Menon Bearings Ltd Management Discussions

A. INDUSTRY STRUCTURE AND DEVELOPMENTS:

Indian Economy Overview:

A decade ago, Indian economy was placed at 10^th largest economy in the world. Gradually, the economy has climbed up and today, we are the 5^th largest economy in the world with a GDP of USD 3.7 trillion in FY 2024 despite the challenges posed by the COVID pandemic. This period is often referred to as an era of metamorphic growth, with Indias economy being part of the G20s fastest-growing economies.

In January 2024, the National Statistical Office estimated that Indias real GDP growth for the 2023-24 financial year would be 7.3%, the highest among major economies. This robust performance can be attributed to strong consumption demand from the middle class, rising incomes, improved lifestyles, and urbanization.

During the first half of the financial year 2024, India witnessed noticeable growth at 7.7%, following a growth rate of 7.6% in the second quarter. This upward trend underscores the resilience of our economy and its ability to rebound during challenging times.

In the interim budget, the government increased capital expenditure to INR 11,11,111 crore (11.1%), accounting for 3.4% of Indias overall GDP. This strategic investment is expected to boost employment opportunities and drive economic growth.

Additionally, a 50-year interest-free loans scheme for capital expenditure was introduced for states with a budget capacity of INR 1.3 lakh crore. Effective budget management has led to a fiscal deficit projection of around 5.1% of GDP for this year, down from 5.8% in the financial year 2023-24.

Foreign Direct Investment (FDI) also saw substantial growth, reaching 596 billion USD between 2014 and 2023.

India aims to position itself as the third-largest economy globally, targeting a GDP of US$ 5 trillion by 2027.

The nation has further set its goal to become a US$ 7 trillion economy by 2030 while keeping a close watch on inflation, macroeconomic stability, and exchange rate while fulfilling the aspirations of Indian citizens to sustain a balanced quality of life in a safe and healthy environment.

The government aims even higher, aspiring to transform India into a developed country by 2047.

Achieving this goal hinges on continued reforms, with active participation from state governments. Reforms should extend to governance at local levels (districts, blocks, and villages), making them more citizen-friendly and conducive to small businesses. Key areas include health, education, land, and labour reforms, where states play a significant role.

Robust domestic demand has been a driving force behind Indias economic growth. Private consumption and investment have played pivotal roles, fuelled by government measures and reforms.

Investments in physical and digital infrastructure, along with efforts to boost manufacturing, have strengthened the supply side. As a result, the economy has maintained a growth rate of around 7% in recent years.

Looking ahead to FY25, real GDP growth is expected to remain close to this level.

In summary, Indias journey involves both challenges and opportunities. Continued reforms, state-level participation, and sustained domestic demand will be critical for achieving its ambitious economic goals.

Industrial Review:

The Indian auto component industry, supported by a well-established manufacturing ecosystem, manufactures a wide range of products, such as engine parts, drive transmission and steering parts, body and chassis components, suspension and braking parts, equipment, and electrical parts, among others. These components cater to the diverse needs of the dynamic automobile industry.

India is experiencing robust demand for auto components due to a global shift in supply chains. Global original equipment manufacturers (OEMs) are increasingly sourcing from India and the trend towards indigenization is making the country an attractive destination for designing and manufacturing.

Key drivers of this demand include Indias growing working population and expanding middle class. As the third- largest automobile market globally, India plays a significant role in the automotive industry.

The auto components sector contributes 2.3% to Indias GDP and provides direct employment to over 1.5 million people. By 2026, it is estimated to be worth US$ 200 billion, contributing 5-7% of Indias GDP. The Automotive Mission Plan (2016-26) aims to create direct incremental employment for 3.2 million people by 2026.

In FY23, the Indian auto component industry achieved a record turnover of US$ 70 billion, with expectations to reach US$ 200 billion by 2026. During H1 2023-24, the turnover of the automotive component industry grew 12.6% year-on-year, reaching US$ 36.1 billion (Rs. 2.9 lakh crore).

In the fiscal year 2024 (April-January), India sold 19.72 million units, reflecting a 16% year-on-year growth compared to 16.99 million units during the same period previous year.

Notably, India surpassed Japan in new auto sales in 2022, becoming the third-largest market for the first time, as reported by Nikkei Asia.

India is emerging as a global hub for auto component sourcing, with over 25% of its production exported annually. During H1 2023-24, the industry exported US$ 10.4 billion and imported US$ 10.2 billion worth of components, resulting in an export surplus of US$ 200 million.

The electric vehicle (EV) market is also gaining traction. By 2025, an estimated 4 million EVs could be sold annually, increasing to 10 million by 2030. The EV market is projected to reach US$ 206 billion.

Furthermore, the aftermarket for auto components grew by 7.5% during H1 2023-24, reaching Rs. 45,158 crore (US$ 5.43 billion). By 2026, the automotive aftermarket segment in India is expected to reach US$ 32 billion by 2030

Achievements:

• Major global OEMs have made India a component sourcing hub for their global operations.

• India is also emerging as a sourcing hub for engine components with OEMs increasingly setting up engine manufacturing units in the country.

• The turnover of the automotive component industry grew 32.8% to Rs. 5.6 lakh crore (US$ 69.7 billion) during 2022-23 compared to the previous year and is expected to reach US$ 200 billion by FY26.

• Establishing special auto parks & virtual SEZs for auto components

• Lower excise duty on specific parts of hybrid vehicles

• Policies such as Automotive Mission Plan 2016-26, Faster Adoption & Manufacturing of Electric Hybrid Vehicles (FAME, April 2015) and NMEM 2020 are likely to infuse growth in the auto component sector of the country.

• PLI schemes has been extended to the automobile sector with an aim of creating an incremental output of Rs. 2,31,500 Crore ( US$ 31.08 billion).

• The Government announced National Mission on Transformative Mobility and Battery Storage based on phased manufacturing program (PMP) until 2024.

Road Ahead- Futuristic Outlook:

The growth of global OEM sourcing from India & increased indigenisation of global OEMs are turning the Country into a preferred designing & manufacturing base.

With the Self-Reliant India mission, the auto industry is looking to half its INR 1 trillion (US$ 13.6 billion) worth of auto component imports over the next 4-5 years. This will provide significant opportunities for existing and new auto components players to scale up.

Growth in working population & middleclass income will drive the market.

The Indian automobile sector recorded an inflow of huge investments from domestic and foreign manufacturers. FDI inflow in the sector stood at US$ 35.65 billion between April 2000 and December 2023 which is around 5.35% of the total FDI inflows in India during the same period.

Production Linked Incentive (PLI) Schemes for 14 key sectors have been announced with an outlay of US$ 23.84 billion (INR 1.97 lakh crore) to enhance Indias Manufacturing capabilities and Exports.

Both Indian & global manufacturers are investing in new capacities & newer programmes to get long term advantage.

As markets in North, West & South of India are getting saturated, component manufacturers are eyeing untapped markets.

Increased investments in setting-up R&D operations & laboratories to conduct activities such as analysis, simulation & engineering Animations.

Several global Tier-I suppliers have also announced plans to increase procurement from their Indian subsidiaries.

On 2^nd January 2024, the Union Finance Ministry allocated US$ 180.3 million (INR 1,500 crores) to the second phase of Indias FAME-II program.

Presence of a large pool of skilled & semi-skilled workforce amidst a strong educational system.

The Indian government has outlined US$ 7.8 billion for the automobile and auto components sector in production-linked incentive (PLI) Scheme under the Department of Heavy Industries. They are expected to bring a capex of INR 74,850 crore (US$ 9.58 billion) in the next five years.

The Bharat New Car Assessment Program (BNCAP) will not only strengthen the value chain of the auto component sector, but it will also drive the manufacturing of cutting-edge components, encourage innovation, and foster global excellence.

By FY28, the Indian auto industry aims to invest US$ 7 billion (INR 58,000 crore) to boost localization of advanced components like electric motors and automatic transmissions, reducing imports and leveraging China Plus One trend.

B. OPPORTUNITIES AND THREATS:

The Opportunities ahead:

High Entry Barrier: Higher gestation in product approval cycle among buyers due to technical nature of the products.

No Capacity Constraint: Land parcel available for future growth expansion in newer products segments to capture market growth.

Diversified Product Portfolio: Capabilities of manufacturing wide range of products and entering into new supplementary products segments.

Long Standing Relationship: Long standing relationships with customers with approvals in place.

New Technological Changes and the trend of outsourcing may gain traction.

Increasing focus on the After Market, aggressive export and import substitution.

Wide product portfolio catering to multiple sector, thereby de-risking the cyclical nature of any industry.

Threats:

Economic downturn: A slowdown in the economy can lead to reduced consumer spending and lower demand for automobiles, which in turn affects the demand for auto components.

Technological advancements: Rapid advancements in technology, such as electric vehicles and autonomous driving, can disrupt the traditional auto component industry. Your Company caters to heavy segments like Mines, Tractors, LCV / HCV etc. which are less challenged from the EV Segment.

Intense competition: The auto component industry is highly competitive, with numerous players vying for market share. Companies need to continuously innovate, improve efficiency and offer competitive pricing to stay ahead.

Currency fluctuations: Fluctuations in currency exchange rates can impact the cost of imported raw materials and components, affecting the profitability of auto component manufacturers.

Exports: The export revenues impact due to geopolitical disruptions and the international inflationary environment.

Future Challenges:

Technological advancements: With the rapid evolution of technology in the automotive sector, auto component manufacturers will need to keep up with the latest advancements. This may require investments in research and development, upskilling the workforce, and adopting new manufacturing processes.

Changing regulations: The automotive industry is subject to various regulations related to safety, emissions and fuel efficiency. Auto component manufacturers will need to stay updated with these regulations and ensure compliance, which may require adjustments to their production processes and product offerings.

Global competition: The auto component industry in India faces competition from both domestic and international players. To remain competitive, manufacturers will need to focus on quality, cost-efficiency, and innovation. They may also need to explore collaborations and partnerships to access new markets and technologies.

Supply chain disruptions: The COVID-19 pandemic highlighted the vulnerability of global supply chains. Auto component manufacturers will need to build resilience in their supply chains, diversify sourcing strategies and ensure continuity of operations even during unforeseen disruptions.

Sustainability and environmental concerns: There is an increasing emphasis on sustainability and environmental responsibility in the automotive industry. Auto component manufacturers will need to adopt eco friendly practices, such as reducing waste, improving energy efficiency and exploring alternative materials.

C. SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE:

The segment-wise products consist of Original Equipment (OEM), After Market and Exports. The Company has a strong share of business in the OE Segment and has been upgrading its capabilities to stay technologically relevant to the segment. In the After Market and Export Segments, the Company supplies parts for several applications. The Companys constant endeavour to upgrade technology and reduce costs has been its strength. The products manufactured consist of bearings, bushes, thrust washers, strips and aluminium die casting components. OEM and Exports both segments have shown improvement.

D. OUTLOOK:

The increase in the demand for the Companys products used in segments like heavy vehicles, tractors, electrical and strips are expected to offer good opportunities for the Company coupled with effective cost control measures undertaken. Your Company has commenced its actions to be part of this change with appropriate product and solutions for customers. The outlook for the year is expected to be higher throughout the year.

E. RISKS AND CONCERNS:

The Board of Directors regularly overviews external and internal risks associated with the operations of the Company and carries out its impact assessment and effective implementation of the mitigation plans and risk reporting is conducted.

F. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has in place proper and adequate Internal Audit System that promotes reliable financial reporting, safeguards assets, encourages adherence to fair management and ethical conduct. Additionally, the Company has in place proper and adequate internal control systems which have been designed in a way that, they not only prevent fraud and misuse of the Companys resources but also protect shareholders interest. Internal control systems comprise of policies and procedures which are designed to ensure reliability of financial reporting, compliance with policies, procedures, applicable laws and regulations. The Audit Committee of the Board of Directors, on regular intervals and in co-ordination with Internal and Statutory Auditors, reviews the adequacy of internal control systems within the Company.

Based upon the recommendations of the Audit Committee, an Annual Audit Plan (AAP) is prepared and is reviewed periodically by the top management and the Audit Committee. The internal audit focuses on compliances as well as on robustness of various business processes. A feedback on non-conformities along with recommendation for process improvements is directly provided to the top management of the Company. Compliance on audit findings and tracking of process improvements is regularly carried out.

G. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE:

Financial Performance:
Financial Year	Income (INR in Lakh)
2020	14,035.59
2021	15,090.09
2022	19,800.38
2023	21,986.34
2024	21,442.27

 

Financial Year	PBT (INR in Lakh)
2020	1,960.67
2021	2,487.17
2022	3,235.14
2023	4,250.78
2024	3,313.92

 

Financial Year	PAT (INR in Lakh)
2020	1,439.80
2021	1,880.00
2022	2,453.38
2023	3,260.18
2024	2,435.50

 

Financial Year	EPS ( INR )
2020	2.57
2021	3.35
2022	4.38
2023	5.82
2024	4.32

H. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED:

Development in Human Resources:

Since its inception, your Company has always viewed its employees as its great strength. The Company strives to develop the most superior workforce so that it can accomplish along with the individual employees, their work goals and services to its customers and stakeholders. Our fundamental belief in immense power of human potential and team work is epitomised in our WE approach. To us, WE represents a strong collective energy. A transformational force that stimulates enterprise accelerates our constant pursuit of excellence and empowers our people to realise their full potential. The Company also believes human resources as the supporting pillars for the organizations success. As on 31^st March, 2024, the Company had 243 permanent employees.

Development and Up-gradation of Technology:

All the staff members working in manufacturing departments have been advised to take different projects:

I. To reduce rejection and wastage in raw materials and consumables;

2. To reduce setting time and to focus on production;

3. To maximise automation to increase productivity;

4. To optimize production activities to reduce electrical energy per unit of production;

5. To work on packaging to enhance preservation and safety;

6. To develop new items in shortest possible time to have early business; and

7. To increase yield and to take it up to optimum level to reduce raw material cost.

This is an ongoing process and projects are getting completed one by one and new projects are being undertaken. This has resulted in increase in both top as well as bottom line.

Global Approach:

The Company trusts its capabilities to capture every opportunity of business in the global arena. Your Company is globally positioned with business activities spanning 24 countries around the globe. Exporting about 30% of its production, it enjoys strong brand equity among leading OEMs all over the world.

Forward Looking Statements:

Certain statements in this Management Discussion and Analysis Report describing the Companys objectives, projections, estimates, expectations or predictions may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ from those expressed or implied therein. Important factors that could make a difference include raw material availability and prices thereof, cyclical demand and pricing in the Companys principal markets, changes in Government regulations and tax regime, economic developments within India and the countries in which the Company conducts business and other incidental factors.

I. DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS, ALONG WITH DETAILED EXPLANATIONS THEREFOR:

Key Financial Ratios:

In accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Company is required to give details of significant changes (change of 25% or more as compared to the immediately previous financial year) in key sector specific financial ratios. The Company has identified following ratios as key financial ratios.

Ratios	2023-24	2022-23	% change
Debtors Turnover	4.03	4.31	-6.50
Inventory Turnover	7.39	7.60	-2.76
Interest Coverage Ratio	11.14	15.60	-28.59
Current Ratio	1.97	2.27	-13.22
Debt Equity Ratio	0.23	0.11	109.09
Operating Profit Margin (%)	15.46	19.33	-20.02
Net Profit Margin (%)	11.36	14.83	-23.40

The Company taken term loan during this year to the tune of INR 22 Crore from Bajaj Finance Limited; this is why Interest Coverage Ratio and Debt Equity Ratio have been affected.

J. DETAILS OF ANY CHANGE IN RETURN ON NET WORTH AS COMPARED TO THE IMMEDIATELY PREVIOUS FINANCIAL YEAR ALONG WITH A DETAILED EXPLANATION THEREOF:

Return on Net Worth in the financial year 2023-24 is 16.78% as compared to 24.45% in the immediately preceding financial year 2022-23. During the financial year under review, return on Net Worth decreased by 31.39% as compared to immediately preceding financial year mainly because of decrease in profits.