K E W Industries Ltd Management Discussions

AUTOMOTIVE INDUSTRY STRUCTURE

The automotive industry covers a wide range of companies and organizations involved in the design, development, manufacture, marketing, and selling of motor vehicles, towed vehicles, otorcycles and mopeds. It is one of the worlds most important economic sectors by revenue. The aerospace and defence industry is of tragic importance to any nation. In India, a large number of SMEs serve as suppliers to defence PSUs and have a role to play in the Indian Defence Market but their contribution has somewhere gone unnoticed. Hence, in order to achieve self reliance in defence production and subsequently emerge as a significant defence player, India needs to improve the competitiveness of its SMEs and enhance their role in the Indian Defence Industry.

ECONOMIC ENVIRONMENT

According to the data released by Society of Indian Automobile Manufacturers (SIAM), passenger car sales in the last fiscal stood at 18,95,471 units, compared to 20,31,306 units in the previous fiscal. This is the first annual decline since 2002-03, when car sales had dropped 2.09 per cent.

Car sales in India fell for the first time in a decade -down 6.69 per cent in 2012-13, as the automobile industry struggled to cope with demand slump due to a sluggish economy.

The overall economic growth has not been so encouraging in the last fiscal. Higher cost of ownership impacted car sales. Also negative sentiments,

particularly among lower-end customers, have resulted in fall of sales.

INDIA OUTLOOK FY 2013-14

Its been a dismal year for Indias automobile industry, but their woes are likely to continue well into next year. Low demand coupled with a capacity overhang (particularly in passenger vehicles) and intensifying competition is likely to reduce industry operating margins.

It is likely that a 10-11% year-on-year volume growth in commercial vehicles (CVs) in 2013 would be driven by sales of light commercial vehicles (LCVs) which are likely to post volume growth of 13-15% year-on-year.

As LCV sales depend on intra-city movement of mostly consumer non-discretionary items and rural taxis, they would be impacted only to a limited extent due to economic downturn.

However, the segmental volume growth in 2013 is likely to be significantly lower than the growth of around 19% observed in 2012 due to expected higher diesel prices and negative economic sentiments persisting in the year.

Medium and heavy CV (MHCV) sales which have a strong correlation with industrial activity, corporate capex and the government spending in infrastructure projects are likely to be exhibit a negative growth of 69% in the absence of fiscal and monetary policy action by the government.

Alternatively, increased government spending on infrastructure and other supportive fiscal measures may lead to year-on-year MHCV volume growth of 34% in 2013 as per India Ratings base case.

OPPORTUNITIES

To remain competitive, the automakers will need to design vehicles that will cater to consumers in both mature and emerging markets while manufacturing them at low-cost using the most advanced technology. Further, the automakers are concentrating on offering more optional features (which will save money on gas), even on the small and less gas-guzzler vehicles in order to attract buyers. The sale of optional features is helping them offset lower profit margins for small cars relative to large trucks.

The role of governments is highly significant. Their energy and environmental policies will be strongly responsible in molding the auto industry in the coming years.

The accomplishments and the contribution of the private sector to Indias growth and development is being increasingly recognized by the Ministry of Defence. The recent amendment to the defence procurement procedures by incorporating a new category "Buy and Make (India" is an ample example to this effect. Now, its time for the private sector to stand up to this challenge by leveraging its expertise, knowledge and networks from other industry sectors such as the automotive and the information technology sectors. SMEs would form a critical component of this exercise of building up a robust supply chain for the aerospace and defence industry.

WEAKNESSES

Although automakers continue to focus on shifting their production facilities to new regions driven by cost and demand factors, developing the supplier networks remains one of their greatest challenges. Existing suppliers to automakers often lack the financial strength to expand capacity in new markets. On the other hand, auto parts suppliers are sensitive to technology transfers to local third parties, which can give rise to low-cost competitors. High dependence on automakers makes the auto market suppliers vulnerable to several maladies, primarily pricing pressure and production cuts. Pricing pressure from automakers constricts parts suppliers margins. On the other hand, production cuts by automakers driven by frequent market adjustments negatively affect their operations.

RISK AND CONCERN

The Company is exposed to external and internal risks associated with the business. The operations of the Company are dependent on the Automobile manufacturers (OEMs) growth and business plans. General economic conditions impact the automotive industry, and in turn, the operations as well. To counter these risks, your company continues to broaden the product portfolio, increase customer base and geographic reach. The Company is exposed to strong competitive pressures from both domestic and overseas. Your companys established reputation, close customer relationships, ability to provide higher level of engineering, design support and relentless drive for improvement gives it a competitive edge. The Company is also exposed to financial risk from changes in interest rates, foreign exchange rates and commodity prices. In order to address these risks the company has been implementing adequate risk management approach.

CAUTIONARY STATEMENT

The above mentioned statements are only "forward looking statements" based on certain assumptions/ expectations. The Companys actual performance could differ materially from those expressed/projected depending upon changes in various factors. The Company does not assume any responsibility to any change(s) in "forward looking statements", on the basis of subsequent development, information or events etc.