Kar Mobiles Ltd Management Discussions

Overview

The Company is a manufacturer of medium and large engine valves for applications in internal combustion engines.

Industry Structure, Developments and Performance

During the financial year 2013-14, the domestic industry witnessed negative growth in all segments except Farm Tractors and Two Wheelers.

INDUSTRY GROWTH

During the year under review, the growth in the domestic automotive industry is given below:-

	Volume growth in % over previous year
Vehicles	2013-14	2012-13
Passenger Cars	(5)	(4)
Utility Vehicles	(1)	52
Small Commercial Vehicles	(25)	(17)
Light Commercial Vehicles	(4)	25
Medium & Heavy Commercial Vehicles	(21)	(28)
Three Wheelers	(1)	(4)
Two Wheelers	7	2
Farm Tractors	27	(1)

Source : Society of Indian Automobile Manufacturers

Domestic Market

Political uncertainties and high interest rates added with a lack of positive market sentiments slowed growth during the year 2013-14.

OEM and Aftermarket

The performance of the Company in the OEM, Aftermarket and Railways and Defence is given below:

						(Rs. in Crores)
	OEM Segment		Aftermarket Segment			Railways and Defence
2013-14	2012-13	%	2013-14	2012-13	%	2013-14	2012-13	%
32.97	27.43	20.20	21.68	21.83	(0.7)	10.99	11.49	(4.40)

OEM sales were higher by 20% during the year under review as compared to 2012-13. Higher production and sales by the key tractor manufacturers where company has the privilege of being single source was the major contributor for higher OEM sales. Aftermarket sales were marginally lower over 2012-13. Railways and Defence sales were lower by 4.4% compared to previous year.

Exports

The overall economic activities were lower in key markets in the USA and Europe, whereas European Union continues to be under severe economic stress during 2013. The projections given by major aftermarket customers and more specifically by our key customers were lower than our original estimates which had a major impact on our exports. The Company’s focus to the export OEM markets has helped us to reduce the impact. The total export turnover was Rs.51.98 crores against Rs.59.49 crores which was 13% lower than previous year.

Operational and Financial Performance

Financial Review:

In the fiscal year ended March 31, 2014, the Company registered net sales and operating revenue of Rs.120.17 crores, a decline of 2.92% from the previous year with the profit before tax of Rs.2.07 crores, a decline of 34% from the previous year, mainly due to adverse market conditions, higher inflationary situation. Despite higher input costs, the company has continued to earn profit through optimization of the cost structure and improvement of operational efficiencies.

Operations and Manufacturing Review

The modernization and expansion of Tumkur plant was complete with commissioning of production lines at the plant for catering to large valve markets. The cost reduction measures such as operational improvement and alternate sourcing of raw material have resulted in savings of about 1.25% in the cost of raw materials.

Thrust continued on the implementation of Total Quality Management (TQM) across all plant locations. The quality improvement projects were implemented through a special quality improvement team and through quality circles. In recognition of the persistent efforts to improve quality standards, the Company received the ‘GOLD AWARD’ in QCFI QCC competition and ‘GOLD AWARD’ in QCFI Kaizen competition held in Bangalore.

Outlook

The Company remains cautiously optimistic about the growth of the automotive industry. It is expected that there will be a gradual pick up in momentum in market growth hoping good governance from newly elected government.

Domestic Market:

We expect the auto component industry’s revenue growth to remain weak, in absence of immediate demand triggers for end-users across all segments. While the company is cautiously optimistic about the growth with selective segments / customers where we enjoy the single source status. Overall we expect a marginal growth in OEM segment as compared to 2013-14.

Aftermarket will remain under price pressure as the excess capacities available with manufacturers will be diverted towards aftermarket and each manufacturer will try to gain market share.

Export Market

With some improvement in economic conditions in parts of the EU and US, the demand outlook would gradually improve during the year 2014-15. Overall the year 2014-15 appears to be a very challenging year and the Company plans to adopt a cautious approach tinged with some optimism.

Opportunities & Threats

Given the stability of the new government, the growth of Indian economy could be back on track to 7-8% levels. This could mean recovery and growth in automobile industry. If the infrastructure issues like power, roads and ports are addressed and some flexibility in employment is enabled through labour reforms, exports could open up larger opportunities.

In anticipation of formation of a stable government at the centre, the foreign investments have increased towards the year-end. India provides a large engineering talent pool with acclaimed designing and process engineering skill sets. The country’s quality manufacturing and test facilities are on par with global standards.

The Company’s strength continues in areas of:

• Strong parentage being part of the Rane group, an established player in Indian auto-ancillary industry

• Recognition as a medium & large valve manufacturer

• High brand equity in served markets

• Vast dealer network and field force

• Diversified presence across industries like railways, defence and has significant presence in export market.

The main threats to which auto component industry is exposed to are:-

• High competitive intensity of the industry with presence of other domestic companies coupled with competition from countries like China and others.

• Unceasing cost reduction initiatives from OEMs from whom the major portion of the future growth is likely to come.

• Spiraling commodity prices affecting the input costs structure.

• Dumping from China and FTA with ASEAN countries.

• Apprehension about weak economic expansion in the developed countries.

Internal Control Systems and Risk Management

Your Company has an adequate system of internal controls in place. These controls have been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls, monitoring of operations, protecting assets from unauthorized use or losses, compliances with regulations and for ensuring reliability of financial reporting. The strong internal control systems have been designed not only to prevent fraud and misuse of the Company resources but also to protect shareholders’ interest.

A well-established multi-disciplinary internal audit team, which reviews and reports to management and the Audit Committee about the compliance with internal controls and the efficiency and effectiveness of operations and the key process risks. The Audit Committee and the Board in consultation with the internal auditor, statutory auditor and operating management approve annual internal audit plan in the beginning of the year. Audit Committee of the Board of Directors, comprising independent directors, regularly reviews the audit plans, significant audit findings, adequacy of internal controls, compliance with Accounting Standards as well as reasons for changes in accounting policies and practices, if any. This process not only seeks to ensure the reliability of internal control systems and compliance with laws and regulations but also covers resource utilization and system efficacy.

The Board takes responsibility for the overall process of risk management in the organization. The business risk is managed through cross functional involvement and communication across businesses. The risks associated with each of the business processes and the sub-processes are reviewed periodically by the Audit Committee. The risks are broadly classified into strategic risks, operational risks, financial risks and statutory compliance risks. These risks are rated based on factors such as past year experience, probability of occurrence, probability of non-detection and its impact on business. Every quarter the top management reviews the strategic risks, the risks with high probability and high impact and presents its report to the board of directors together with the risk mitigation plan on half-yearly basis. The strategic risks are taken into consideration in the annual planning processes. Other risks are covered as part of internal audit process and presented to the Audit Committee every quarter. The risk ratings are revalidated with the top management as part of the internal audit process every quarter. The overall re-assessment of risks at company level is carried out and presented to the board once in two years for their review.

Human Resource Development and Industrial Relations

In the Company’s journey towards profitable growth, business linked and solution focused learning is imperative. The HR strategies are aimed at building leadership pipeline and meeting the future competency needs. We have introduced the High Potential Leadership Development (HPLD) initiative designed in a contextual framework focussing on core competencies. High performing individuals at senior, middle and junior levels are identified and groomed to take on higher order challenges in the future. Such talent has a line of sight to the top management with specific and targeted growth measures such as career acceleration, larger and multi-dimensional roles, special projects and competitive compensation.

Competency development that contributes to business success was the theme for the learning and development space. Characteristic of this was the domain specific development initiative for marketing excellence, coupled with interactions with professionals from diverse backgrounds through learning series at the Rane Institute for Employee Development (RIED).

White collar productivity continues to be a focus area. The Company is teaming-up with industry experts to enhance white-collar productivity by conducting detailed studies on work force analysis and developing a robust framework.

Focus on innovation to drive business growth and manage costs effectively will continue to be in the agenda. The efforts are directed at aligning aspirations, inspiring to take on orbit shifting challenges and partnering in healthy and profitable growth. The Company’s pursuit of expanding horizons through innovation led initiatives will propel it on the path of profitable growth.

As at the end of March 31, 2014, the total number of employees stood at 389 against 419 as on March 31, 2013.

Cautionary Statement

The information and opinion expressed in this report may contain certain forward-looking statements, which the management believe are true to the best of its knowledge at the time of its preparation. Actual results may differ materially from those either expressed or implied in this report.

FORM - B

Information as per section 217(1)(e) of the Companies Act, 1956 read with Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988 and forming part of the Directors Report for the year ended March 31, 2014.

RESEARCH AND DEVELOPMENT (R & D)

1. Specific areas in which R & D is carried by Company	: NIL
2. Benefits derived as a result of R & D and future plan of action	: Not applicable
3. Expenditure on R & D	: NIL
TECHNOLOGY ABSORPTION, ADAPTATION AND INNOVATION
Efforts in brief	: Commissioned one production line at Plant 2 with integration of Lean Production system
1. Benefits derived as a result of the above efforts	: Quality Improvement and consistent output with reduction in total employee cost
2. (a) Technology imported (Technology imported during the last 5 years reckoned from the beginning of the financial year)	: NIL
(b) Year of import	: Not Applicable
(c) Has technology been fully absorbed	: Not Applicable
(d) Areas where technology not fully absorbed, reason and future plan of action	: Not Applicable

 

	For and on behalf of the Board
Place : Chennai	L Ganesh	L Lakshman
Date : May 20, 2014	Chairman	Director