government bonds jumped in the last three months of 2023. India was ranked 63 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. Indias unemployment declined to a low of 3.2% in 2023 from 6.1% in 2018.

Outlook: India withstood global headwinds in 2023 and is likely to remain the worlds fastest-growing major economy on the back of growing demand, moderate inflation, stable interest rates and robust foreign exchange reserves. The Indian economy is anticipated to surpass US$ 4 trillion in 2024-25.

Union Budget FY 2024-25: The Interim Union Budget 2024-25 retained its focus on capital expenditure spending, comprising investments in infrastructure, solar energy, tourism, medical ecosystem and technology. In 2024-25, the top 13 ministries in terms of allocations accounted for 54% of the estimated total expenditure. Of these, the Ministry of Defence reported the highest allocation at Rs 6,21,541 crore, accounting for 13% of the total budgeted expenditure of the central government. Other ministries with high allocation included Road transport and highways (5.8%), Railways (5.4%) and Consumer Affairs, food and public distribution (4.5%).

(Source: Times News Network, Economic Times, Business Standard, Times of India, The Hindu Businessline, fxstreet.com)

Global automotive industry overview

In 2024, global automotive sales are expected to reach 95 million units, with a year-on-year growth rate of 3.1%. The combined sales volume of passenger vehicles and commercial vehicles experienced a notable year-on-year growth of 12.3% from 2022 to 2023. Contributing around 3% to the total global GDP, the automotive industrys largest share is observed in emerging markets like China and India, where it accounts for 7% of GDP

The global automotive industry (~4 trillion) is expected to grow ~7 trillion till 2032 from the value of USD 4075.65 Billion in 2024, exhibiting a compound annual growth rate (CAGR) of 6.9% during the forecast period (2024-2030). The global automotive industry is propelled by rapid technological advancements, substantial investments in new electric vehicle (EV) capacity, and an increasing customer demand, serving as key drivers of growth.

(Source: Azom.com, Market Research Future.com, telematicswire.com)

Consumer powertrain preference for their next vehicle (FY 2023-2024)

Country	Gasoline/ Diesel Vehicle	Hybrid electric vehicle	Plug-in hybrid electric	Battery electric vehicle	Other vehicles
US	67%	16%	5%	6%	1%
China	33%	18%	13%	33%	1%
India	49%	24%	12%	10%	3%
Germany	49%	10%	11%	13%	5%
Japan	34%	32%	9%	6%	2%
South Korea	38%	26%	9%	15%	6%

Indian automotive industry overview

India is the worlds third-largest automobile market, accounting for the highest production of three-wheelers, passenger vehicles, and tractors, while also ranking as the second-largest producer of two-wheelers. By 2030, India is expected to lead in shared mobility, presenting opportunities for the adoption of electric and autonomous vehicles. The nations focus is increasingly directed towards electric vehicles to combat emissions, with the government committing to ensuring that 30% of all new vehicle sales in India are electric by 2030. Between April 2000 and September 2023, the automobile sector in India attracted a cumulative equity Foreign Direct Investment (FDI) inflow totaling approximately US$ 35.40 billion. Positioned on a trajectory to emerge as the largest electric vehicle (EV) market by 2030, India anticipates an investment opportunity exceeding US$ 200 billion over 8-10 years.

The EV industry was propelled to the top of the news agenda in 2023 with the shift to eco-friendly motoring reflected in the growing share of EVs in total auto sales - from just 2,390 units and a 0.01% share in 2014 to 1.75% in 2021, 4.75% in 2022 and to over 1.5 million units and a 6.38% share in 2023. It is projected that Indias EV market, valued at US$2 billion in 2023, is expected to reach US$7.09 billion by 2025 and a projected 10 million in annual sales by 2030.

The India commercial vehicles market size is expected to reach USD 48.27 billion in 2024, and expected to reach USD

62.95 billion by 2029, growing at a CAGR of 5.45% during the forecast period (2024-2029).

Surge in the exports is anticipated to continue, particularly in electric vehicles, supported by the production-linked incentive (PLI) scheme tailored for the automobile and parts industry.

The total production of passenger vehicles, three wheelers, two wheelers in 2024 stood at 23,25,959 units. Passenger vehicle exports saw an increase of1.4 per cent, rising to 6,72,105 units in FY24 from 6,62,703 units in FY23. Automotive mission plan 2016-26 is a mutual initiative by the Government of India and the Indian automotive industry to lay down the roadmap for the development of the industry. FAME Scheme was extended for a further two years up to March 31^st, 2024.

(Source: IBEF, autocarpro.in, india-briefing.com, hindustantimes.com, indiatimes.com, yourstory.com)

Global auto components industry overview

In 2023, the global market for auto parts manufacturing reached a value of US$ 2,197.9 billion. By 2032, it is expected to grow to US$ 2.7 trillion, representing a compound annual growth rate (CAGR) of 2.39% between 2024 and 2032. Several factors are driving this growth, including the increasing global demand for automobiles, government initiatives and incentives aimed at fostering the automotive industrys growth and sustainability, and rising consumer demand for advanced comfort, connectivity, and convenience features in vehicles.

(Source: imarcgroup.com)

Indian auto components industry overview

The Indian auto component market size is expected to increase by USD 115.79 billion, at a CAGR of 25.7% between 2023 and 2028. The market growth analysis depends on several factors such as the growing middle-class population, the surge in demand for compact SUVs, and the government initiatives and policies for easy automotive industry setup procedures.

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$ 30 billion in FY26.

By FY28, the Indian auto industry aims to invest US$ 7 billion to boost localization of advanced components like electric motors and automatic transmissions, reducing imports and leveraging China Plus One trend.

Financial analysis FY 2023-24 Balance Sheet

Working capital management

Current assets as on March 31, 2024 stood at Rs. 3792.87 mn compared to Rs.4,278.52mn as on March 31, 2023. Current ratio as on March 31,2024 stood at 6.94 compared to 5.02 as on March 31,2022. Inventories increased from Rs.318.85 mn as on March 31, 2023 compared to Rs. 357.34 mn as on March 31, 2024. Current liabilities stood at Rs. 546.65 mn as on March 31,2024 compared to Rs.851.86 mn as on March 31,2023. Cash and bank balances stood at Rs. 2643.06 mn as on March 31,2024 compared to Rs. 3113.48 mn as on March 31,2023.

Key ratios

Particulars	FY 2023-24	FY 2022-23
EBITDA/Turnover	26.59	29.46
EBITDA/Net interest	178.33	291.93
Debt-equity ratio	0.00	0.00
Return on equity (%)	7.02	11.48
Book value per share (Rs.)	189.76	200.23
Earnings per share (Rs.)	12.99	18.45

Risk management at Divgi- TTS

Key risks and their explanation	Mitigation measures
If consumer demand shifts, the Companys emphasis on a particular niche segment could pose a challenge.	The Company is diligently expanding its portfolio to encompass a broader spectrum of products and applications, spanning passenger vehicles, commercial vehicles, tractors, and construction equipment. Additionally, it aims to extend its market presence to diverse consumer segments and geographical regions.
An economic downturn could adversely impact the Companys performance due to potential reductions in automobile demand, subsequently affecting revenue.	In an effort to mitigate the risk associated with dependence on a single market, the Company has diversified its presence across four countries. Furthermore, it has expanded the applications of its products to reduce reliance on a limited number of markets.
Fierce competition in the global market is propelled by factors such as cost and volume considerations.	Divgi - TTS stands out as a prominent leader in the market. To optimize cost management, the Company has embraced lean manufacturing principles.
A growing trend among global OEMs involves closely scrutinizing the carbon footprint and conducting life cycle assessments of their suppliers products, resulting in the implementation of more rigorous screening criteria.	The Company has broadened its network of knowledge partners and prioritized environmental responsibility. With several years of ISO 14000 certification, it has adopted the Global Reporting Initiative (GRI) framework for sustainability reporting. Additionally, the Company leads in the development of energy-efficient vehicles, collaborating with some of the worlds foremost brands in this sector.
The inability to attract and retain talent could pose a threat to the Companys long-term success and sustainability.	In its efforts to attract and retain top talent, the Company provides a positive work environment along with opportunities for professional development.
Utilizing child labor can result in adverse public perception and damage the Companys reputation and goodwill.	The Company has taken policy measures against the employment of child labor, reflecting its strong moral values and code of conduct.
The tightening of environmental regulations may affect the Companys growth prospects.	The Companys investments in refined R&D projects aim to mitigate the environmental impact of its products, while intensified Lean Manufacturing practices have minimized raw material usage.
Innovations have the potential to supplant current technologies.	To stay competitive, the Company invests in upgrading its technology.
Global OEMs are now prioritizing cost reduction alongside quality improvement.	The Company elevated its quality standards through the introduction of a vendor development program utilizing CMM and a supplier quality enhancement initiative. Moreover, it made investments in complementary capital equipment to drive cost reduction.

Human resource management

The company fosters a positive work environment that inspires performance and prioritizes customer-centricity and innovation, all while upholding the highest standards of quality. Significant investments are made in employee training and development to enhance operational efficiency continually. In its commitment to retaining and attracting talent, the company offers avenues for growth and learning, alongside implementing progressive policies and programs such as recognition and reward initiatives, engaging employee activities, and initiatives promoting work-life balance. Notably, industrial relations remained harmonious across all company plants throughout the previous year.

interna! control systems and their adequacy

The company boasts a robust internal control system ensuring proper authorization, recording, and reporting of transactions, alongside safeguarding its assets. This system is fundamental to risk management and governance. Tailored to the companys size and operational intricacies, its well-defined and adequate. Throughout the year, it has operated effectively. Both internal and external auditors routinely test and certify these controls across all offices, factories, and crucial business areas. Cross-functional teams within the factories also contribute significantly to production operation control. System certification adds another layer of strength to these systems.