RACL Geartech Ltd Management Discussions.

RACL Geartech Limited having a fully integrated manufacturing set up, offers complex engineering solutions in the field of Transmission Gears & Shafts, Sub-assemblies, Precision Machined Parts and Industrial Components to domestic as well as global markets. RACL provides unique and innovative automotive products and services that deliver superior measurable values to all stakeholders.

In 2019 our main aim is to come up with products and solutions which help maximize the reach of Indias as well as global manufacturing companies. Few of the steps are as under:

• Availability of raw material in its totality.

• Value enhancement to machines.

• Cost effectiveness to production environment.

• Unexpected failures best managed.

• Increasing customer condense.

• Delivering maximum output.

Since the introduction of the smart phone, it has become clear that customers are quick to adopt even highly complex and expensive technology if it makes their lives easier. In other word, users value convenience and ease. These core values turned the automobile into the defining technical cultural item of the 20th century. Now it is time to translate these properties into the context of todays and tomorrows technology and society.

The automotive industry has the opportunity to shape this fundamental restructuring. When devising strategies and business models, companies should not only consider direct product purchasers but all users and groups affected by transport issues. The automobile has long since changed from a technical to a social commodity, it guarantees our personal mobility and social participation, shape our cities.

Furthermore, Indias manufacturing industry has witnessed significant growth owing to multiple government policies and overall push to boost manufacturing in the country. Government of Indias Make in India programme has not only given an impetus to domestic player, but also attracted a lot of foreign platform as a hub for manufacturing and this will grow significantly.

With the above customer centric approach, we are successfully supplying to top overseas OEMs like BMW Motorrad - Germany, Kubota Corporation (Japan, Thailand & USA), I.T Switzerland (SAME Group Company), Piaggio - Italy, Vietnam, KTM AG - Austria, Schneider Electric - Germany, Dana - Italy & China and BRP Rotax - Austria amongst others and in the domestic market we are supplying to Yamaha India, Piaggio Vehicles & SML Isuzu etc.

a) The Global Economy 2018-19 in the field of Automotive Industry:

Overall, the global automotive industry is in better shape than it was five years ago, especially in the US, where profits and sales have recovered following the recent economic crisis, and in China, where growth remains strong. This progress will likely continue. By 2020, global profits for automotive OEMs are expected to rise by almost 50 percent. The new profits will come mainly from growth in emerging markets and, to a lesser extent, the US, Europe, Japan and South Korea will be stagnant in terms of profit growth.

There are four key challenges that OEMs need to address to get a piece of future profitability. The analysis of the report projects to 2020, but these challenges will shape the industry until at least 2025.

• Complexity and cost pressure: There will be more platform sharing and more modular systems. At the same time, regulatory pressures will tighten, and prices in established markets are likely to be flat.

• Diverging markets: OEMs need to adapt to changing regional and segment patterns of supply and demand with respect to their production and supply base foot-prints, supply chains and product portfolios, and the emerging Chinese after sales market offers new growth opportunities.

• Digital Demands: Consumers want more connectivity are focus on active safety and ease of use and are increasingly using digital sources in making their purchase decisions.

• Shifting Industry landscape: Suppliers will add more value in alternative power train technologies and in innovative solutions for active safety; Europe needs to restructure and adjust its capacity to better match demand, and competition is emerging from china.

To capture future growth and find profit from these challenges - and to mitigate their risks - OEMs cannot simply turn to their traditional toolbox. They need to review and adjust their strategic priorities, deploy the appropriate investments and resources, and develop new skills to execute these strategic objectives.

Indian Automotive Sector/ Environment

The Indian automotive industry is seeing significant transformation with respect to its sustainable growth and profitability. The industry is crucial for the economy as it accounts for the economy for 7.1% of the countrys Gross Domestic Product (GDP) and as per Automotive Mission Plan (AMP) 2016-26, its contribution is projected to increase to 12%. India is expected to emerge as the worlds third largest passenger vehicle market by 2021.

There are a number of key trends that are shaping the industry today, which are expected to have a significant bearing on its ability to realize the objectives of the AMP. In addition to automation of various processes to meet these goals, the sector is also expected to generate additional direct and indirect jobs.

Currently, Indias automotive industry is at an inflexion point and is witnessing five megatrends that are expected to transform the industry in a big way:

a) Rapidly evolving customer expectations.

• Changing customer persons.

• High level of product awareness.

• Digitally savvy.

• Surge in corporate customers.

b) Disruptive impact of technology.

• Rapid adoption of technology in vehicles, industry supply chain and business models.

• Disruption through innovative products and services (e.g. shared mobility).

c) Dynamic regulatory environment.

• Regular but uncertain regulatory interventions (GST, shift from BS IV to BS VI, CAFE norms, ABS for two-wheelers, higher axle loads in CVs etc.)

• Increasing investments in regulatory compliance by industry players.

d) Changing face of mobility infrastructure

• Efforts to enable electric vehicle infrastructure.

• Investment in roads and highways.

• Shared mobility as an alternative

• Smart cities.

e) Globally interconnect & Industry.

• Indian companies going global

• Next wave of investments from global companies

• Shift in economic power to countries such as India.

In overall the industry has never witnessed this magnitude of multi-dimensional change till now.

b) OPPORTUNITIES & THREATS :

Some of the major opportunities in the automobile sector are as follows:

a) Rise in middle class income and young population may result in strong growth.

b) India is expected to become a leader in shared mobility by 2030, providing opportunities for electric and autonomous vehicles. Global market opportunity itself is the ultimate opportunity provided by auto industry.

c) Shifting focus towards electric cars can also provide opportunities in the sector.

d) India also has a significant cost advantage that attracts investment in the sector.

e) The Government aims to develop India as a global manufacturing centre. The Government has also come up with reforms like GST and changes in FDI policies to boost the growth in the sector.

f) Leverage on product engineering expertise to improve the worthiness and exports of auto components.

g) The growing need to outsource and growth shifting to Asian Markets, Although American & European market is the pulse of this Industry, but the focus is shifting to developing markets like China, India and other Asian nations because of the rise in disposable income, changing lifestyle & stable economic conditions.

h) Increasing demand for VFM (Value for Money) Vehicles means more demand of automotive components. The reason of increased demand is basically VFM products would be fuel efficient & high mileage vehicles.

Some of the major threats/weaknesses in the automobile sector are as follows:

a) Vulnerabilities introduced through lack of manufacturer attention or expertise, combined with competitive pressures and growing product and service complexity.

b) No software code is 100% bug free - and where there are bugs there can be exploits, Further, with software being written by different developers, installed by different suppliers, and often reporting back to different management platforms, no one player will have visibility of, let alone control over, all of a vehicles source code.

c) Connected vehicles will generate and process ever more data - about the vehicle, but also about journeys ad even personal data on the occupants - this will be of growing appeal to attackers looking to sell the data on the black market or to use it for extortion and blackmail.

d) Further, lawmakers will come up with requirements and recommendations for making cyber security a mandatory part of all connected vehicles.

e) Low investment in Research and Development and Limited knowledge of product liability and offshore warranty handling.

f) Comparatively poor infrastructure for supply chain and exports.

g) Bargaining power of consumers: Over the last 3-4 decades the automobile market has shifted from demand to supply market. Availability of large number of variants, stiff competition between them, and long list of alternatives to choose from has given power to customers to choose whatever they like.

h) Growth rate of Automobile industry is the in the hands of the government due to regulations on taxation front, no entry of outside vehicles in the state, decreasing number of validity of registration period & volatility in the fuel prices. These factors always affect the growth of the industry.

All these factors lead to lesser demand of automotive components.

c) Segment-wise performance

The Company has one line of business, namely, manufacturing of gears, shafts and other automotive component parts. The Company has no unit (plant) of production outside India, therefore, there is no geographical segment and no production segment wise information is required.

d) Outlook

The World Economic Forum which assesses the manufacturing capabilities of more than 100 countries, ranks India within 100 countries on the global manufacturing Index.

The Governments "Make in India" initiative has played an important role in elevating countrys position. In the past three to four years, India improved on nine out of ten parameters for ease of doing business.

Although there is still a long way to go before India becomes a leader in the manufacturing arena, companies in the automotive sector are embracing this opportunity to leverage India as a hub for low-cost, high-quality products.

e) Risks & Concerns

The company is exposed to external and internal risks associated with the business. The operations of the company are directly dependent on the Automotive manufacturers (OEMs) growth and business plans. General economic conditions impact the automotive industry and in turn, the operations as well. To counter these risks, company continues to broaden the product portfolio, increase customer base and geographic reach. The company is exposed to strong competitive pressures from both domestic and overseas. RACL established reputation, close customer relationships, ability to provide higher level of engineering, design support and relentless drive for improvement gives it a competitive edge. The company is also exposed to financial risk from changes in interest rates and foreign exchange rates etc.

In order to address the aforesaid risks the company has implemented adequate risk management approach. The Audit Committee of the Company periodically reviews the risk assessment and risk management process. A periodical audit is conducted by the Internal Auditors in all the areas to ensure that the companys control mechanism is properly followed and all statutory requirements are duly complied.

f) Internal Control Systems and their adequacy

The Company has an Internal Control process which aims at providing reasonable assurance on reliability of financial information, compliances with laws and regulations in force and realisation and optimisation of operations. It ensures documentation and evaluation of unit and entity level controls through existing policies and procedures, primarily to identify any significant gaps and define key actions for improvement. Installation of Compliance Mantra system (a software based compliance system) to doubly ensure the enforcement of compliances and various laws on the company.

The Companys internal controls are supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures. Internal Auditors reports its findings to the Audit Committee and to the Board of Directors on quarterly basis. The internal controls are designed to ensure that financial and other records are reliable for preparing financial information and other data, and for maintaining accountability of assets.

The Audit Committee and the Board of Directors review internal controls and the progress of implementation of the recommendations of internal audits. The management actively implements the recommendations of such reviews.

g) Performance of the Company

In the Financial Year 2018-19, the company achieved an overall income of Rs. 190.96 crore from operations as compared to Rs. 140.11 crore in 2017-18. The company achieved an operating profit of Rs. 17.34 crore (PBT) as compared to Rs. 8.64 crore (PBT) in last year. The company has made a provision of Rs. 7.57 crore on account of Income Tax / Deferred Tax Liabilities.

The company has MAT credit of Rs. 0.94 crore which shall be utilized/ adjusted for payment of Income Tax in future. Company has a Reserve & Surplus of Rs. 56.19 crore as on 31.03.2019 as compared to Rs. 44.74 crore in last year.

The Company continues to make concerted efforts at leveraging relationships with existing customers as well as widening the customer base by adding new customers. The company added TVS Motors in terms of new customers in the financial year 2018-19. However, there were significant requirements for new product development of existing clients. The wider product portfolio was important to build the export business.

RACL Geartech Limited (RACL) continues to service a strong customer base, many of these customers are global players with a domestic presence in India. The Company continues with its effort to strengthen and cement relationships with these customers in the domestic market and explore opportunities to service their global needs. RACL remains positioned globally as a cost competitive manufacturer with focus on quality. Continuous efforts are being undertaken to maintain the highest delivery standards in terms of ‘on time and ‘in full. The larger customer base with wider product portfolio, which is fast emerging as the need of the markets today, increases the challenges on this front. It has introduced a degree of flexibility in its production equipment and is continuously working on improving its planning systems.

EXPORT

In line with the economic trend seen in last year, Export sales of the company leading to rise by approximately 54.10 % from Rs. 71.30 crore in financial year 2017-18 to Rs. 109.87 crore in financial year 2018-19.

The global markets are under stress, RACL has miniscule share of the global pie and there is ample scope and opportunities to grow exports aggressively.

h) HUMAN RESOURCES EFFICIENCY

During the year, the company delivered value to its customers and investors. This was made possible by the relentless efforts of each and every employee. The company has developed a robust and diverse talent pipeline which enhances RACL Geartech Limited organizational capabilities for future readiness, further driving greater employee engagement. Our human resource program is focused on attracting the right talent, providing excellent on the job training opportunities, and finally giving them the growth opportunities consistent with their aspirations.

Company has taken sufficient steps to impart practical training to its work force at all levels. A separate cell in HR function has already been created for imparting such training in the plant itself. In order to encourage the senior staff, they are being deputed to attend Conferences, Seminars, In-house Workshops, so that they are satisfied and bring in knowledge and skills to RACL for mutual benefits.

RACL Geartech Limited has always enjoyed strong industrial relations. The company has a systematic grievance redressal system to further strengthen these relationships. This system encourages employees to share their views and opinion with the management. The company reflects on this feedback and incorporates relevant changes into the existing policies, systems and processes.

The permanent employees strength on pay rolls of your Company as on the end of financial year 31st March, 2019 was 478.

i) Details of Significant changes in Key financial ratios along with explanation

In compliance with the requirement of Listing regulations, the key financial ratios along with explanation for significant changes (i.e. changes of 25% or more as compared to the immediately preceding financial year) has been provided hereunder:

S. No. Particulars Unit of Measure 2018-19 2017-18
1. Debtors Turnover Times 4.15 3.82
2. Inventory Turnover Times 5.28 4.22
3. Interest Coverage Ratio Ratio 5.18 3.14
4. Current Ratio Ratio 1.18 1.11
5. Debt Equity Ratio Ratio 1.27 1.20
6. Operating Profit Margin i.e. EBITDA % 16.60 13.80
7. Net Profit Margin % 4.96 5.15
8. Return on Net worth % 14.19 13.20

It may be kindly observed that there is improvement in the performance of the company, which is being reflected in the above ratios except the debt equity ratio, which has been inconsistent due to increase in volume of business.

Disclosure of Accounting Treatment

In the preparation of financial statements, the company has followed the applicable Accounting Standards i.e. Indian Accounting Standards issued by the Institute of Chartered Accountants of India to the extent applicable and other applicable act(s) and regulation(s).

Cautionary Note

This Management Discussion and Analysis statement contains, what could be regarded as forward-looking statements and information. These statements include forecasts and estimates as well as the assumptions on which they are based, statements related to projects, objectives and expectations concerning future operations, products and services or future performance.

The company does not assume any responsibility to any change(s) in forward looking statements on the basis of subsequent developments, information or events etc., Important developments that could affect the companys operations include a downward trend in the domestic automotive industry, competition, rise in input costs, exchange rate fluctuations and significant changes in the political and economic environment in India, environmental standards, tax laws, litigation and labour relations.

The readers are hereby cautioned and advised that these forward-looking statements are subject to numerous risks and uncertainties that are difficult to foresee and actual outcomes might differ.

For and on behalf of the Board
For RACL Geartech Limited
Sd/-
Place: Noida Gursharan Singh
Date: 09th August, 2019 Chairman and Managing Director
DIN:00057602
Regd. Office: 15th Floor, Eros Corporate Tower, Nehru Place, New Delhi-110019, INDIA
Ph.: +91-11-66155129
e-Mail - investor@raclgeartech.com