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Your Directors have pleasure in presenting the Management Discussion and Analysis Report for the financial year ended on 31st March, 2019.
A. INDUSTRY STRUCTURE AND DEVELOPMENTS
The Company continues to operate in sheet metal component manufacture and supply, supplying primarily to auto-manufactures and railways. The Indian autocomponents industry can be broadly classified into the organized and unorganized sectors. The organized sector caters to the OEMs and consists of high-value precision components while the un-organized sector consists of low-valued products and caters mostly to the aftermarket customers.
The auto-component industry by and large depends upon the automotive industry. Its growth is broadly synonymous with the growth of automotive industry. Indian Automotive industry has been one of the largest automotive industries in the world. Most of the major car manufactures are present and manufacture in India; the Indian Auto Component industry has become an attractive supplier base for global markets
The Indian auto-components industry has experienced healthy growth over the last few years. The autocomponents industry accounts for around 2.3% of Indias GDP and employs about 50 lakh people directly and indirectly. The overall industry is set to become the 3rd largest in the world by 2025. A stable government framework, increased purchasing power, large domestic market, and an ever increasing development in infrastructure have made India a favourable destination for investment. In recent years, various global automobile OEMs have made their footprints in India. Their increased presence in the Indian manufacturing landscape has significantly increased the localization of their components in the country. India has become the preferred designing and manufacturing hub for global auto OEMs for local sourcing and exports.
Over the last decade, the automotive components industry has registered a CAGR of 14 per cent while exports have also grown at a CAGR of 14 per cent. The growth of global OEM sourcing from India & the increased indigenisation of global OEMs is turning the country into a preferable designing and manufacturing base.
The Company also supplies sheet metal components to Indian Railways. Indian Railways has shown steady growth over the years. Freight and Passenger earnings are the two largest components of revenues for Indian
Railways. With increasing participation expected from private players, both domestic and foreign, due to favourable policy measures, both passenger and freight traffic is expected to grow rapidly over the medium to long term. Government of Indias focus on infrastructure is a major factor which will accelerate growth of railways. The Company hopes to benefit from the same.
B. OPPORTUNITIES AND THREATS
In the advent of growing concerns of excessive use of fossil fuels and increasing pollution level, the government has pushed for shifting to electric vehicles. The Government of India has plans to make a major shift to electric vehicles by 2030. Globally, countries have already started shifting to electric vehicles. Hence, the relevance of internal combustion engines run by fossil fuels would lose relevance in long run. Hence, the electric vehicle segment would throw a big opportunity for Indian manufactures. India can be a global manufacturing hub for electric vehicles. Manufacturers may look at not only producing EV models for domestic market but also for exports. Electric vehicles are a sunrise opportunity as India has over 72 per cent two-wheelers and these could be made into electronic vehicles. Government has proposed that two-wheelers and three-wheelers sold in the country to be shifted to electric ones in a phased manner. There is a huge opportunity in this segment.
The railway sector has been the engine for Indian economy for years. However, there have not been significant investments in this sector. After decades of under-investment, the railway sector is finally getting momentum. In the past two years, the government has taken number of initiatives to capture the sectors real growth potential. An ambitious investment outlay of Rs 8.56 Lakh Crores has been announced for FY 2016-20, supported by external funding and participation of various stakeholders. Around Rs. 1 Lakh Cr. has already been expended, marking the governments determination to see these plans materialize within defined timeframes.
In last few years, metro rails in India has made rapid strides and has become first choice in urban transport and mobility. Currently, ten cities have metro railways and as many as fifteen new cities may have metro rail connectivity in the near future. Hence, there is huge scope of growth in this segment. The Company currently catering to Indian Railways, have scope to venture into supplying parts and components for metro railways.
Presence of such a large number of players in the Automobile industry results into extensive competition, every company eating into others share leaving little scope for new players. Further, currently, global economic slowdown, industry crisis in automotive industry, increasing fuel prices, low financing options due to NBFC crisis, new emission norms, policy uncertainty about electric vehicles are some of the impeding factors for slowdown in the industry. Subdued demand, recent investments made for transition from BS IV to BS VI emission norms, lack of clarity on electric vehicle (EV) policy has left the industry unsure of its future and has caused it to stop all future investments.
Macroeconomic uncertainty, Recession, un-employment etc. are the economic factors which may also daunt the automobile industry. Due to the fact that mature markets are already overcrowded, industry is shifting towards emerging markets by building facilities, R & D centers in these markets.
A. SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE
The Company operates in single segment of metal sheet components and parts.
Due to continuous low business from customers, Twowheeler products could not do well in the previous year. The turnover in 2018-19 was Rs. 314 Cr. compared to Rs. 678 Cr. in the previous year.
Commercial Vehicles (CV) products has contributed the largest to the overall turnover of the Company. The CV segment has shown considerable growth in the previous year. During 2018-19, the turnover was Rs. 387 Crores as against Rs. Rs. 244 Crores in the previous year achieving a growth rate of 58.6%. The turnover is expected to grow healthily in 2019-20 as well.
The Passenger Car segment witnessed marginal degrowth in turnover. This segment recorded a turnover of Rs. 103 Crores in 2018-19 as against Rs. 104 Crores in the previous year. The Company has taken few initiative to improve this segment.
Railway has shown considerable growth in sales during the previous year. The Company was able to increase the turnover of this segment from Rs. 144 Crores in 2017-18, to Rs. 171 Crores in 2018-19, achieving a growth rate of 18%.
Currently, the slowdown in domestic economy is quite visible. Auto Industry has also slowed down significantly.
The slowdown in the auto sector will trickle down to auto component sectors also. As major auto OEMs are cutting their production, auto-component manufactures is also facing sharp production cuts in the near term. Due to technological changes in the industry they have to face cost pressures also. The comparative revenue growth has also declined for many of the auto-component manufacturers. Overall vehicle production in the country has also declined. It indicates the auto sector slowdown will loom around for some more time. Revenue and profit growth of auto-component firms in 2019-20 expected to be a mixed bag depending on their product portfolio, despite the overall slowdown. There is also uncertainty due to change in emission norms from BS IV to BS VI by next year. There may be also cost pressure due to this new technology and may also impact profit margins. Further, global automobile demand has also been remained subdued. Due to looming slowdown in foreign market, export business may also be hurt. Hence, the outlook for auto sector will remain subdued in short to medium term.
In railway sector, the mood is better. The Indian Railway network is growing at a healthy rate. In the next few years, the Indian railway market is expected to be one of the largest markets. Indian Railways is targeting to increase its passenger and freight traffic significantly. Government has also announced significant investment outlay in railway infrastructure. It would boost railway sector significantly.
The industrys long-term growth prospects in India will continue to be healthy. The management of the Company is optimistic about the outlook of the company in medium to long term. With reduction in costs and increasing operational efficiency, the Company is expected to perform well in 2018-19.
E. RISKS AND CONCERNS
The Company is an automotive component manufacturer; hence, its business is largely dependent on the health of the automotive sectors. The health of automotive sector and auto component sector is dependent on various factors viz. general economy of the country, global economy, disposable income with consumers, interest rate, fuel prices, finance options, regulatory norms, input costs etc. Given the fact that the Indian economy and also the automobile sector are experiencing a slowdown, its impact would be felt in auto-component industry and on the Company as well.
The Companys customer base is not very broad. The Companys major turnover comes from very few customers. Any significant business risks to these customers can have consequent impact on the Company.
The management is putting its best effort to widen its customer base.
Auto industry is driven my technology and the same is undergoing very rapid change. A technology may make existing technology obsolete in very short period of time. Whoever cannot adapt to the pace of technology, may miss the bus. If it impacts any of the major customers of the Company, it may impact the Company as well.
The Company being an auto component manufacturer, it uses Steel and Cast iron sheets as major raw materials. Prices of these raw materials used in manufacturing have become increasingly volatile in recent years. The auto component manufacturers typically have low bargaining power and find it difficult to pass on the price increases to the price-sensitive customers. An increase in the price of these input materials could severely impact the profitability of the company.
The Company is largely into the business of manufacture of automotive components. This sector has already been very competitive. Lack of diversification into new business segments may also have impact on the future prospects of the Company.
The Company currently has a sound product base catering to the demand of the customers. Considering that technologies are changing very fast and new products and technologies are being developed rapidly, the Company will also face the risk of new product development or new technology development. The business of the Company may hamper if Company fails to keep pace with the new product or technology requirements of its customers.
F. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
For the purposes of effective internal financial control, the Company has adopted various policies and procedures for ensuring the orderly and efficient conduct of its business, including adherence to companys policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.
In respect of adequacy of internal financial controls with reference to the Financial Statements, the Company has, inter alia, established various control systems which have been already reported in the last Annual Report. There have not been any significant changes in such control systems. The control systems are reviewed by the management regularly. The same are also reviewed by the Statutory Auditors and Internal Auditors from time to time. The Company has also adopted various policies and procedures to safeguard the interest of the Company.
These policies and procedures are reviewed from time to time. There has also been proper reporting mechanism implemented in the organization for reporting any deviation from the policies and procedures. Compliance audit is also conducted from time to time by external agencies on various areas of operations.
G. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE
The financial performance of the Company during the yearunderreferencewas reasonably well.The Company achieved a turnover of Rs. 1004 Cr. compared to Rs. 1220 Cr. for the previous year. The decline is primarily due to decline of 2W business. The Company has decided to consolidate this business and has started to rationalize the costs and monetize the idle assets of this business. This will help the Company in reduction of costs and increase the operational efficiency of other business areas. However, due to better management of working capital and cost reduction plans, the Company has managed to increase the PBT from Rs. 0.57 Crores in the previous year to Rs. 5.15 Cr. in the current year. Operationally also Company had a reasonable year during 2018-19. There was no major setback for the Company during 2018-19. However, Company has taken decision to consolidate its 2W business and decided to sell identified assets of two 2W units. Later, these units were also closed. The CV, PC and Railway business of the company did very well during 201819. During the year the Company has initiated setting up two manufacturing units in Uttar Pradesh for its CV and Railways business. Overall, the operational performance of the Company was satisfactory during 2018-19.
H. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED.
The company recognizes the importance of human values and ensures that proper encouragement both moral and financial is extended to employees to motivate them. The human resources received commensurate attention during the year considering the growth of the organization and the need arising therefrom.
Due to very low customer demand, the Company had to reduce its production plan. Hence, unwillingly the Company had to lay off few workers and later, they were separated from the Company in due compliance of the statutory requirements. Though the management did not want this situation, but could not avoid the inevitable. There was no significant IR issues during the year under review. The Company had generally cordial relationship with its human resources.
The Company has initiated many programs on up- skilling / training its manpower. As an ongoing exercise, the Company has continued to look at, identify, create and execute seamlessly, initiatives which enhance productivity and efficiency. The Company continues to invest in people through various initiatives which enable the work force to meet the production requirements and challenges related thereto and to infuse positive enthusiasm towards the organization. The Companys strength of employees stood at 1567 as on 31st March, 2019.
The statements in the "Management Discussion and Analysis Report" section describes an optimistic approach of the management regarding the Companys visions, strategies, objectives, projections, estimates, expectations and predictions. These may be "forward looking statements" within the meaning of legal framework. However, the annual performance can differ significantly from those expressed or implied, depending upon the market conditions, economic and climatic conditions, Government policies and other incidental factors.
I. DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS:
There are no significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios except for Debtor Turnover Ratio and Net Profit Margin. The Debtor Turnover Ratio has been 0.0994 for 2018-19 compared to 0.1366 for 2017-18, a decline of 27.23%. The decline is due to reclassification of part of the trade receivables as assets held for sale. Trade receivable which was at Rs. 165.08 Cr. in 2017-18 has been significantly reduced to Rs. 98.55 Cr. due to this reclassification. Hence, the ratio has also been skewed significantly. However, the classification being an exceptional and onetime event, may not continue in future. Similarly, the Net Profit Margin stood at 0.043% and 0.628% for 2018-19 and 2017- 18 respectively, thereby showing a decline of 93.13%. This is due to the abrupt increase in Net Profit in 2017-18. The new accounting standard IND-AS was made applicable to the Company from FY 2017-18. Accordingly, figures for 2016-17 had to be recast as per IND-AS. Due to which, impact of an exceptional income in Deferred Tax had to be taken in the books in 2017-18, increasing the Net Profit significantly. Hence, the Net Profit Margin reduced in the current year significantly. However, the changes was due to the transition of applicability of accounting standards and will not be continued in future.
Return on Net Worth has been 0.19% and 3.33% for 2018- 19 and 2017-18 respectively showing a decline of 94.31%. This is due to abrupt change in Net Profit compared to previous year. The reason for significant change in Net Profit has been discussed in paragraph above.