PTL Enterprises Ltd Management Discussions.

India Market Overview

Economy

India has emerged as the fastest growing major economy in the world and is expected to be one of the top three economic powers of the world over the next 10-15 years, backed by its strong democracy and partnerships. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent. Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

The Indian economy began on a strong footing for Financial Year 2019-20 (FY20). FY19 had closed registering a growth of 6.7% and there were clear expectations that the economic powerhouse would have a higher GDP grow rate for FY20. However, as the year progressed, it was evident that the forecast was far removed from the realities faced by the country.

Indias growth engine was actually sputtering well before the threat of outbreak arrived. Once one of the fastest growing economies in the world, its growth slowed to 4.7% last year - the slowest level in six years. Unemployment was at a 45-year high last year. Small businesses had only just begun to recover from the controversial 2016 currency ban that came as a body blow to the cash-consuming informal economy. Rating agencies, both global and domestic, are unanimous that the COVID-19 pandemic will be an economic tsunami for India. The IMFs estimate of the global economy growing at -3 per cent in 2020 is an outcome "far worse" than the 2009 global financial crises. Even though the country may not slip into a recession, unlike the Eurozone, the US, or Asia-Pacific that have stronger trade ties to China, analysts believe the impact on Indias GDP growth will be significant. However, the real impact of the lockdown will be felt in the first quarter of financial year 2021.

Auto segment

FY20 is not a year the auto segment is likely to forget in a hurry. The sector has been facing a long slowdown with the unit growth in FY19 being largely led by the high volume three- wheelers and two-wheelers categories which grew 49% and 16.5% respectively, over the previous year. However for FY20, all the key categories were in the negative growth zone. Passenger Vehicles (PV) closed the financial year with sales of 2.8 million units, as compared to 3.4 million units FY19, down by 17.8%. Commercial Vehicles (CV) sales was down by a whopping 28.8% to close the year with a sale of nearly 0.72 million units. The growth leaders for the industry, three-wheelers and two- wheeler, also posted negative growth of 9.2% and 17.7% respectively for the year.

The auto industry has been asking for some booster since the beginning of the financial year. Without any stimulus along with poor consumer sentiment, increased cost of ownership due to higher insurance cost, higher financing cost due to the NBFC liquidity crisis, no relief on high GST, increased vehicle prices due to the BS6 upgrade and stringent safety norms only added to the woes of the industry. The results - overall industry sales fell 18%.

Tyre Segment

Since FY09, the tyre industry has been growing at a CAGR of 7%. It had degrown only during FY13. However, FY20 seems to a repeat of FY13, as the numbers from Automotive Tyre Manufacturers Association (ATMA) indicate. According to the data released by ATMA for 11- months, the industry shows an overall decline of around 6% as compared to the 11-months numbers of FY19. This is no surprise as the industrys fortunes are closely linked to those of the auto sector and the overall economic development.

In terms of key segments, demand for the Medium & Heavy Commercial Vehicle (M&HCV) segment tyres dropped by 12% even though it had seen a stellar growth of 16% for FY19. The other major segment - PV - posted a drop of 3% for the year.

(a) Industry Structure and Developments

The tyre industry is directly dependent on the business from the Original Equipment Manufacturers (OEMs) and the replacement market. With the auto sector in a limbo during the year, the tyre segment felt the direct impact of it, as sales to OEMs reduced drastically. However, the replacement market played the role of the saviour and helps recoup some of the losses of the OEM market. The CV space saw a greater utilization of existing assets and helped the sale in the replacement segment.

According to ATMA data, replacement sales for M&HCV accounted for 72% of total domestic production, among the highest in all categories. The category saw good demand in the replacement market post monsoon till the COVID-19 impact and the subsequent lockdown. Imports continued to fall with the continued imposition of anti-dumping duty.

The tyre industry was helped in some measure by fall of some of its key raw material cost in India. These raw materials declined by about 5% in FY20 over the previous year, aided by a drop in Carbon Black, Synthetic Rubber, Nylon Fabric and Chemicals prices. However, the domestic natural rubber prices saw an increase of approx. 7% during the same period. The domestic supplies were partially impacted during the year due to erratic weather pattern. Prices for the imported natural rubber witnessed a spike in the second half of the financial year. Reduced production and supplies from Indonesia and Thailand due to the onset of fungal leaf disease were the key factors for this. The country continued to see the inverted duty on natural rubber during the year.

(b) Swot Analysis (Opportunities and Threats) Strengths

• Tyre manufacturing facility leased to ApolloTyres Ltd.–a global player.

• Fixed Income from lease rent of the tyre unit.

• Apollo Tyres has the advantage of a diversified market base across geographies and therefore, it is not completely dependent on the Indian market alone. Further, Apollo Tyres is working towards establishing and growing operations in other large markets, including ASEAN and North America.

• The Company is powered by strong product brands in its key markets – Apollo and Vredestein.

• Apollo Tyres enjoys an extensive distribution network for its products across its two key markets.

• Experienced team of workers.

Weaknesses

• A relatively old tyre manufacturing unit with not very modern machinery.

• No direct presence in the tyre market.

• Dependence on Apollo Tyres.

Opportunities

• Diversification into other sector through new investments.

• Production of Apollo Tyres leading to technology up gradation

Threats

• Economic downturn or slowdown in the key markets (India and Europe) can lead to decreased volumes and capacity utilisation.

• The continuing lockdown situation due to COVID-19 pandemic in many parts where the Company operates can have a significant impact of the business of the Apollo Tyres.

(c) Segment-wise performance

The truck-bus, cross ply tyres manufactured at the Companys plant leased to Apollo Tyres Ltd- under the brand name ‘Apollo are mostly sold/exported by Apollo Tyres Ltd.

(d) Outlook

With the worldwide outbreak of COVID-19, the global economy is staring at a recession of a magnitude never seen before in recent history. To counter the pandemic, countries across the globe has resorted to lockdowns which has already brought the economy to a standstill. While the debate between ‘Lives and Livelihood rages across the world, the International Monetary Fund (IMF) has issued a warning that the repercussion of COVID-19 will be similar to the "worst recession since the Great Depression" and will dwarf the economic damage caused by the global financial crisis a decade back.

The IMF recent projection for a 3% contraction of the global economy would mark the steepest downturn since the Great Depression of the 1930s. However, experts believe that the situation can further worsen given that the behaviour of corona virus continues to be unknown and there are no immediate medical solutions.

With the countrywide lockdown, India will certainly be hit hard and IMF along with other rating agencies have sharply slashed Indias growth estimate for FY21 ranging from 0% to 1.9% from the 5.8% estimated in January. According to the European Economic Forecast, EU economy is expected to contract by 7.5% in 2020 and bounce back by 6% in 2021.

The COVID-19 has grave consequences for the automobile industry and all related sectors, with most automobile manufacturers having announced temporary closures of plants due to collapsing demand, supply shortages and government measures. OEMs in India are forecasting a degrowth of between 30-40% in FY21 demand given the BS-VI implementation and the price increase, COVID-19 impact, poor consumer sentiment and liquidity crunch, which in turn will seriously impact the tyre industry.

Industry experts estimate a decline in the replacement tyre industry as well with impact of COVID-19 playing well into the year. All industries across the globe are looking at their respective governments and their decisions regarding stimulus packages, support to turnaround sentiments, triggering demand, etc will decide the economic outcome for any country.

(e) Risk and Concerns

The Company has in place a robust risk management framework that identifies and evaluates business risks and opportunities. The Company recognises that these risks need to be handled effectively and mitigated to protect the interest of the shareholders and stakeholders, to achieve business objectives and create sustainable value and growth. The Companys risk management processes focus on ensuring that these risks are identified promptly and a mitigation action plan is identified and monitored periodically to ensure that the risks are being addressed accordingly. The Companys risk management framework operates with the following objectives:

• Proactively identify and highlight risks to the right stakeholders

• Facilitate discussions around risk prioritisation and mitigation

• Provide a framework to assess risk capacity and appetite; develop systems to warn when the appetite is getting breached

The list of key risks and opportunities identified by the Management are the following:

• Demand-supply situation must remain in favour of the industry to enable it to undertake price increases.

• Demand in the tyre industry is dependent on economic growth and/or infrastructure development. Any slowdown in the economic growth across regions impacts the industry.

• The continuing lockdown situation due to the COVID-19 pandemic can lead to a serious impact on the organization including a significant drop in demand of Apollo tyres, drop in profitability, liquidity concerns, etc.

(f) Internal Controls Systems and their adequacy

The Company believes that Internal Control is one of the key pillars of governance, which provides freedom to the management within a framework of appropriate checks and balances. It has an adequate internal control framework, which has been instituted considering the nature, size and risks in the business. .. These policies are complimented by a management information and monitoring system, which ensures compliance with internal processes, as well as with applicable laws and regulations.

The Companys internal control environment ensures efficient conduct of operations, security of assets, prevention and detection of frauds/errors, accuracy and completeness of accounting records and the timely preparation of reliable financial information. The Company uses SAP – Enterprise Resource Planning (ERP) software – as its core IT system. The systems and processes are continuously improved by adopting best-in-class processes and automation and implementing the latest IT tools. The operating management is not only responsible for revenue and profitability, but also for maintaining financial and commercial discipline.

The Company has a well-established independent in-house Internal Audit function that is responsible for providing assurance on compliance with operating systems, internal policies and legal requirements, as well as suggesting improvements to systems and processes.

The Internal Auditor reports functionally to the Audit Committee and administratively to the Chairman. Key internal audit findings are presented to the Audit Committee at its quarterly meetings.

Most importantly, the senior management sets the tone at the top of no tolerance to non- compliance and promotes a culture of continuous innovation and improvement.

(g) DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO PERATIONAL PERFORMANCE

Rs. in Lakhs
S. No. Particulars

Year Ended

31.03.2020 31.03.2019
1. Revenue from operations 6,323.03 6,322.15
2. Other income 356.20 291.18
Total 6,679.23 6,613.33
3. Expenditure
a) Employee benefit expenses 213.93 237.37
b) Other expenses 328.03 236.43
Total 541.96 473.80
4. Operating Profit (EBITDA including other income) 6,137.27 6,139.53
5. Finance cost 211.89 191.74
6. Depreciation and amortization expense 124.83 121.34
7. Profit before tax 5,800.55 5,826.45
8. Provision for tax
- Current tax 1,440.04 1,695.75
- Deferred tax (33.06) 145.36
Total 1,406.98 1,841.11
9. Profit after tax 4,393.57 3,985.34

(h) MATERIAL DEVELOPMENT IN HUMAN RESOURSES/INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

The Company workers are the key drivers for its sustained growth and success. The Company nurtures and trains its employees to further enhance their management and leadership skills, while the same time rewarding them for high performance; this is done to attract and retain the best talent within the Company. The industrial relations for the year under consideration, by and large, were cordial. The number of permanent employees on the rolls of the company are 670.

(I) DETAILS OF SIGNIFICANT CHANGES (I.E. CHANGES OF 25% OR MORE AS COMPARED TO IMMEDIATELY PREVIOUS FINANCIAL YEAR) IN KEY FINANCIAL RATIO, ALONG WITH DETAILED EXPLANATIONS

Particulars 2019-20 2018-19
Current ratio 0.26 0.12

The Increase in current ratio was mainly attributable to increase in Bank and other bank balances at year end.

(J) DETAILS OF ANY CHANGE IN RETURN ON NET WORTH AS COMPARED TO THE IMMEDIATELY PREVIOUS FY ALONG WITH DETAILED EXPLANATION THEREOF.

Particulars 2019-20 2018-19
Return on net worth 9.40% 8.3%

The Increase in return on net worth was mainly attributable to higher net profits in the current year.