Jainex Aamcol Ltd Management Discussions.

COMPANY REVIEW

Operational Overview

Jainex Aamcol is a leading manufacturer of gear hobs and special cutting tools, inspection tools & precision accessories under the brand "Aamcol" and is a part of Jainex Group. Jainex Group is a conglomerate with offices in all the leading cities of India and representative offices in USA, UK and Hongkong. Jainex Group deals with steel, gear cutting tools, pneumatic brake systems for railways, and has a turnover of US$ 20 million. The company has been catering to a wide range of customers including automobile industries, industrial and special gearbox manufacturers, machine tool manufacturers, and many others. The Companys product range includes Various Hobs for different applications such as Spur / Helical Gears, Chain Sprocket & Timer Pulleys, Worm Gears, Cutters, and other Inspection Tools & Precision Accessories. By producing international quality products, the company has not only saved countrys foreign exchange but also generated it by exporting its products. Led by several cost control initiatives and expanding revenue streams, the Company had turned profitable in FY 2018. This growth momentum was sustained further during FY 2019. The Company continued its strategic focus on enhancing process efficiency, product quality and customer connect. With an emphasis on manpower training, automation and product innovation, the Company strengthened its positioning in the marketplace.

Productivity Enhancement

The Company undertook an array of measures for productivity enhancement like retrofitting/ reconditioning and automation, improvement in use of high-speed cutting tools and cycle time improvement to improve productivity.

Safety Measures

Being a safety conscious organisation, the Company imbibes safety across various functions of the entire plant operation. In order to protect the health of workforce at the shop floor level, it curtails the use of hazardous material inside the plant premises.

ECONOMIC OVERVIEW

Global Economy

Advanced economies registered slower growth in CY 2018 at 2.2% as compared to 2.4% in CY 2017. Growth is projected to further slow down to 1.8% in CY 2019 and 1.7% in CY 2020, led by the negative effects of tariff increases in US and China. The new fuel emission policy in Germany, sovereign and financial risk in Italy, contraction in Turkey and an overall weak financial market sentiment will further add to subdued performance in the coming years. Growth in emerging markets is also expected to slow from 4.5% in CY 2018 to 4.4% in CY 2019 but is seen slowly picking up to 4.8% in CY 2020. Factors such as slowing external demand, rising borrowing costs and persistent policy uncertainties are expected to weigh down growth in CY 2018 and CY 2019. Trade tensions with US will negatively impact Chinas economy, in addition to the needed financial regulatory tightening. Indias economic growth is expected to pick up in FY 2020, benefiting from lower oil prices and a slower pace of monetary tightening, as inflation pressures ease. In CY 2019, world economic growth is expected to further decelerate to 3.3%, before recovering a bit to 3.6% in CY 2020. Negative effects of tariff increases enacted in US and China will be the primary reason for slow output. Growth rate for the emerging market and developing economies is also likely to witness a slowdown in CY 2019, urther impacting output.

Indian Economy

While the global economy is battling headwinds, Indias economy continues to be one of the fastest growing major economies in the world. India became the worlds sixth-largest economy in FY 2019. The second advanced estimates Officentral Statistics Office (CSO) show that Indias gross domestic product (GDP) is likely to grow by 7% in FY 2019, slower than 7.2% growth witnessed in FY 2018. However as per International Monetary Fund (IMF) Indias GDP is estimated to grow by 7.5 per cent in FY 2020 and is expected to grow 7.7 per cent in FY 2021.

INDUSTRY OVERVIEW

Domestic Automobile Industry

India is considered to be the worlds 4th largest automobile industry, beating Germany. It is soon on its way to become the 3rd largest by FY 2021, riding on rapid economic development, rising urbanisation, burgeoning middle class, supportive regulations and the Governments strong push for growth. The Governments Automotive Mission Plan (AMP) FY 2016-26 envisions the industry to grow around four times by FY 2026 at 10% CAGR for vehicle sales volumes. The Government aims to develop India as a global manufacturing as well as a research and development (R&D) hub. It has set up National Automotive Testing and R&D Infrastructure Project (NATRiP) centers as well as a National Automotive Board to act as facilitator between the government and the industry. Taking forward Governments Make in India initiative, the players in the industry invested in technology infusion from across the globe and contributed towards making India a manufacturing hub. The automotive after-market in India too is on a higher growth trajectory. A CII report estimates suggest that the domestic automotive aftermarket recorded a growth of 14% CAGR in the last five years, and moving ahead, it is projected to touch Rs 75,000 Crores by FY 2020. The opportunities generated by the disruptions are changing the competitive game for players willing to step beyond their traditional roles and engage with customers in a new and digital environment.

Opportunities, Threat and Mitigation Strategies:

Being a manufacturer of components for end-user industries, the Company is prone to market vagaries with rapid technological development and unique economic cycles. In addition, the regulatory and macro economic environments have a direct impact on the business. The Company has been quick to respond to any market challenges, thus making smart come backs. The Company has in place a robust mechanism to preempte merging risks and take meaningful corrective actions in a timely manner. Some of the key risks that may emerge are enlisted below, with the corresponding mitigation measures that can be adopted by the Company.

Product Risks:

Risk: The Company supplies to leading brands which have strict norms and insist on adherence to compliance with quality and technical standards for auto components used as raw materials. The Company has to ensure superior precision and quality, as the product quality directly impacts the reputation and profitability. Mitigation: The Company invests in maintenance and upgradation of its manufacturing facilities and in employee skill development. It also follows various quality and productivity enhancing initiatives to maintain competitiveness. Regular feedback from clients aids in mitigating product quality risk. Adequate product liability insurance is also in place to safeguard the interests of the Company.

Market risks:

Risks: The Company derives most of its revenue from few large customers. Any glitch in the customer relations with them will have an adverse impact on the Companys revenues. Mitigation: Our Company is currently having a large pool of customer base and has planned to diversify its base and is working accordingly. Our Company is not only working towards client diversification but also business diversification.

Financial Risks:

Risk: The Company is exposed to changes in foreign exchange rates, interest rates, credit availability and liquidity. Mitigation: The Company has in place adequate hedging mechanisms and closely monitors macro policy changes to foresee any likely movements in interest rates.

Raw Material Risks:

Risks: Input costs being a primary cost for the Company, they have a significant impact on the financials of the organisation. Mitigation: Robust procurement policy, expertise in inventory management, understanding of price fluctuation and long-lasting relationships with suppliers including pass-through clauses enables the Company in ensuring timely, regular and adequate supply of raw materials.

Technology Risks:

Risk: The Company supplies to reputed OEMs who are abreast with market changes on the technology front. These marquee players are constantly on the look-out for quality supplies with superior efficiency. The Company is challenged to promptly respond to the evolving demands and also needs to be prepared to face the risk of technological obsolescence.

Mitigation: Our Company is well focused on modernization and technology upgradation and has been a forerunner in terms of adding new and advanced gears to the industry.

Regulatory Risks:

Risk: The Company is exposed to changes in laws, regulations, policies and other Governmental actions including those affecting environmental matters, employee welfare, safety, wastage emissions.

Mitigation: The Company has a dedicated compliance team which foresees any regulatory changes and developments in laws that govern it and its clients. It takes course corrections in a timely fashion to avoid any such major disruption.

Segment wise or Product-wise Performance

The Companys segment-wise performance for the financial year 2018-19 is as under:

(Amt. in Lacs)

Sl. No. Segment Performance
1. Gear Hobs 1225.52
2. Milling Cutters 292.21
3. Spline Gauges 160.99

Internal Control Systems and their Adequacy

The Company is committed to good corporate governance practices and has well-defined systems and processes covering all the corporate functions and units. It also has an Internal Audit Process to provide reasonable assurance regarding the effectiveness and efficiency of operations, safe-guarding of assets, reliability of financial records and reports and compliance with applicable laws and regulations. The Company has an elaborate system of identifying key business risks and taking mitigating steps. Well-documented policies and procedures enable the Company to strictly adhere to all applicable procedures, laws, rules and statutes. Any variance from budgetary allocations are promptly reported and corrected to ensure strict compliance.

The Audit Committee of the Board oversees the Audit function through regular reviews of audit findings and monitoring corrective actions taken on the same.

Discussion on Financial Performance With Respect to Operational Performance

During the financial year 2018-19 under review, the turnover of the Company augmented from Rs. 15.76 Crores in F.Y. 2017-18 to Rs. 17.53 Crores in F.Y. 2018-19 thus resulting in profit of the Company after deducting the Finance Costs, Depreciation and Taxes from Net Loss of Rs. 3 Lacs in the previous financial year to profit of Rs. 61.03 Lacs in the current financial year.

SUPPORT SYSTEMS

The Company is constantly focusing on enhancing its process efficiency, product quality and customer connect. The Company believes that the employees are not a resource but the most valuable assets of the Company and will play a key role in its future growth. Planned efforts are made to develop and retain talent. The Company provides growth opportunities to internal talent by assigning them higher responsibilities with suitable exposure and training. The Company undertakes various training and development programmes regularly in order to upgrade its human resources and keep them abreast of the changing requirements.

Cautionary Statement

Statements in this Management Discussion and Analysis and Directors Report describing the Companys objectives, projections, estimates and expectations might be construed as ‘forward looking statements within the meaning of applicable laws and regulations. Actual results may differ substantially or materially from those expressed or implied by the forward looking statements due to risks or uncertainties associated therewith depending upon significant changes in political and economic environment, economic conditions, government policies and other incidental factors, environmental standards, tax laws, litigation and labour relations. Readers are cautioned not to place undue reliance on these forward-looking statements.