Maruti Suzuki India Ltd Management Discussions.

Overview

FY 2019-20 began amid considerable challenges with sluggish economic growth in India and the world. One of the primary reasons for the global economic slowdown was growing protectionist measures in many countries of the world.

In India, the issue of inadequate credit availability, driven by challenges in the financial sector was one of the important reasons for moderate economic expansion. Consequently, the slowdown in consumption affected the overall demand environment. Therefore, a combined impact of muted demand in the domestic and export markets dragged down capacity utilisation of industries and dried up fresh investments.

To bolster the economy, the Government of India took some bold measures like reducing corporate tax rates and offering credit guarantee for financially sound Non-Banking Financial Companies (NBFCs). The year also witnessed considerable easing of monetary policy by the Reserve Bank of India (RBI) with reduction in the repo rate to the tune of 185 basis points. With significant fiscal and monetary measures, the economy started to show early signs of improvement in the later part of FY 2019-20. However, at the end of the year, the outbreak of COVID-19 brought the economy to a screeching halt.

For the auto sector, FY 2019-20 can best be summarised as the year when all negative factors struck simultaneously with full force. Over the last two decades, the auto industry hasnt witnessed such a huge demand contraction. The slowdown was broad-based with all the segments of auto industry witnessing significant decline.

In line with the degrowth in sales in the domestic passenger vehicle narket, sales volume of the Company in the segment declined by 8.2%. Including the sales of Light Commercial Vehicles, the overall sales in the domestic market for the Company declined by 18.1%.

FY 2019-20 began with the general elections spread over April ind May. During these two months, the passenger vehicle industry saw significant degrowth. Initially, it appeared that slowdown in sonsumption—a tendency during elections—may have caused his decline. However, as the year progressed, other major factors egan to emerge.

The key factors that affected the demand of passenger vehicle industry :an be summarised as follows:

i) Increase in selling price specially of entry level cars affected the affordability to own a car

The cost of acquisition of cars increased due to simultaneous convergence of multiple factors, including:

• Implementation of various product regulations: Mass emission regulation (BSVI), and Safety regulations (Frontal-Offset, Pedestrian safety, Airbag, ABS etc.)

• Increase in road tax in some states

• Increase in vehicle insurance premiums

ue to these factors the car prices, especially of those in the entry segment, saw a sharp rise to the tune of ~20% This increase, along vith subdued economic growth adversely impacted the affordability of :ars and consequently car demand.

b) Issues related to vehicle financing

With financiers getting more cautious in lending, both dealers as well as customers faced the issue of credit availability. Moreover, a reduction in the Loan-to-Value (LTV) ratio led to an increase in the down payment amount. The total upfront payment, which a customer needs to incur at the time of vehicle purchase, further rose due to an increase in insurance premiums and road taxes. Given the fact that over 80% of cars are sold on finance, the issues in vehicle financing considerably affected the sales.

c) Uncertainties in the mind of customers

• With significant degrowth of car sales in the starting months of the financial year, there was a strong anticipation of GST rate cut leading to customers deferring purchases

• Much discussion around Electric Vehicles (EVs) made customers wait for EVs without knowing much about the price and challenges related to charging infrastructure

• Some customers were not sure whether to buy BSIV or BSVI cars. While BSIV cars had a cost advantage, they felt BSVI cars would be technologically superior and command high resale value

• Customers were also doubtful that a government or court ruling may render BSIV cars obsolete even before the useful life of the car

• A section of customers held back their purchases hoping that car manufacturers would be forced to liquidate their stocks at heavy discounts as the Supreme Court deadline of BSIV sale by end-March approached

d) Slowdown in rural economy

Over the last 2-3 years, PV sales growth in rural markets outpaced that in urban markets. However, in FY 2019-20, especially in the first half, rural consumer sentiments weakened impacting sales. The monsoon was delayed and erratic. Rainfall during the harvesting time damaged some crops as well. The excessive rainfall also led to floods in more than 10 states. However, the sentiments in rural markets improved in the latter part of FY 2019-20.

e) Disruption due to COVID-19

The demand for cars usually remains good in March. The unprecedented COVID-19 outbreak led to a nationwide shutdown of economic activity. In line with the national policy, the Companys operations were suspended in the latter part of March 2020, which also impacted the sales.

Besides, the economic and political uncertainties and increased protectionism in some of the export markets impacted the exports sales.

As a result of the weak demand environment in both the domestic and export markets, the Company registered an overall volume decline of 16.1%.

Being capital as well as labour intensive, the passenger vehicle industry has higher fixed costs and capacity utilisation is one of the important levers for profit margins. With a decline in volume on one hand and capacity addition on the other, the capacity utilisation fell much below that of the previous year. Weak demand condition kept sales promotion expenditure at an elevated level. These two factors viz: reduced capacity utilisation and higher sale promotion expenses alone brought down the operating margin significantly. Moreover, due to weak market situation, the Company could not take adequate price increases to neutralise the increase in input costs.

The Company could partially off-set the impact of unfavourable factors by stepping up cost reduction measures. The movement in commodity prices and foreign exchange remained favourable during the year.

During the year, the Company also began vehicle sales to another OEM, thereby selling 25,002 units. This incremental volume also helped the Company to marginally improve its capacity utilisation.

Domestic Sales Passenger vehicles

During the year, the Company posted a decline in sales of 18.2% in the domestic passenger vehicle market, which is the highest ever annual de-growth registered by the Company since its inception.

Amid weak market demand with fewer walk-in customers to the showrooms, the Company increased its efforts to reach out to customers. The Company conducted relevant events across urban and non-urban markets. The targeted digital campaigns through hyper-local activity were stepped up to identify potential customers. The enquires for new car buying through digital platform witnessed multi-fold increase during the year.

Given the issue in credit availability in both working capital financing for dealer and retail financing for consumers, the Company established tie-ups with leading Scheduled Commercial banks, NBFCs and Regional Rural Banks in order to ensure the credit availability at competitive interest rates with low down-payment requirements. The Company forged tie-ups with 13 finance companies like Bank of Baroda, Kotak Mahindra, HDB Financial Services, Federal Bank and Tata Capital.

Amidst a weak demand environment, the Company successfully managed the transition from BSIV to BSVI vehicle technology. Given the wider portfolio of the Company, the introduction of BSVI vehicles had to be done at the right time with meticulous planning in order to ensure that the dealer partners were not burdened with any unsold stock of BSIV vehicles. The Company has sold around 8 lakh BSVI vehicles during the year.

During FY 2019-20, the Company expanded its sales network further. With the pursuit of going closer to the customer for better convenience and experience, despite weak market conditions, the Company added 152 sales outlets primarily in non-urban markets.

The Company has acquired 118 land parcels for setting-up sales outlets and service workshops on the CODO principle (Company Owned & Dealer Operated). Six pilot projects are being taken up across zones. During the year, the focus was to complete pre-construction activities and roll out the pilot projects in FY 2020-21. Based on the learning from these pilot projects, the sales and service facilities will be built on rest of the acquired land parcels. The Company will continue to work on this initiative in future with higher focus on setting up small service workshops to increase its service touchpoints.

The Companys two new products—XL6 and S-Presso—launched just before the festive period, were well received by customers. This created excitement in the market and helped improve sales. The shift towards petrol vehicles is more evident now with share of diesel vehicles for the industry falling below 20% in Q4 FY 2019-20. For the Company the contribution of sales from petrol vehicles stands at 93% in Q4 FY2019-20.

Seven out of the top ten best-selling models in India came from the Company. Maruti Suzuki has been leading the green mobility initiative in India by providing the factory fitted S-CNG Technology. During the year, while overall sales of the Company in domestic market declined by 18%, the CNG sales grew by 1%. This clearly indicates the growing interest of customers in CNG vehicles.

Light Commercial Vehicles (LCVs)

The Company sold 21,778 units of Super Carry during the year posting a degrowth of 8.8%. Going forward, the Super Carry CNG with industry-best fuel efficiency and attractive pricing is well placed to provide value to the customer.

Pre-owned car sales: Adopting increasingly digital ways in functioning

The Company had re-launched its pre-owned car brand True Value with a new brand identity three years ago and has since been evolving every year. The Company uses a combination of digital applications and artificial intelligence based tools in vehicle evaluation. This not only ensures transparent practices but helps in buying and selling good quality cars to help improve the overall customer satisfaction. During the year, the Company introduced online vehicle buying facility through which the customers can get their cars evaluated digitally at their homes. There are now a total 280 independent True Value outlets across 162 cities. During the year, the certified True Value sales contracted by 6.5%.

Service

One of the key success factors of the automobile industry is the ease and low cost of maintenance of vehicle. This includes service workshops in close proximity and quick availability of spare parts at affordable price.

During the year, 250 service workshops were added to the network across Arena and NEXA Service channels. This is the highest ever addition in a single year, taking the total number of workshops to 3,864 covering 1,914 cities, towns and villages.

Based on the size of the market, suitable workshop formats are being introduced. A mobile single bay workshop concept ‘Service on Wheels is very useful for a customer residing in a remote area. Workshops are being set up at existing sales touchpoints in rural areas by creating 1-2 bay infrastructure.

Use of technology is being increased to improve customer satisfaction at service workshops and productivity of service personnel. Digitising the job card opening system and customerd voice capturing system are initiatives in this regard.

To improve the quality of service, the Company trains the workshop manpower on the latest and advanced technological platforms, behavioural and soft skills through Suzuki Service Qualification System (SSQS) based on the global standards defined by the Suzuki Group. The Company has rapidly scaled up its training infrastructure from just 17 in FY 2017-18 to 200 this year.

Spare Parts and Accessories

Availability of spare parts is critical in minimising the downtime of the vehicle and enhances customer satisfaction. It is a big challenge to ensure quick availability of every single part, from a basket of 70,000 different spare parts, in the vast network spread across the country.

Accurate forecasting methods, along with Artificial Intelligence based delivery route optimisation system has helped ensure that more than 98% of customers have immediate access to Maruti Suzuki Genuine Parts (MGP).

The Companys efficient warehouses in NCR (Gurugram and Manesar) and Gujarat along with the Regional Parts Distribution Centres at Bengaluru, Nagpur and Siliguri also help ensure faster delivery. In addition to dealer workshops, 84 distributors and 599 retail outlets across the country assist in easy availability of Genuine Parts and Accessories to customers located even in the farthest corners of the country.

During the year, the Company extended round the clock support to customer vehicles affected by Cyclone Fani in Odisha, floods in Kerala, Mumbai, parts of Gujarat, Bihar, Pune and Sangli.

To ensure that the customer buys and uses genuine parts, the Company launched a mobile App Scan & Assure that scans the unique QR code on the part to test its genuineness.

The new-age customer is constantly evolving and wants to have customisation in a car. The Company launched about 100 new accessories during the year. To improve the customer convenience, an e-commerce compatible website was also launched for selling accessories. Despite sluggish market conditions, proactive steps taken by the Company to satisfy customer needs led to a 10% growth in the amount a customer spends on accessories in their cars.

Exports

During the year, the Company exported 102,171 vehicles to over 100 countries, registering a decline of 6%. The economic and political uncertainties and increased protectionism in some of the export markets affected the sales.

Exports to Latin American region, one of the major markets for the Company, were adversely affected due to socio-political unrest and huge currency depreciation in some of the countries.

The Companys exports were further impacted when a South East Asian country imposed model-wise quota restrictions on import of cars. Moreover, restrictions on vehicle financing and the prevalent used car market remained a challenge in SAARC countries.

The decline in sales was contained to some extent by increasing the dispatches to Africa and the Middle East. South Africa emerged as one of the growing markets for the Company. Towards the end of the year, the global outbreak of COVID-19 pandemic severely affected the sales performance.

Operations

The Companys manufacturing philosophy is based on zero safety incident, zero defect and continuous optimisation of the resource efficiency by imbibing lean and green manufacturing practices.

Increasing features and multiple regulations lead to increase in complexity of manufacturing a vehicle. To achieve defect free products, the Company put in place a robust process control system by leveraging new technologies and implementing traceability solutions to prevent wrong fitment of parts.

The inspection systems are increasingly being shifted to the source to prevent outflow of defects. This significantly reduces the time taken for any corrective action leading to resource optimisation. The Company is progressively using loT technology for improving product quality.

To minimise the changes during the mass production of a vehicle, the accessibility of part fitment and workplace ergonomics is simulated using virtual reality techniques to incorporate suitable modifications during the design and development stage of the vehicle. The Company extensively uses technologies such as weld spots projection for position check of more than 2,500 Weld Spots in new model weld body trials and scanning of vehicle body using photogrammetry for achieving "build to design" as close as possible.

Since the market demand is witnessing considerable fluctuations both in terms of overall volume and choice of models, the manufacturing operations need to be flexible.

To achieve this, the Company not only invests in agile and flexible manufacturing systems but also up-skills its workforce continuously to manage volume fluctuations.

Conservation of Natural Resources and Environment Protection

The 3R (Reduce, Reuse and Recycle) principle, is a way of life for the Company. ‘Smaller, fewer, shorter, lighter and neater is the guiding principle based on which the Companys operating processes are designed. The Companys commitment to preserve resources is reflected in every step, right from designing products to improvising manufacturing processes.

In a bid to conserve natural resources, the Company uses solar power in its overall energy mix. During the year, the Company commenced

the installation of 5 MW (p) grid connected PV solar plant at Gurugram With this addition, the total solar power used in manufacturing of cars now stands at 6.3 MWp. Apart from this the Board has also approved commissioning of a 20 MW solar power plant.

During the year, with the initiative to promote recycling of resources, the sand used for making cores in the casting shop is 100% recycled for use in brick manufacturing. Further, 100% reusable material is used for packaging to ensure resource optimisation.

Towards environment protection, the Company not only conforms to laws and regulations, but strives to stay ahead. The Company has adopted the globally acclaimed International Material Data Systems (IMDS) tool for controlling the use of Substance of Concern (SoC). Since long, the Company has done away with usage of SoC, and now with IMDS, it will be able to quantify the recoverable and recyclable materials in its vehicles. IMDS has been implemented in Wagon-R, XL-6 and S-presso models. Besides commitment to environment protection, this initiative reinforces the Companys firm belief in the 3R practices.

As a step towards circular economy, with an aim to promote recycling of steel and other commodities, the Company, together with the Toyota Tsusho Group, announced setting up one-of-its-kind vehicle dismantling and recycling joint venture in Noida, Uttar Pradesh, with each of the firms having a stake of 50%. The unit will have an initial capacity to dismantle ~2,000 vehicles per month and will source vehicles from dealers as well as directly from customers. This Joint Venture will also be responsible for procuring and dismantling End-of- Life Vehicles (ELVs).

During the year, the Company took an initiative to drastically reduce the usage of bottled mineral water as well as plastic and paper cups. The reduction in plastic wastage achieved was ~4 tonnes plastic in a year.

The Companys Sustainability Report elaborates on the initiatives undertaken in this section.

Safety

The Companys vision on Safety is ‘Zero Incident - Zero Human Injury - Zero Fire. A 3-tier committee under the direct supervision of the MD & CEO is making constant progress towards the improvement of safety systems and compliance to achieve the Companys safety vision. The Company also reinforces a culture of safety across its value chain. The Company carries out periodic risk assessment of fire safety, water logging and human injuries at the facilities of its suppliers and dealers. Keeping in view the increasing trend of road incidents, the Company has also taken initiatives to promote and create awareness on the importance of road safety discipline among employees. Also, the Company carried out training on defensive driving skills during the year.

Quality

In order to deliver defect-free products, the Company not only focuses on excellence in its in-house production processes, but also actively supports suppliers in manufacturing defect-free components. With increasing customer expectations on product quality and to comply with the upcoming stringent product regulations, the complexity of manufacturing components and vehicle has increased manifold. This makes quality improvement a continuous journey. Among the many thrust areas to achieve world class quality, the broad area of quality management is depicted below:

Reinforcement of zero-defect philosophy

The Company believes that for utmost customer satisfaction, not a single product should have any defect. To accomplish this, the Company has taken an initiative to establish zero defect lines at suppliers works. During the year, a series of sensitisation workshops by the Company encouraged suppliers to enhance their knowledge and implement best practices to achieve zero defect production lines.

Measures to prevent reoccurrence of defects (Pro-active Quality Management)

A) New model quality improvement

a. Implementing Front Loading concept

1 Front loading refers to early involvement of the Quality Assurance function at designing and development stage of components. With this, the inputs for part quality improvement get incorporated at the design stage. This will not only reduce defects, but also improve the overall build quality and also lead to faster development of new models.

b. Peak production verification trials and initial flow management

The Company uses Peak Production Verification Trial (PPVT) method to identify well in advance, the quality defects that can surface after the commencement of mass production of a new model component. Since there is a sufficient time gap between the trial production and the mass production, this enables suppliers get time to take countermeasures. Further, Initial Flow Management is used to stabilise the quality parameters of new models before ramping up the production.

c. Stringent product evaluation

I n order to comply with the upcoming stringent product regulations, thorough evaluation of new models is required during the development stage. For this, the Company uses its state-of-the-art testing facility in Rohtak, to rigorously evaluate the new models, following which it incorporates necessary improvements.

B) Mass production quality improvement

a. Capability development

The Company is promoting the development of relevant workmen skills by setting up DOJO training centre at suppliers works. The training is provided in simulated production conditions to equip workmen to do a high-quality job on the production lines.

b. Adherence to rules: 10 cycle check

The Company is implementing one of the best practices, 10 cycle check, for identifying the root cause of why a workman is not able to adhere to the standard operating procedures leading to quality defects. In this method,

by observing a workman continuously for 10 cycles of operations, the reasons for not adhering to rules like lack of awareness, fatigue, improper workplace ergonomics, use of improper tools etc. get identified.

c. Focus on equipment and tool maintenance

Upkeep and periodic maintenance of equipment and tools is necessary in order to maintain consistent quality. The Company has been focusing on improving Tool and Die maintenance capabilities of plastics and sheet metal suppliers for the last three years. It has created standard maintenance manuals containing the best practices for upkeep of tools, dies and jigs with periodic assessment for their condition and ensuring quality.

Measures to prevent recurrence of defects & containment (Reactive Quality Management)

a) Reinforcing the culture of identification of root cause

The Company carefully reviews market and dealer feedback. Prompt and corrective actions are undertaken to prevent recurrence of all issues. The Company has established a defect-recurrence- prevention department to institutionalise the learning and take necessary countermeasures.

b) Implementing part traceability system

In case if any defect flows from the suppliers or from the Company, traceability system helps identify the vehicles in which the defective part is fitted. Without a traceability system in place, it is quite possible that corrective action is taken on a wider range of vehicles causing unwarranted inconvenience to customers and deployment of additional resources towards its corrective action.

Human Resources Our philosophy

The Company always strives to promote a safe, healthy and happy workplace. It creates and instills a culture of partnership among its employees.

Empowerment of the human resource to acquire knowledge and build capability, grow and prosper in a healthy work environment is the guiding philosophy of the Companys HR policies. With people-centric policy interventions, a constant two-way communication led by the MD & CEO to promote participative decision-making and various welfare measures that are taken from time to time, the Companys motivated human resource has been making strong contribution to the best of its ability in responding to business challenges successfully.

Industrial relations environment

The Company strives for a stable and cordial industrial relations environment through effective communication, participation of employees across levels in important decisions and various employee welfare programmes. A regular two-way communication led by the MD & CEO with the employees across levels keeps them informed on the overall business scenario and provides them with a strong platform for exchange of views.

Capability development

Apart from regular training programmes for capability building, employees have an opportunity to excel academically for their growth. For this, the Company has tied up with renowned academic institutions and employees completing the training programmes are promoted to take up higher responsibilities.

Courses Courses taken by Number of employees undergoing higher education
Diploma programme Workmen 173
B. Tech programme Supervisors 152
Part-time MBA programme Managers 67
Total 392

The Companys in-house training academy also provides tailormade course based on individual skill gaps to improve proficiency levels of personnel. During the year, a total of 73,500 people were trained (including own employees, vendor employees, dealer employees and other flexi-manpower).

Employee welfare

Along with industry leading benefits, making an employee own a house has been a major area of intervention for the Company, right from its first housing project in 1989. FY 2019-20 saw another milestone in this journey, when a lot of flats was delivered to the employees in a housing society in Dharuhera town situated in Haryana. The Company has facilitated the entire process from selecting land, negotiating the price and appointing a real estate firm for ensuring quality, timely construction of houses and providing housing loan subsidies. Going forward, the Company plans to introduce similar housing options at more locations.

The Company values its employees, who have devoted their lives for the progress of the organisation. It contributes 1% of the Profit After Tax of the previous year to a fund that is exclusively earmarked for the welfare of the employees. The fund is used to provide social security measures such as post-retirement medical benefits and welfare measures like educational support for children of employees and developing common infrastructure facilities in housing projects.

The Company takes care of the health of its employees. Periodic medical checkups, regular talks on health from experts are

organised. The Company not only encourages participation in various sporting events held in the country, but also organises marathons exclusively for its employees. This initiative helps the Company to engage positively with its employees.

Multi-layered connect

For larger connect and welfare of the families of employees, the Company has a calendar of events, which includes expert career counselling for children of employees, a gala family day, plant visits for family members and attractive rewards for innovators. In engaging with the families of employees in communication, an in-house magazine and MD & CEOs messages on special occasions play an important role.

Gender diversity and inclusion

The Company promotes gender diversity and provides equal opportunity to all. Various welfare measures are taken to support and encourage our female employees.

Grievance redressal mechanism

To address any grievance of its workmen, including temporary workforce, the Company has a well-structured grievance redressal mechanism. Periodic grievance redressal camps are organised to address the issues of workmen.

Supporting business partners

The Company has put in place a Vendor HR department. This has been created to promote good people practices throughout the value chain. Regular workshops and audits are conducted for suppliers. Till now, this initiative has helped more than 380 suppliers in improving their HR practices and for some suppliers it helped in resolving IR issues.

Customised training courses are also carried out for Tier-1 suppliers. Courses offered range from shop specific training and preventive maintenance to plant safety and 5S.

During the year, an initiative was taken for contractor evaluation and a department was created to ensure that all contractors working with the Company abide by all compliances and welfare schemes related to the contractual workforce working with the Company.

Engineering, Research and Development

FY 2019-20 was marked with introduction of several product regulations in passenger vehicle industry. The Company being a responsible market leader complied with the regulations well ahead of the timeline. This was achieved through timely support from Suzuki Motor Corporation in providing the requisite technological support. Considering the wider range of product portfolio with multiple product variants and also keeping in mind that the dealer partners should not be burdened with excessive inventory of unsold BSIV vehicles, the Company chalked out a detailed transition plan. The Company embarked on its journey for transiting towards BSVI standards in 2016 when the entire auto industry was not even BSIV compliant. Starting April 2019,

which was a year ahead of the stipulated timeline for adhering to BSVI standards, the Company started introducing BSVI compliant vehicle models in a phased manner. The Company sold around 800,000 BSVI compliant vehicles in FY 2019-20 itself, reflecting its commitment to urgently reduce the pollution levels.

In a weak demand environment, it is necessary to create excitement in the market by offering new products with relevant technologies. With the support from Suzuki Motor Corporation in providing the necessary platform and powertrain technology, the Company launched two new models XL6 and S-Presso just before the festive period. In order to cater to the growing interest of consumers in the Utilility Vehicles (UV) space, the Company launched its flagship model—Vitara Brezza—with a bigger engine and a host of other features.

Key highlights of R&D efforts during FY 2019-20 are discussed in detail in Annexure D of the Board Report.

Powertrain strategy

The emission regulations both in terms of emission standards (BSVI, CAFE etc.) and in terms of emission measurement (RDE, WLTP, IUPR, OBD etc.) are becoming increasingly stringent. In India over the next 2-3 years, major emission regulations would be in force. Consequently, the auto industry is at a crossroad now and industry players had to make hard choices over which technology to embrace and which to exit from.

An analysis suggests that continuing with diesel technology may be challenging in the long run, given the significant cost increase compared to that of petrol vehicles due to several regulations coming in succession. Improvement required to comply with BSVI norms is much higher in the case of diesel vehicles as compared to the petrol vehicles. The cost of compliance is therefore much higher in diesel vehicles.

Additionally, in the next 3 years, an emission measurement regulation (RDE) would be in force and would lead to further disproportionate cost increase in diesel vehicles compared to that of petrol vehicles.

Besides, if the fuel efficiency of diesel vehicles is to be improved for meeting CAFE norms, then the hybridisation would be required.

Cost increase due to various upcoming regulations in diesel vehicles seems to be exorbitantly high. On the other hand, the economic advantage in running cost of a diesel car over a petrol car is reducing for a customer.

Given the uniqueness of the Indian passenger vehicle industry with over 75% of sales coming from small cars, the significant increase in acquisition cost coupled with the narrowing price gap between petrol and diesel fuel prices would only mean diesel vehicles are not going to be affordable to the masses. Even before transition to BSVI standard, the share of diesel vehicles in industry sales was continuously falling from the highs of ~60% in FY 2012-13 to well below 30% in FY 2019-20, especially the industry diesel share in Q4 FY 2019-20 was lowest at ~20%. Any model or powertrain technology offered in the market should be relevant to preferences of the consumers.

Consequent to the reducing gap in fuel prices between diesel and petrol, the share of diesel models in Indian passenger vehicle market has contracted continuously.

Within the passenger car segment, the hatchback segment has lost its appeal. The diesel share in the hatchback segment declined rapidly from the highs of ~1/5th of the PV market in FY 2012-13 to a meagre ~1% in Q4 FY 2019-20. This clearly shows the hatchback segment consumers are highly price sensitive.

Declining Share of Diesel within UV Segment

The Company is watchful of big diesel engine space (1.5 litre) and would explore to re-enter the diesel space, provided customers continue to prefer diesel vehicles in that segment.

Future Powertrain Strategy of the Company

The Company always chooses the strategy that is best placed to serve the needs of consumers and also meets the national priorities of reducing vehicular emissions and enhancing energy security. To this end, the Company would pursue a wide range of powertrain options ranging from:

• Fuel efficient internal combustion engines

• Promotion of Green Fuel: CNG

• Electrification of powertrain including smart hybrids, strong hybrids and electric vehicles

A) Fuel-efficient Internal Combustion engines

The Company, with the support of its parent - Suzuki Motor Corporation, has been able to progressively improve the fuel efficiency of the Internal Combustion engines. The new generation, more fuel efficient K-series powertrain stands as a testament to the exemplary and innovative design skills of the Suzuki Motor Corporation.

B) Promoting Green fuel: CNG strategy

CNG, being an environment-friendly fuel with higher fuel efficiency and lower running cost, is best placed in meeting both the consumers interest as well as national priorities. With the increased focus of the government towards increasing the CNG distribution infrastructure across the country and diesel vehicles losing their appeal, the demand for CNG vehicles could see an upsurge in the near future.

Going forward, in order to further strengthen the competitive advantage in CNG, the Company is also exploring the possibility of localising more parts of CNG system in India. FY 2019-20 despite being a challenging year, CNG posted a growth during the year while the overall sales of the Company declined by 18%. Even in retail-sales CNG vehicles posted a growth of 6.1%. CNG is advantageous both for the customer as well as for the country.

Healthy increase in CNG outlets across the country

Average CNG stations added in a year increased by three folds in FY 2018-19 and FY 2019-20. The CNG stations in the country are expected to be doubled over the next 2-3 years. The government has already completed the bidding of 8,000 new CNG stations in various regions across the country and commissioning of the same would progressively be completed by FY 2026-27. With this, CNG distribution will cover ~75% of the population of India.

C) Electrification of Powertrain

The Company has a well laid out plan in electrifying its powertrain ranging from smart hybrids to strong hybrids to electric vehicles. The partnership between Suzuki Motor Corporation and the Toyota Motor Corporation will help the Company to gain access to hybrid technology. If the Company were to develop this technology on its own, it would take considerable time and significant investments. Also, many emission and safety related regulations are coming in the near future, thereby requiring more resources. Sourcing hybrid technology from Toyota could free up the Company resources to deploy them on other priorities. Combining the global volume of Suzuki and Toyota will provide a significant scale and make technology more comma after affordable, specially for a price-sensitive market like India.

The Suzuki Motor Corporation is not only providing its support in providing the requisite technology to manufacture hybrid and electric vehicles but also developing the battery manufacturing ecosystem in India. Some measures include investing in Indias first cell level lithium battery manufacturing, skilling people on battery manufacturing, recycling of lithium ion batteries. Further, the possibility of investing in developing electric charging infrastructure is being explored.

The Company is offering Smart hybrid versions in XL6, Ciaz, Brezza, Ertiga and Baleno models. Rigorous testing of over 50 EVs across the length and breadth of the country in various terrains and in different climatic conditions is helping the Company gather critical inputs based on actual consumer usage and will help it to develop a reliable and suitable electric vehicle for the Indian market.

Cost Optimisation

FY 2019-20 was a challenging year on the cost front. A weak demand environment led to reduced capacity utilisation and increase in sales promotion expenses, which severely impacted operating margins.

In order to partially off-set this impact, several cost reduction programmes continued throughout the year. These include localisation of direct and indirect imports, value engineering and value analysis, yield improvement, logistic cost optimisation etc.

The Company has also been working with Indian steel makers for localisation of high-tensile and galvanised steel. Introduction of alternate source for raw materials like Plastic, Aluminum Alloy etc. also helped reduce cost. The Company was also able to maximise the benefit of softening of commodities prices through better negotiation and hedging.

The Company has minimal import content but is still working on an ambitious plan to reduce it significantly and insulate the financial performance from such fluctuations.

Every year, the contribution of all employees in cost reduction drives and suggestion schemes result in significant cost savings. It demonstrates the oneness with which employees collectively work towards achieving organisational goals. During the year, the Company achieved cost savings to the tune of Rs 2,479 million on account of such efforts.

Besides, as an austerity measure, operating overheads were reduced to a greater extent by deferring or reviewing discretionary activities, curtailing travel expenses, optimising marketing expenditure and having stricter cost control.

Financial Performance

The Company registered Net Sales of Rs 716,904 million and Profit after Tax of Rs 56,506 million, a degrowth of 24.7% over the previous year.

Treasury Operations

The Company has efficiently managed its surplus funds through prudent and cautious treasury operations. The guiding principle of the Companys treasury investments is to keep safety and liquidity of investment over and above returns. In view of this, the Company invested its surplus funds in debt schemes of mutual funds. This has enabled the Company to earn reasonable and stable returns.

Abridged profit and loss account for 2019-20

(Rs million)
Parameters FY20 FY19 Change
1 Volumes (Nos.)
Domestic 1,461,126 1,753,700
Export 102,171 108,749
Total 1,563,297 1,862,449 (16.1%)
2 Gross sale of products 716,904 830,265
Vehicles 632,266 747,715
Spare parts/ dies & moulds/ components 84,638 82,550
3 Excise duty - -
4 Net sales (2-3) 716,904 830,265
5 Other operating revenue 39,202 29,938
6 Other income 34,208 25,610
7 Total revenue (4+5+6) 790,314 885,813 (10.8%)
8 Consumption of raw materials, components & traded goods 530,349 594,264
9 Employee benefit expenses 33,839 32,549
10 Finance costs 1,329 758
11 Depreciation and amortisation 35,257 30,189
12 Other expenses 118,892 123,397
13 Total expenses 719,666 781,157 (7.9%)
14 Profit before tax (7-13) 70,648 104,656 (32.5%)
15 Current tax 13,748 29,323
16 Deferred tax 394 327
17 Profit after tax (14-15-16) 56,506 75,006 (24.7%)

Table 2: Financial Performance - Ratios

(% of Net Sales)
Parameters FY20 FY19 Change
Material cost 74.0% 71.6% 2.4
Employee benefit expenses 4.7% 3.9% 0.8
Depreciation and amortisation 4.9% 3.6% 1.3
Other expenses 16.6% 14.9% 1.7
Profit before tax 9.9% 12.6% (2.7)
Profit after tax 7.9% 9.0% (1.1)
Particulars FY20 FY19 Change Remarks:
(i) Debtors Turnover (No of Times) 39 52 -25% Debtor turnover is lower this year on account of higher secured credit sales
(ii) Inventory Turnover (No of Times) 16 18 -11%
(iii) Interest Coverage Ratio 214 430 -50% Interest Coverage Ratio is lower this year due to lower profit as compared to last year.
(iv) Current Ratio 0.7 0.9 -15%
(v) Debt Equity Ratio 0.002 -
(vi) Operating Profit Margin (%) 5.3% 9.5% -45% Operating Profit Margin is lower as compared to previous year, mainly on account of lower sales volumes, higher sales promotion and depreciation expenses, partially offset by lower operating expenses and cost reduction efforts.
(vii) Net Profit Margin (%) 7.9% 9.0% -13%
Return on Net Worth 12% 16% -26% Return on Networth is lower this year due to lower Net profit as compared to last year.

Table 3 lists the investment of surplus funds while Table 4 lists the return on these surplus funds.

Table 3: Investment of surplus funds

(Rs million)
31-03-20 31-03-19
Debt Mutual Fund 358,089 354,810

Table 4: Income from investment of surplus fund

(Rs million)
31-03-20 31-03-19
Interest on fixed deposits 1 168
Net Gain on sale of investment in debt mutual funds 1,503 1,601
Fair Value gain on investment in debt mutual funds 29,413 22,681
Total 30,917 24,450

Foreign exchange risk management

The Company is exposed to the risks associated with fluctuations in foreign exchange rates mainly on import of components, raw materials, royalty payments and export of vehicles. The Company has a well-structured exchange risk management policy. The Company manages its exchange risk by using appropriate hedge instruments judiciously depending on market conditions and the view on currency.

Internal controls and adequacy

The Company has a proper and adequate system of internal control to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition, and that all transactions are authorised, recorded and reported correctly. The internal control system is designed to ensure that financial and other records are reliable for preparing financial information and other data, and for maintaining accountability of assets. The internal control system is supplemented by an extensive programme of internal audits, reviews by management, and documented policies, guidelines and procedures.

Information Technology (IT)

The Company continuously leverages the use of IT to improve the quality of business, optimise resource efficiency and receive analytical inputs to enable faster and better decision making.

New-age technologies like Artificial Intelligence and Machine Learning have been incorporated in various aspects of the business. One such initiative undertaken was the implementation of a holistic analytics driven Customer Relationship Management. Encompassing all aspects of a customers life cycle experience, it is a transformation that delivers superior customer experience and assists dealer partners with analytics-based insights for individual customers.

To translate the vast data repository that the Company possesses into business value, initiatives are being taken to establish enterprise data management and analytics platforms using Data Lake technology.

Logistics

During the year, there was a 15% increase in vehicle dispatches through rail mode. With the rail mode remaining a focus area, the Company formed joint ventures with the state governments of Haryana and Gujarat and the Indian Railways for setting up in-plant railway sidings at Manesar and Gujarat manufacturing plants. These sidings will facilitate car loading directly from the

plants, enhancing operational efficiency. This will be the first time in the country that an automobile OEM will be using an in-plant railway siding.

The increasing use of rail transport has helped reduce over

3.000 MT of CO2 emissions in the past six years as it saved over

94.000 truck trips and around 100 million litres of oil.

A Unified Digital Interface, launched during the year provides real-time tracking on the movement of cars and spare parts. This helps the dealer in planning the delivery to the customers accurately thus improving customer satisfaction. The platform also helps in monitoring the movement of import consignments and any possible delay is immediately communicated to adjust the production plan.

The Company accords high priority to the wellbeing of drivers and undertakes numerous initiatives. Regular training on state-of-the-art driving simulators to enhance driver skills in various driving conditions, behavioural training to inculcate safe driving habits and periodical medical check-up camps are year round activities in the Company. Several training programmes covering over 100,000 people have been conducted during the year.

Risk Management

While few risks are discussed hereunder, Risk management is covered in greater detail in Integrated reports section of the annual report.

Cyber security

Over the past several years the Company has made conscious and concerted efforts to counter the threat of cyber security to its business. This year it implemented GRC (Governance, Risk & Compliance) Framework to proactively and effectively combat the ever growing technological threats.

Ensuring continuity in component supplies

The Company conducts a comprehensive supplier capability assessment to identify the weak areas. Risks get identified during assessments and appropriate mitigation measures are subsequently taken with a time bound action plan. A few areas covered under comprehensive supplier assessment are ensuring fire safety, industrial relations management, quality improvement, financial prudence, water logging, succession planning, and minimising single location supply dependence.

Ensuring continuity in companys operations

In the recent past, the Company has implemented various preventive measures including some of the best fire safety practices employed by SMC, Japan. Given the increased frequency of hailstorms in recent time, the Company has taken various measures to prevent any damage to the vehicles caused by hailstorm to vehicles.

Succession planning

To tap the growth opportunity going ahead, it is imperative for the Company to groom its employees and create a talent pool. Accordingly, the Company has put in place a systematic succession planning process in place to create a talent pipeline.

Outlook

The Passenger Vehicle Industry has witnessed unprecedented de-growth this year that has not been experienced in at least the last two decades. Consequently the volumes have significantly contracted and the industry is back to volume levels of FY15. Given the outbreak of COVID-19 resulting in almost no sales in the initial months of FY 2020-21, the gradual easing of lock-down restrictions will further delay the return of normalcy in sales operation. With the most of the credible national and international research agencies lowering their projection for economic growth for FY 2020-21; the industry is apparently set for another year of dismal performance unless some bold measures are taken to revive the industry. The auto industry has a long value chain starting from Tier3, Tier2 and Tier1 suppliers which completes at sales and service outlets of the dealers which are spread all over the country and the world. A discontinuity in any one of them can lead to a discontinuity in the whole business. The Company along with the industry associations is in discussion with the government to overcome these challenges while keeping the infection from spreading. The Company has evolved some of the best safety systems and operating procedures and is continually sharing this openly while learning and improving.

During the Global financial crisis of 2008, a crisis similar or less severe than the current crisis, countries across the world unleashed revival packages to revive the auto industry. Due to its strong interlinkages with many other industries, the industry is one of the biggest employment generators in the economy and acts as a major lever to revive overall economy. Pursuing production, sales, service and keeping the economic activity running in such times will use up the best of human endeavor, innovation, execution and partnership like never before.

Disclaimer

Statements in this Management Discussions and Analysis describing the Companys objectives, projections, estimates and expectations are categorised as forward looking statements within the meaning of applicable laws and regulations. Actual results may differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations include trends in the domestic auto industry, competition, rise in input costs, exchange rate fluctuations, and significant changes in the political and economic environment in India, environmental standards, tax laws, litigation and labour relations.