RACL Geartech Ltd Management Discussions

Global Economy

The global economy is doing better than expected as the year began, showing signs of growth based on various key indicators. However, high levels of debt and ongoing geopolitical conflicts pose risks to global growth and inflation in the medium term. Although the US economy has remained resilient, higher-than-anticipated inflation has delayed interest rate cuts by the Federal Reserve. Meanwhile, the economies in the UK and Europe remain weak. Concerns about a potential real estate bubble in China could further hinder economic recovery. For many developing countries, the medium-term outlook has worsened due to slowing growth, sluggish global trade, and tighter financial conditions. Fluctuations in crude oil prices and ongoing shipping issues in the Red Sea could further complicate global supply chains and drive up inflation. The Middle East is also facing economic pressure due to the conflict in Israel; any escalation could have broader economic implications for the region. Structural reforms are essential for boosting growth in the Middle East, especially by diversifying into clean energy and other industries beyond oil. Despite these challenges, India is poised to become the third-largest economy by 2027, surpassing Japan and Germany. It is also the fastest-growing large economy, supported by a young population, strengthening institutions, and effective governance.

Indian Economy

The financial year 2023-24 has presented a mix of opportunities and challenges. On one hand, domestic economic activity has shown resilience due to strong local demand; on the other hand, global geopolitical uncertainties have affected inflation, interest rates, and supply chains. Despite these global challenges, the Indian economy has displayed strength, achieving a growth rate of 8.2% for FY 2023-24, driven primarily by government infrastructure investments. Improved manufacturing output, a thriving auto and real estate sector, healthy corporate finances, strong credit growth, increased tax revenues, and manageable inflation levels are all contributing to Indias economic growth. We expect this positive momentum to continue next fiscal year, supported by strong domestic demand, easing inflation, targeted government spending, and a robust manufacturing sector. While private sector capital spending has been cautious in FY 2023-24, it is projected to pick up next year, driven by global supply chain diversification and the governments Production Linked Incentive (PLI) scheme aimed at boosting manufacturing industries. Nevertheless, challenges such as geopolitical tensions, fluctuations in international financial markets, trade disruptions, and extreme weather events could pose risks to this otherwise optimistic outlook. With its structural reforms and improving infrastructure—both physical and digital—India is well-positioned to navigate these challenges and emerge stronger.

Automobile Industry Global Automobile Industry

The global automotive market, valued at USD 29.09 billion in 2023, is projected to grow to approximately USD 42.86 billion by 2032, reflecting a compound annual growth rate (CAGR) of 4.4%. The Asia-Pacific region leads with a market size of USD 12.52 billion, driven by rising demands for high engine performance and increasing disposable incomes. Europe and North America also contribute significantly, with growth fuelled by advanced technologies and improved facilities. Despite challenges like geopolitical tensions impacting the supply chain and increasing costs, the industry remains resilient, buoyed by technological advancements and heightened demand for high-end vehicle features.

However, the status quo is being challenged and the industry faces massive ongoing transformations, such as the shift from internal combustion engines to electrified powertrains and a shift in focus from hardware to differentiation through software. This dynamic has allowed new entrants in Europe and abroad—especially in China, the largest automotive market in the world to disrupt the market and win market share. In 2022, China surpassed Germany in light-vehicle exports for the first time, with exports of about 3.0 million vehicles, in contrast to Germanys 2.6 million. These transformative forces overlap with a challenging macroeconomic environment in Europe, including rising energy costs, inflation, and geopolitical tensions. All of these factors have greatly affected the European auto industry and make navigating the sectors transformation challenging. A prosperous future for the European automotive industry will therefore depend on how well and quickly it responds and how European stakeholders can shape the necessary conditions for future success.

The European automobile sector remains a dynamic and influential market, characterized by strong growth in electric mobility and stringent regulatory standards. Both two-wheelers and four-wheelers are witnessing significant transformations driven by technological innovation and environmental policies. Companies operating in this sector must navigate regulatory challenges while leveraging opportunities for growth in sustainable and advanced mobility solutions.

In fact, the automotive OEM sector has entered a period of decline and disruption. Emerging out of the pandemic is a perfect storm that threatens to change the fortunes of the automotive industry forever.

Five key factors are driving this perfect storm:

1. Drop in demand: Increasing economic uncertainty could mean post-pandemic demand never materializes.

2. Socio-demographic change: Aging populations and declining purchasing power could slow new car sales.

3. Shift to EVs: The move to EVs will reduce labor intensity and erode market value for traditional OEM suppliers.

4. Suppliers near peak debt: The majority of traditional OEM suppliers could face financial distress.

5. Price parity comes early: Inflation and rising costs could affect the ICE and EV market differently. In 2024, the automotive industry is set for a turbulent year with global challenges like the energy crisis, slower demand, and ongoing supply chain disruptions. Despite these headwinds, global car sales are expected to hold steady at around 69 million, driven by expanding markets in developing regions like China and India.

Automobile Industry in India

Historically, the Indian automobile industry has been a strong indicator of the economys health, playing a significant role in both economic growth and technological progress. The two-wheeler segment leads the market in volume due to the growing middle class and a young population. Additionally, increasing interest from companies in rural markets has further boosted the sector. Rising demand in the logistics and passenger transport sectors is also driving growth in commercial vehicles. Future market expansion is expected to be fuelled by trends like vehicle electrification, particularly among three-wheelers and compact passenger cars.

India holds a strong position in the global market for heavy vehicles, being the largest producer of tractors, the second-largest manufacturer of buses, and the third-largest producer of heavy trucks. In January 2024 alone, passenger vehicle sales reached 393,074 units, marking a 14% growth compared to January 2023, the highest monthly sales recorded. Additionally, India achieved a milestone with the sale of 1,325,112 electric vehicles (EVs) in FY24 (up to January 2024). India has a strong market in terms of domestic demand and exports. In April, 2024, the total production of passenger vehicles, three-wheelers, two-wheelers, and quadricycles was 23,58,041 units. The Indian EV market is expected to reach US$ 7.09 billion (Rs.50,000 crore) by 2025, and according to NITI Aayog, the EV financing sector is projected to grow to US$ 50 billion (Rs. 3.7 lakh crore) by 2030. A report by the India Energy Storage Alliance anticipates that the EV market will grow at a CAGR of 36% until 2026, while the EV battery market is projected to expand at a CAGR of 30% during the same period.

To meet rising demand, several automakers have made significant investments across various industry segments in recent months. The automobile sector has attracted cumulative foreign direct investment (FDI) inflows of about $35.65 billion from April 2000 to December 2023. The Government of India supports foreign investment in this sector and allows 100% FDI through the automatic route. In January 2024, the Ministry of Heavy Industries extended the Production Linked Incentive (PLI) Scheme for Automobile and Auto Components by an additional year, making it applicable for five consecutive financial years until March 31, 2028.

The automobile industry relies on several factors, such as access to skilled labor at competitive costs, strong R&D capabilities, and affordable steel production. The sector offers significant investment opportunities and creates both direct and indirect jobs for skilled and unskilled workers. The electric vehicle industry alone is expected to generate 50 million jobs by 2030. To address the industrys needs, the Ministry of Heavy Industries has extended the PLI Scheme for Automobile and Auto Components for one more year, offering incentives for achieving sales targets over five consecutive financial years from 2023-24 to 2027-28, with incentive payments made in the following financial year.

Auto Components Industry in India Overview

In recent years, India has emerged as the fastest-growing economy in the world. This rapid growth, along with rising incomes, increased infrastructure spending, and better manufacturing incentives, has greatly boosted the automobile industry. The two-wheeler segment has been particularly strong, driven by the growing middle class, with total automobile sales reaching 19.72 million units from April to January in FY24.

As demand for vehicles has increased, more manufacturers of original equipment and auto components have entered the market. Consequently, India has developed significant expertise in both vehicles and their parts, resulting in heightened international demand for these products. Therefore, the Indian automobile sector plays a crucial role in the success of the auto components industry.

Industry Impact

Indias auto component industry is a key player in promoting economic growth and generating jobs. It consists of businesses of all sizes, from large corporations to small enterprises, spread across various regions of the country. This sector represents 2.3% of Indias GDP and employs over 1.5 million people. By 2026, its expected that the auto component sector will contribute between 5-7% to Indias GDP.

Indias auto components industrys market share has significantly expanded, led by increasing demand for automobiles by the growing middle class and exports globally. The automobile component industry turnover stood at Rs. 2.9 lakh crore (US$ 36.1 billion) in H1 2023-24 the industry had revenue growth of 12.6% as compared to H1 2022-23. Domestic OEM supplies contributed 66% to the industrys turnover, followed by domestic aftermarket (12%) and exports (22.3%) in FY23. The component sales to OEMs in the domestic market grew by 13.9% to US$ 30.57 billion (Rs. 2.54 lakh crore). In H1 2023-24, exports of auto components grew by 2.7% to Rs. 85,870 crore (US$ 10.4 billion). The aftermarket for auto components grew by 7.5% in H1 2023-24 reaching Rs. 45,158 crore (US$ 5.5 billion).

Investment Landscape

The Indian automobile sector has seen significant investments from both domestic and international manufacturers, with a foreign direct investment (FDI) inflow of US$ 35.65 billion from April to December 2023, accounting for approximately 5.35% of total FDI inflows into India during this period.

The Indian government is committed to promoting electric vehicles (EVs) and aims for 30% of all vehicles to be electric by 2030. In the latest budget, customs duty exemptions were announced for importing machinery and goods necessary for manufacturing lithium-ion batteries, typically used in EVs.

Future Prospects

The Bharat New Car Assessment Program (BNCAP) aims to enhance the auto component sectors value chain by encouraging the production of advanced components and fostering innovation and global standards. As the world transitions towards electric, electronic, and hybrid vehicles—which are seen as safer and more efficient—new opportunities for the transportation industry are emerging. The next decade is set to bring more options and growth prospects for auto component manufacturers. To help with these changes, the Indian government is providing various production incentives and investing heavily in EV infrastructure.

Manufacturers are now focusing on sustainable solutions, lightweight materials, and efficient production processes to meet the automotive sectors evolving needs. There is also an increasing emphasis on digitalization and data analytics to optimize operations and improve product performance. As the automotive sector continues to evolve, the auto components industry will be vital in shaping the future of mobility. Success in this competitive market will depend on strong collaboration with automakers, investment in research and development, and adaptation to changing regulations.

Opportunities

• Fuel-Efficient Vehicles: Improved fuel combustion engines and cost-efficiency programs present great opportunities, especially in emerging markets where demand for fuel-efficient cars remains strong.

• Changing Lifestyles and Consumer Groups: Increased access to data and information, along with evolving customer preferences and heightened safety regulations, will fuel industry growth.

• Market Expansion: Expanding into new regions, such as Asian and BRIC nations, is expected to significantly increase vehicle demand.

Strengths

• Evolving Industry: The ongoing growth of the automobile sector enhances peoples ability to live, work, and travel, which is likely to keep fuel demand high in the future.

• Innovation and Technology: With the rise of electric vehicles and alternative fuels like CNG and Shell gas, companies are investing more in research and development to explore renewable energy sources, including solar and wind.

• Cost Management through Manufacturing Facilities in Asia: Automakers like Harley and Volvo are establishing manufacturing plants in developing countries like India and China to control costs, given the low labor costs and abundant resources in these regions.

Threats:

• Intense Competition: The automobile industry has many players, leading to fierce competition where companies compete heavily for market share, making it difficult for new businesses to enter the market.

• Slow Economy: Economic issues like uncertainty, recessions, and unemployment can negatively impact the automobile industry for a long time.

• Fuel Price Fluctuations: Changes in fuel prices greatly influence consumer choices and overall growth in the market. Additionally, government regulations regarding alternative fuels like CNG and Shell gas are also affecting inventory levels.

Weaknesses:

• Consumer Bargaining Power: Over the past few decades, the automobile market has changed from being supply-driven to demand-driven. With many options available, strong competition, and various choices, consumers now have the power to select the products they prefer.

• Government Regulations: Policies such as excise duties, restrictions on outside vehicles entering certain states, reduced vehicle registration validity, and fluctuating fuel prices create significant challenges for automobile companies, impacting the industrys growth.

• High Employee Turnover: The automobile industry experiences higher employee turnover compared to many other sectors. Attracting and keeping skilled employees is tough, especially when competitors are actively trying to recruit the best talent.

Awards & Recognition:

• The companys Gajraula plant has reached a major sustainability goal by becoming a 100% Green Electrical Energy compliant premises.

• The company won the First Prize for Highest Export Performance in the Engineering and Builders Hardware category for the Financial Year 2022-23 from the Department of Micro, Small and Medium Enterprises and Export Promotion, Uttar Pradesh Government.

• The company received a nomination from a customer in Germany for supplying gears for pedal-assisted electric bicycle gearboxes.

• The company has partnered with BMW Motorrad as the title sponsor and official partner for the 2023 BMW GS Trophy India Qualifier.

• The Company has been nominated as Tier 1 series supplier, by a Premium Car Manufacturer in Germany for supply of Parking Lock Mechanism for electric cars.

Performance Overview:

RACL Geartech Limited is a leading automotive components supplier in India and is recognized globally. We supply auto parts as a Tier 1 provider to major Original Equipment Manufacturers (OEMs) and key system manufacturers worldwide, with a strong presence in Europe, Asia-Pacific, and North America.

In the FY 2023-24, we achieved a total revenue of Rs 423.03 Crore. This includes Rs 308.52 Crore from exports, Rs 84.71 Crore from domestic sales, and Rs 29.81 Crore from other sources. Exports accounted for 73% of total sales, while domestic sales made up 27%. Compared to the previous year, our revenue increased by 15.16%, EBITDA rose by 12.39%, and Profit Before Tax grew by 4.69%.

RACL has focused on diversifying the product portfolio in last couple of years. Passenger car segment which was started in FY 2022-23 has contributed almost 9% of FY 2023-24. Similarly, commercial vehicle segment which used to contribute around 2% of overall business in FY 2021-22 has grown to around 9% in FY 2023-24.

RACL takes pride in having a dedicated customer base that values our commitment as a reliable supplier, known for concurrent engineering and value engineering capabilities. We consistently deliver high-quality products with 100% on-time deliveries. We hold a strong position in the competitive gear market, and our product range is tailored for this specific niche. We are committed to improving our market presence through technological upgrades, skill development, quality enhancement, and human resources improvement to meet the challenges of future mobility, including e-mobility solutions.

OUR CERTIFICATIONS: Gajraula Plant

• Implementation of Information Security Management System in accordance with ISO/IEC 27001: 2013 from TUV SUD South Asia Private Limited;

• BSI Certificate of Registration for Occupational Health and Safety Management System – ISO 45001:2018;

• BSI Certificate of Registration for Environmental Management System – ISO 14001:2015;

• BSI Certificate of Registration for Quality Management System – ISO 9001:2015;

• BSI Certificate of Registration for Quality Management System – IATF 16949:2016;

Noida Plant

• BSI Certificate of Registration for Quality Management System – IATF 16949:2016

Certifications

Certifications/Recognitions in any form act as a great motivator. And, we are the proud recipient of many certifications from important institutions.

These certifications are a testament to our commitments to Quality Management Systems (IATF 16949:2016), Environmental Management Systems (ISO 14001: 2015), Occupational Health & Safety Management Systems (ISO 450001: 2018), and other core areas of the business. We are Dun & Bradstreet certified and also hold Quality Management System (ISO 9001:2015) certification from BSI. We have also been recently certified by TISAX.