Today's Top Gainer
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Industry Structure and Development and Outlook
The Company is in the ball and roller bearing business for the requirements of the mobility industry which has Original Equipment Manufacturers (OEMs) accounting for 65% -70% of the demand while the rest is supplied to the Aftermarket (12% -15%) and Exports (20% - 25%). OEMs comprise domestic and global vehicle manufacturers in the following broad segments:
- 2/3 wheelers comprising motor cycles, scooters, mopeds, auto rickshaws ( passenger & goods) and industrial 4 stroke engines
- passenger cars from small car hatchbacks to luxury models and utility vehicles
- commercial vehicles from LCVs, MCV/HCV to buses
- farm equipment and off highway vehicles including forklift trucks and construction equipment
- railway locomotives.
- defence vehicles including gun carriers and tanks
- aircraft and aerospace applications
Market growth in the Indian mobility industry for both people and goods has a very large potential given the geographical spread and size of population- personal mobility is spurred by the increasing disposable incomes and higher rural incomes of an aspirational young population, given the relatively low current penetration, while growth in the goods mobility segment is being driven by the need to establish strong supply chains between producers and markets.
The annual production of the domestic organized sector (as represented under Ball & Roller Bearing Manufacturers Association-BRBMA) has grown to Rs. 6300 crores for the year 2017-18. Your Companys market share in the domestic organized sector is 13% approximately.
FY 2017-18 started on a weak note with the market trimming purchases in anticipation of GST which was to become effective 1st July, 2018. Thereafter, the good monsoons gave a boost to the rural economy, the global environment turned positive and with the increased spend on infrastructure upgradation, consumer demand revived resulting in manufacturing activity accelerating. Strong FDI inflows continuing at $ 60 billion and continuing IIP growth momentum have led to expectations that GDP growth will be 6.7% in FY 18, rising to 7.4 % and 7.8% in the next two years.
Globally, elevated crude prices , rising protectionism and geopolitical risks remain a threat during FY 2018-19. The Indian economy outlook is optimistic considering IMD forecasts of a second year of normal monsoon, average inflation down to 4.5%, interest rates remaining soft, increased government spends for expanding the public transport systems and building dedicated freight corridors for movement of farm produce and goods from and to the rural areas.
As the private sector investment cycle gains strength with the expected growth in demand in almost all segments of the Indian automotive industry, aided by the "Make in India initiative with its boost for manufacturing for defence, aerospace, etc and concrete measures to improve ease of doing business, India has emerged as one of the most preferred locations in the world for manufacturing high quality auto components and vehicles of all kinds. The Indian automotive industry and the bearings industry are expected to be major beneficiaries of this expected growth
During 2017-18, all vehicle segments witnessed robust growth in double digits, except the passenger car segment which showed growth, albeit at a lower rate. Overall, industry growth has been 15% with growth in production driven by economic activity upswing for the commercial vehicles, strong rural demand fueled by the income growth for 2/3 wheelers, new model launches for passenger cars and good rainfall for the farm segment. Tabled below are growth estimates for 2018-19 projected by the Company, after assessing demand forecasts with all major OEMs:
Vehicle Production (Nos)
|User Industry||2017-18||2016-17||% growth||2018-19|
|Passenger Cars||2739899||2711911||5.4||} 25|
Source: SIAM for 2016-17 and 2017-18 production data and Company estimates Financials
Revenue from operations, net of levies, has increased by 18% to Rs. 83056 lacs from Rs. 70669 lacs in 2016-17. Domestic sales increased by 13% to Rs. 65047 lacs from Rs. 57606 lacs while exports have increased by 32% to Rs.16957 lacs from Rs. 13292 lacs in 2016-17.
The table below sets forth the key expense items as a percentage of net revenues for 2017-18 and 2016-17. Margins have been higher owing to higher volumes leading to lower employee and expense payments.
|31st March, 2018||31st March, 2017|
|Revenue from operations (net of excise duty)||83056 (100%)||70669 (100%)|
|- Material (Including change in stock) %||42.78||42.10|
|- Employee Cost %||15.44||16.59|
|- Manufacturing and Other expenses (Net) %||22.20||25.29|
|Total Expenditure %||80.42||83.98|
|Profit before Depreciation, Interest and Tax %||19.58||16.02|
|Finance costs (Net) %||1.72||2.32|
|Profit before Exceptional Items and Tax %||14.49||9.56|
Benchmarked against other large players in the domestic bearings industry, your Companys performance compares favourably for certain ratios as below:
|Ratio/||NRB||SKF||SCHAEFFLER (I) Ltd.|
|Year Ended||31st March, 2018||31st March, 2018||31st December, 2017|
|Operating Profit to Net Sales - %||18.42||17.79||18.8|
|RONW-PAT/Net Worth - %||21.0||16.10||15.0|
|ROCE -EBIT/Cap employed - %||22.8||26.68||21.4|
* For SKF, FAG F. V. Rs.10/- per share and for NRB F. V. Rs.2/- per share
Economic Value Addition
EVA is residual income after charging the Company for the cost of capital provided by the lenders and shareholders. It represents the value added to the shareholder by generating operating profits in excess of the cost of capital employed in the business.
Rs. In Lakhs
|Less: Adjusted Tax||4657||2906|
|NOPAT (Net Operating Profit less tax)||8800||5490|
|Total Invested Capital||59398||60029|
|Post Tax Cost of Debt %||3.99||3.42|
|Cost of Equity %||11.50||11.30|
|Weighted Average Cost of Capital % (WACC)||8.93||7.87|
|Weighted Average Cost of Capital (WACC)||5302||4724|
|EVA (NOPAT - WACC)||3498||766|
Notes: Tax calculation excludes deferred tax and is adjusted for tax shield on interest.
Cost of equity is based on cost of risk free return equivalent to yield on long term government bonds @ 7.0% p.a. plus equity premium adjusted for Companys beta variant. The equity premium is assumed @ 9% while the beta is considered at 0.5.
The Companys EVA, which is a real measure of shareholdersvalue creation, has significantly improved during the year.
Higher yields on long terms Government Bonds increased the cost of equity, but Capital Employed in the business has reduced with lower debt levels, resulting in higher weighted average cost of capital employed. EVA is higher on the previous year arising from 60% increase NOPAT.
Segment wise Performance
Your Company has a single reportable segment of ball and roller bearings as the primary business segment for the purpose of AS 17. The assets and liabilities of the Company are all expended towards this business segment.
Opportunities and Threats
- AMP 2026 ( Automotive Mission Plan II ) envisions that by 2026 the Indian auto industry will be among the top three in the world in terms of engineering, manufacturing and export of vehicles as well as auto components, targeting a growth 3.5 to 4 times its current output, growing in value to over 12 percent of Indias GDP and generating an additional 65 million jobs.
- Potential to scale up exports to the extent of 35-40% of overall output in the next 10 years and become one of the major automotive export hubs of the world.
- Automotive industry fortunes directly impact the fortunes of several related manufacturing industries, from Iron & Steel
to Aluminium, Lead, Plastics, Rubber, Glass, Machine Tools, Moulds & Dies and also several in Services sector like logistics, banking & Insurance, Sales & Distribution, Service & Repairs and Fuels and therefore attracting significant quantum of investments from global and local OEMs as well as Government incentives.
- AMP II seeks to achieve healthy balance between the human aspiration of personal transport and the efficiency of public transport.It is imperative to develop quality public transportation uniformly across India, given its present relatively poor quality and reliability, to provide a choice to the consumer to access multiple options of mobility.
- Boost for farm equipment requirements is imminent with expectations of a near normal monsoon, technology aiding improvement in productivity systems, micro-irrigation intensifying and financing for the same being readily available and at lower affordable rates.
- Most of the worlds large vehicle manufacturers have set up base in India and are expanding capacities with a thrust on localisation to improve competitiveness.
Your Company has the largest product range in the domestic market and has been investing in technology development and building competencies for skilled based manufacturing. Having won customers confidence by leveraging innovative ideas, creative engineering and comprehensive manufacturing expertise we are well positioned to take advantage of the revival in demand.
Spurious / Counterfeit products continue to attract price sensitive Replacement Market which accounts for 25-30% of total demand of bearing industry. These supplies , being of inferior quality, are unsafe in use and pose a risk to people, industry and to the economy by way of unexpected downtime and are safety hazards. In spite of industry wide efforts in educating customers and increasing awareness about the need to use safe sources of procurement, the problem continues owing to the slow legal process in punishing unscrupulous suppliers. There is an industry wide effort to control the same.
The next generation of cars are likely to be "computers on wheels " with the switch to alternate fuels eg. electric/hybrid vehicles. The Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) India scheme bei ng implemented by the Government also addresses technology development and commercialization aimed at making the electric/hybrid vehicles (xEV) market self sustaining. The entire industry will have to readjust to the changing scenarios.
Regulatory demands on emission levels and improved safety norms is driving Indian industry to shift their focus on reducing vehicle weight and opt for lower friction technologies. Customers are demanding higher fuel efficiency, improved manoeuvrability, lighter weight, intelligent vehicle control and of course low noise and improved reliability from their vehicles. Company will need regular investments in R & D, new technology and even new production facilities to meet these requirements. Indian industry will need to capitalize on its competitive advantages of an economical and large skilled workforce for establishing R & D capabilities to leap frog into the future by getting into such hi-tech businesses.
Your Company is working continuously to mitigate these threats - leveraging its wide range of products and its Engineering capabilities and priming its sourcing and purchasing capabilities. The Company remains committed towards implementing TPM and investing in sophisticated technology to offer enduring and efficient solutions.
Risks and concerns
Risk management practices seek to sustain and enhance long term competitive advantage of the Company.
The Board of Directors looks at risks which are mainly reputational and where the risk grid shows criticality. For the risk grid, the risks have been listed, then prioritised and ranked in terms of probability and impact- high/moderate/low. Wherever possible, triggers are being identified, even multiple triggers, which would help decide when a risk has become critical - eg. Euro Dollar rate changing to 1.00 or USD INR rate exceeding a specified risk point.
The Board also approves the risk policies and associated practices of the Company, reviews and approves risk related disclosures. Otherwise in a normal situation, the operating team would be responsible for all operational risks. At the operating level the core group of the Executive Management team comprising the Managing Director and the functional Heads review enterprise risks from time to time, initiate mitigation actions and identify owners for the action to be taken.
The following broad categories of risks have been considered :
Strategy : Choices and decisions we make to enhance long term competitive advantage of the Company and value to the stakeholders eg. the Companys shift from bearing related products to becoming a friction solutions provider.
Industry : Relates to the inherent characteristics of our industry including competitive structure, nature of market and regulatory environment. Eg. adding to existing segments, the emerging segments of defence, aerospace and railways and improving its presence in the ASEAN region, thus spreading the risk in terms of geographies.
Counterparty : Risks arising from our association with entities for conducting business. These include customers, vendors and their respective industries.
Resources : Risks arising from sub-optimal utilization of key organization resources such as capital and infrastructure. Eg. risks further broken up into equipment risk and people risk. With insurance covers in place for the equipment, the management of people risks by way of a cordial relationship with the employees and keeping motivation in the plants at a high level.
Operations : Risks inherent to our business operations includes service & delivery to customers, business support activities like NPD, TPM, Quality management, IT, Legal, Taxation eg. plants having detailed plant maintenance and tool manufacturing programs, dedicated teams for managing risks relating to information security (data leakage, cyber security attacks from malware), and technology disruption risks and constantly researching how new technologies are changing the applications and products.
Regulations and compliance : Risks due to inadequate compliance to regulations and contractual obligations violations leading to litigation and loss of reputation.
The business environment is expected to improve during the year, with economic performance helped by well managed fiscal deficits, forecast of a near normal monsoon and Government initiatives to increase the spend on rural infrastructure and the Make in India drive to boost manufacturing. The automotive industry, the largest consumer of bearings, has strong linkages with the economy and should benefit from the same.
Management of financial risks such as interest rates risk, currency risk and liquidity risk, have come in for increased focus. Various measures were deployed to continuously monitor risks and take appropriate actions to mitigate the same.
Internal Control Systems and Adequacy
Based on the nature of the business and size of operations the Company has in place adequate systems of internal control and documented procedures covering all financial and operating functions. These controls have been designed to provide for
- Accurate recording of transactions with internal checks and prompt reporting
- Safeguarding assets from unauthorized use or losses
- Compliance with applicable statutes, and adherence to management instructions & policies
- Effective management of working capital
- Monitoring economy and efficiency of operations
Processes are also in place for formulating and reviewing annual and long term business plans and for preparation and monitoring of annual budgets for all operating plants and the service functions.
A reputed external audit firm carries out periodical audits at all plants and of all functions and brings out deviations from laid down procedures. The audit firm independently tests the design, adequacy and operating effectiveness of the internal control system to provide a credible assurance to the Audit Committee. The observations arising out of audit are reviewed, in the first instance by the respective HODs and plant/functional heads and compliance is ensured. Further corrective action plans are drawn up to build business processes which will eliminate repetition of deviations. Business risks are managed through cross functional involvement, facilitated by internal audit and the results of the assessment are presented to senior management.
The Audit Committee reviews the recommendations for improvement of the business processes and the status of implementation of the agreed action plan.
Human Resource and Industrial Relations
Overall relations with the workmen at all plants have been cordial during the year and the Company has contained its employee costs, benefiting from the wage settlements which have linked incentive payments to increase in overall production volumes (net of rework) and reduction in rejection rates.
There have been settlements with the Workmen Unions at Thane, Waluj and Jalna Plants, all with wage increases linked to productivity improvements, multi machine working and with penalties for non-achievements of quality and productivity as agreed. The settlements, all valid for 3 years, will expire between July and November 2020 and involve a financial impact of Rs. 10.3 crores annually from FY 2018-19. These settlements, with committed productivity increases of 18-20% were an enabling factor in the management drive for higher outputs during FY 2017-18, and are expected to help sustain the higher outputs during FY 2018-19.
The primary focus of IR during the current year will continue to be on the engaging, motivating and improving the productivity of blue collar employees and finalizing new settlements while ensuring improved productivity & product quality at the Thane, Waluj and Jalna plants and without any interim work disruptions. The company has ambitious sales revenue and proft targets budgeted for the year and its people approach, encouragement of team work should enable its achievement.
Employment of young talented GETs and Management trainees, who currently constitute over a fourth of the companys employees and make it a forward looking young organization (average age 39 yrs) and to harness their potential, we have multi phased training programs imparting understanding of bearing and engineering principles, diverse bearing applications, modern manufacturing practices, lean management and quality management and in behavioural aspects and providing an understanding of the Companys customers and markets. Besides developing knowhow building managerial and technical capabilities to align with career aspirations, they also serve as a platform to interact with peers from diverse backgrounds and spread the values of togetherness, positive thinking and mutual respect.
SPEED : System of Performance Evaluation and Employee Development, the framework for Individual Development Planning, Career and Succession Planning maps employee competence with current and future needs of the organization and forms the basis for developmental interventions. As part of its plan to build a bench strength of talented future leaders of tomorrow, the company has campus recruited engineering trainees from reputed engineering colleges and Indo German Toolroom, and other interns from Ashoka University, IIT, Mumbai, etc. who are deployed on effciency improvements and cost control exercises through out the company.
Permanent employees directly employed by the Company currently total 1557 nos.
Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may constitute forward looking statements within the meaning of applicable laws and regulations.
Actual results may differ materially from those either expressed or implied.