NRB Bearings Ltd Management Discussions.

Industry Structure and Development

The Company is in the ball and roller bearing business for the requirements of the mobility industry which has Indian Original Equipment Manufacturers (OEMs) and Tier I customers accounting for 65 per cent -70 per cent of the demand while the rest is supplied to the Aftermarket (12 per cent -15 per cent) and Exports (20 per cent -25 per cent). Exports is predominantly to OEMs and Tier I customers. Other than the Aftermarket, vehicle manufacturers comprise of the following broad segments:

• 2/3 wheelers comprising motor cycles, scooters, mopeds, auto rickshaws (passengers and goods) and industrial 4 stroke engines

• Passenger cars from small cars hatchbacks to luxury models and utility vehicles

• Commercial vehicles from LCVs, MCV/HCV to buses

• Farm equipment and off highway vehicles including forklifts 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, size of population and the current low penetration. Growth in the goods mobility segment is being driven by the need to establish strong supply chains between producers and markets. Improvements in road infrastructure would help this area of business.

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of 2018, reflecting a confluence of factors affecting major economies. Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The euro area economy lost more momentum than expected as consumer and business confidence weakened and external demand, especially from emerging Asia, softened. Trade tensions increasingly took a toll on business confidence and financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets and advanced economies.

The Indian economy started the fiscal year 2018-19 with a healthy 8.2 per cent growth in the first quarter on the back of domestic resilience. Growth eased to 7.3 per cent in the subsequent quarters due to rising global volatility, largely from financial volatility, normalized monetary policy in advanced economies, externalities from trade disputes, and investment rerouting. Further, in the first half of FY19 the Indian rupee suffered because of the crude price shock, and conditions exacerbated as recovery in some advanced economies caused faster investment outflows. The rupee recovered in the latter half though the global growth remained muted. Despite the global scenario, the Indian economy remains one of the fastest growing. In fact, the effects of the aforementioned external shocks were contained in part by Indias strong macroeconomic fundamentals and policy changes (including amendments to the policy/code related to insolvency and bankruptcy, bank recapitalization, and foreign direct investment).

These projections could be attributed to the sustained rise in consumption and a gradual revival in investments, especially with a greater focus on infrastructure development. The improving macroeconomic fundamentals have further been supported by the implementation of reform measures, which has helped foster an environment to boost investments and ease banking sector concerns. Together, these augur well for a healthy growth path for the economy.

The automobile industry in India is worlds fourth largest, with the country currently being the worlds fourth largest manufacturer of cars and seventh largest manufacturer of commercial vehicles in 2017. Indian automotive industry (including component manufacturing) is expected to reach Rs. 16.16-18.18 trillion (US$ 251.4-282.8 billion) by 2026. The automobile industry produced a total 30,915,420 vehicles including passenger vehicles, commercial vehicles, three wheelers and two wheelers in April 2018-March 2019 as against 29,094,447 in April 2017-March 2018, registering a growth of 6.26 per cent over the same period last year.

In April 2018-March 2019, overall automobile exports grew by 14.50 per cent. While Passenger Vehicles exports declined by (-) 9.64 per cent, Commercial Vehicles, Three Wheelers and Two Wheelers registered a growth of 3.17 per cent, 49.00 per cent and 16.55 per cent respectively in April 2018-March 2019 over the same period last year.

Source: International Monetary Fund, IBEF, SIAM

Vehicle Production (Nos.)

Category 2018-19 2017-18 % Growth % Growth Expected in 2019-20
2-Wheelers
Motorcycle 16,502,734 15,159,700 8.86%
Scooter 7,095,163 7,117,795 -0.32% 5-7%
Mopeds 905,189 869,562 4.10%
Total 24,503,086 23,147,057 5.86%
3-Wheelers 1,268,723 1,022,181 24.12%
Passenger Cars 2,710,057 2,746,658 -1.33%
MUV/MPV 1,315,990 1,273,609 3.32% 3-5%
HCV/MCV 444,202 344,592 28.91%
LCV 667,974 550,856 21.26% 10-12%
Total 30,910,032 29,092,734 6.26%

Source: SIAM

The auto-components industry accounts for 2.3 per cent of Indias Gross Domestic Product (GDP). Auto Components industry exports, which is currently valued at USD 13.5 bn, is expected to grow at an annual rate of 23.9 per cent to reach USD 80 bn by 2026. USA, Germany, Turkey, UK, and Italy are the top destinations for exports.

Source: IBEF

Growth drivers of the Auto comp industry:

• Expanding R&D hub

India accounted for 40 per cent of global engineering and R&D activities

• Emerging global sourcing hub

Proximity to markets such as ASEAN, Europe, Japan and Korea

• Cost competitive

Excise duty reduction in vehicles will spur demand

• Fourth largest vehicles manufacturer in the world India expected to be the third largest market by 2026

• Favorable trade policy

100 per cent FDI allowed and no restrictions on import-export

The auto components sector has been observing robust growth with a turnover of US$ 51.2 billion in FY18 and turnover is anticipated to reach US$ 200 billion by FY26. Indias exports of auto components could account for as much as 26 per cent of the market by 2021. Favourable government policies such as Auto Policy 2002, Automotive Mission Plan 2016-2026, National Automotive Testing and R&D Infrastructure Projects (NATRiPs), have helped the Indian auto components industry achieve considerable growth. The government has also extended the FAME Scheme from September 2018 to March 2019, largely benefiting electric public transportation and personal use hybrid vehicles.

India is emerging as global hub for auto component sourcing. A cost-effective manufacturing base keeps costs lower by 1025 per cent relative to operations in Europe and Latin America. Relative to Chinese suppliers, India is geographically closer to key automotive markets like the Middle East and Europe.

Financials

During the year under review Revenue from operations, net of levies, has increased by 13.2 per cent to Rs. 94,021 lacs from Rs.83,063 lacs in 2017-18. Domestic sales increased by 11.8 per cent Rs.72,767 lacs from Rs. 65,082 lacs while exports have increased by 17.5 per cent to Rs.19,821 lacs from Rs. 16,860 lacs in 2017-18.

The table below sets forth the key expense items as a percentage of income for 2018-19 and 2017-18. Margins have been higher owing to higher volumes leading to lower employee and expense payments.

% of Turnover -Year ended March 31

2019 2018
Revenue from operations (net of excise duty) 94021 (100%) 83063 (100 %)
Other income 691.23 1151.54
Expenditure:
- Material (Including change in stock) 41.38 42.78
- Employee Cost 13.00 13.39
- Manufacturing and Other expenses (Net) 28.05 28.65
Total Expenditure 82.43 81.82
Profit before Depreciation, Interest and Tax 17.57 18.18
Depreciation 3.39 3.37
Finance costs 1.50 1.72
Profit before Exceptional Items and Tax 13.42 14.48
Exceptional Item 1.76 0.00

Benchmarked against other large players in the domestic bearings industry, your Companys performance compares favourably for certain ratios as below:

Ratio NRB SKF India Timken India Schaeffler India
Year Ended 31.03.2019 31.03.2019 31.03.2019 31.03.2019
Operating Profit (EBITDA) to Net Sales - % 20.07% 16.01% 17.34% 18.20%
RONW-PAT/Net Worth - % 20.84% 19.78% 11.08% 15.51%
ROCE -EBIT/Cap employed - % 27.68% 29.76% 16.54% 24.79%
EPS * 10.19 16.63 66.03 134.30

* For SKF, Schaeffler, Timken F. V Rs.10/- per share and for NRB F. V Rs. 2/- per share Source: Information disclosed in public domain

Economic Value Addition

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 ofthe cost of capital employed in the business.

(Rs. In Lacs)
2018-19 2017-18
EBIT 15682 13457
Less: Adjusted Tax 4391 3840
NOPAT (Net Operating Profit less tax) 11291 9617
Equity 47401 39034
Debt 25875 20364
Total Invested Capital 73276 59398
Post Tax Cost of Debt % 3.98 3.99
Cost of Equity % 11.28 11.50
Weighted Average Cost of Capital % (WACC) 8.70 8.93
Weighted Average Cost of Capital (WACC) 6376 5302
EVA (NOPAT - WACC) 4915 4315

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 10 year G-secs @ 7.2 per cent p.a. plus equity premium adjusted for Companys beta variant at 0.85.

The Companys EVA, which is a real measure of shareholders value creation, has improved during the year.

Segment wise Performance

The Company has a single reportable segment of ball and roller bearings as the primary business segment for the purpose of IND AS 108. The assets and liabilities of the Company are all expended towards this business segment.

Outlook

The ancillary industry has set targets to achieve by 2026 ; to double the contribution to manufacturing GDP with a four-fold growth in size and a six-fold growth in exports. At present, the auto components industry accounts for 2.3 per cent of Indias GDP and has a share of 4 per cent share in countrys exports.

But the reality is more than what meets our eye. The global automotive industry is at an inflection point today, facing stark headwinds by a variety of disruptive megatrends that can broadly be categorised into three - electrification, connected technologies and autonomous mobility. There is a pronounced shift towards cleaner, greener, and smarter mobility across the globe, thanks to rapid pace of climate change and sprawling urbanisation woes - India being no exception. The disruptions are questioning the status quo in the automotive sector that was prevalent for over a century, ushering both challenges and new opportunities for the stakeholders including OEMs and suppliers.

Critical trends

As the industry gears to ramp up performance in India and globally, the following are shaping the industry:

• Constantly shifting market dynamics due to changing manufacturing locales, customer demands, operating models and priorities

• Changing needs of OEMs, who are likely to want different, and more agile component inputs, while demand, timelines and processes keep shifting

• Technological improvements and discontinuities that are already starting to change revenue pools, trigger new competition and invite new forms of co-operation

• An evolving regulatory and trade environment forming the backdrop for it all Source: Mckinsey

Opportunities and Threats Opportunities

• Pursue export opportunities aggressively

• Enhance import substitution

• Offer premium features at lower costs at a rapid pace

• Focus on component categories that could contribute more to vehicle costs

• Expand aftermarket products to capture value from existing vehicle parts and aftermarket exports

• Offer components which could take off due to an increase in electric vehicle (EV) sales

• Expand portfolio to serve adjacent industries

Identifying which opportunities fit best, and working strategically to seize them, could create a successful future for auto component manufacturers.

Challenges/Threats

Constantly shifting market dynamics

Manufacturing locales, customer demands and operating models are all evolving, creating a dynamic market for auto component manufacturers.

The number of vehicle recalls has significantly increased in recent years, leading to a growing trend of quality consciousness and renewed focus on manufacturing excellence. The global supply chain is more connected than ever before. This amplifies the impact of any unexpected changes from exchange rate fluctuations and price volatility to geopolitical tensions or natural disasters. These factors and their impact on the industry are difficult to forecast, adding uncertainty to an already dynamic situation. Adding to the mix are rapidly changing customer preferences and the constant need to upgrade, which are constantly creating new paradigms.

* Changing OEM needs

The industry needs to keep pace with the changing needs of automotive OEMs, who in turn are coping with the dynamic expectations of the end customer, consolidation of platforms to reduce complexity and alterations in vehicle cost composition. The automotive manufacturers require simpler, more versatile components that are usable across multiple platforms.

* Technological improvements and discontinuities

Autonomous vehicles, Connected vehicles, Electrification and Shared Mobility (ACES) are very real, disruptive and technology-driven trends that could change the future of the mobility industry. India is making rapid strides in innovative ACES technologies across cars, two-wheelers and commercial vehicles.These technologies are gaining ground due to increasing customer acceptance, stricter emission regulations, lower battery costs and more widely available charging infrastructure.

* Evolving regulatory and trade environment

Rapidly evolving emissions and safety regulations as well as technological disruptions such as connectivity and e-mobility could underpin the demand for electronics at an OEM and customer level. It is expected that the implementation of BS- VI standards will lead to a spike in demand for components like catalytic convertors, electronic fuel injection systems, oxygen sensors and intelligent battery sensors.

* Spurious/Counterfeit Products

Spurious / Counterfeit products continue to attract price sensitive Replacement Market which accounts for 25-30 per cent 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.

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 and 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) 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.

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 and 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 overall production volumes (net of rework) and reduction in rejection rates.

The primary focus of Industrial Relations during the current year will continue to be on the engaging, motivating and improving the productivity while ensuring improved productivity and product quality at the plants without any interim work disruptions. The Company has ambitious sales revenue and profit 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 third of the companys employees and make it a forward looking young organization (average age 38 years) 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 efficiency improvements and cost control exercises throughout the company.

Permanent employees directly employed by the Company currently total 1,516 nos.

Cautionary Statement

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.