RACL Geartech Ltd Management Discussions.

RACL Geartech Limited ("RACL or Company") is one of Indias leading automotive gear manufacturers. The Company is engaged in the Business of manufacturing of Automotive Component Transmission Gears and Shafts, Sub-assemblies, Precision Machined Parts and Industrial Components. After establishing a dominant positioning in the domestic market, in the last few years the Company has focused on consciously building global customer relationships and growing its exports. In this business, RACL works on identifying markets, determining market positioning, developing innovative sourcing and distribution. RACL has evolved as a leading supplier to OEMs in the Automotive Sector and some prominent names from the global arena have entrusted their faith in the Company.

RACL has a vision for the future and we are working with passion to achieve it, keeping in mind the following parameters:

• How are the Industry and the market evolving.

• What are the future challenges and opportunities.

• How can OEMs benefit from these new challenges and opportunities.

• What are the implications for different market segment.

• Impact of Covid Crisis on the Market.

GLOBAL ECONOMIC OVERVIEW

COVID-19 has triggered the deepest global recession in decades. While the ultimate outcome is still uncertain, the pandemic will result in contractions across the vast majority of emerging market and developing economies. It will also do lasting damage to labor productivity and potential output. The immediate policy priorities are to alleviate the human costs and mitigate the near-term economic losses. Once the crisis abates, it will be necessary to reaffirm a credible commitment to sustainable policies and undertake the reforms necessary to buttress long-term prospects. Global coordination and cooperation will be critical.

The year 2019 was a difficult year for the global economy with world output growth estimated to grow at its slowest pace of 2.9 per cent since the global financial crisis of 2009, declining from a subdued 3.6 per cent in 2018 and 3.8 per cent in 2017. COVID-19 has further delivered an enormous global shock, leading to steep recessions in many countries. The baseline forecast envisions a 5.2 percent contraction in global Gross Domestic Product (GDP) in 2020—the deepest global recession in decades. Per capita incomes in most emerging and developing economies will shrink this year. The pandemic highlights the urgent need for policy action to cushion its consequences, protect vulnerable populations, and improve countries capacity to cope with similar future events. It is also critical to address the challenges posed by informality and limited safety nets and undertake reforms that enable strong and sustainable growth.

The automobile sector is also substantially hit by the outbreak. OEMs and parts suppliers have yet to return to full production capacity. Consequent delays in delivery might impact the market at multiple levels from postponed new car model launches, shattered supply chains, financially drained SMEs, and dampened vehicle sales in Q1,2020. If we are to believe the forecasts, automotive sales most likely will decrease 14-22% among the China, US and European markets in 2020. However, as the effect of the pandemic start to wane and the industry begins to recover, OEMs will explore various options to drawback consumers and offset the drop in sales. The pandemic also paves way for new opportunities in terms of other mobility verticals such as shared mobility, electric vehicles, connectivity solutions, after market, and vehicle leasing. Personal mobility modes will make a strong comeback. The demand for micro-mobility solutions, in particular, will surge. Micro-mobility solutions are easy-to-use and ideal in congested city environments. In the current context of Covid-19, these single or double seaters, like mopeds and scooters, offer riders better control over their health & wellness. Automakers are likely, therefore, to explore the potential of this sector as they attempt to draw up blueprints for a post-corona virus scenario.

INDIAN ECONOMY

The International Monetary Fund projected shrinkage of 4.5% for the Indian economy in 2020, due to the unprecedented coronavirus pandemic that has nearly stalled all economic activities. However, the country is expected to bounce back in 2021 with a robust 6% growth rate. Like other countries around the world, India too is grappling with the conundrum of reopening the economy - protecting and restoring activity this year to help shape a return to growth in 2021 - while containing the spread of the virus, and potentially further lockdowns.

Indias government deficit stood at - 7.4% by the end of 2019and should decrease slightly in 2020 and 2021, reaching -7%. According to the IMF, the inflation rate increased from 3.4% to 4.5% in 2019, although it is expected to decrease to 3.3% in 2020 and slightly increase to 3.6% in 2021 (April 2020 World Economic Outlook IMF). Moreover, as the Reserve Bank of India has cut its key policy interest rate five times in the first 10 months of 2019, the room for monetary policy manoeuvring has also narrowed. Still, the economy is aiming to move towards a more stable price regime, with a programme of reforms aimed at consolidating public accounts, promoting investment and industrial development and improving the business climate. The market stimulus and reforms introduced by the government included corporate tax rate cuts, cash transfers to farmers, rural developmental spends, payments of all pending Goods and Services tax (GST), Income Tax Refunds, and further liberalisation of Foreign Direct Investment (FDI). These measures were supported by the Reserve Bank of India (RBI) with a series of rate cuts, reduction in the Cash Reserve Ratio (CRR), moratorium on term loans and working capital loans, the injection of liquidity through various modes to help the industry get back on its feet. The measures should begin to facilitate growth. Numerous foreign companies are also setting up their facilities in India on account of various Government initiatives like Make in India and Digital India which aim to boost countrys manufacturing sector and increase purchasing power of an average Indian consumer, which would further drive demand and spur development, thus benefiting investors.

INDUSTRY OUTLOOK

India became the fifth largest auto market in 2019 with sales reaching to 3.81 million units. It was the seventh largest manufacturer of commercial vehicles in 2019. However, The Indian automobile sector registered a drop of nearly 18 percent in domestic sales in the financial year 2019-20. Majority of contribution to this decline was due to various amendments to emission norms, higher insurance costs, higher fuel prices and other vulnerabilities due BSVI shift. The Covid-19 outbreak has further added to woes for the auto industry. CRISIL Research projects domestic auto-component production revenue growth to decline by 15-17% in fiscal 2021. Volume demand from OEMs will decline by 13-24% across asset classes. Further, export demand is also expected to decline by 20% (in value terms) as more than 50% of our exports are to Europe and US and demand is expected to decline from these markets amid Covid-19 outbreak. Demand from the replacement market is expected to decline by 12-14% (in value terms) due to limited movement of vehicles in fiscal 2021 amid the lockdown imposed. Lower freight demand even post the lockdown will limit the movement of trucks hurting demand in the replacement market.

The Indian auto-components industry has experienced healthy growth over the last few years. In 2018-19, the turnover of the Indian auto components sector was Rs 3,95,902 Crore ($57 billion), its contribution to GDP 2.3% and to manufacturing GDP 25%.

OPPORTUNITIES

Although, post COVID crisis, the short-term demand shall have an adverse effect on Automotive demand patterns across the industry, but in the long term, post Covid era shall open up huge opportunities for the Indian auto components sector to become the factory of the world.

Taking a cue from various feedback from market reactions, there will be significant changes in buying behavior after the lockdown. Consumer preference will be more towards individual health, hygiene and cleanliness during travel. Post the pandemic, we expect consumers to switch more towards personal mobility. Public Transport shall take a backseat in the medium term, thereby giving a rise to demand for 2 wheelers and 3 wheelers. Thus, RACL shall have huge opportunity in improving its penetration in the domestic market because of majority of product base having presence in 2-wheeler and 3 wheeler segment.

It is widely expected that even the Global customers shall shift their focus from East Asian Countries to India. Hence, demand of Export of Auto components from India is set to grow manifolds. Manufacturers who are already exporting to Western countries, shall become the first choice of prospective buyers. RACL has a leading edge in this aspect also, as we have a well-established connect with major European & American OEMs with unblemished track record of over a decade.

THREATS, RISKS AND CONCERNS

More than ever before, today, the automotive industry is in a state of constant pressure. Customers are demanding new and stringent quality norms - often without showing willingness to pay additional cost. Regulators are rightfully demanding strictest adherence to environmental and safety standards, thus increasing cost of production. Major technology players, with deep pockets, are pushing investments in diverse mobility business models and threatening the current & traditional OEM dominance.

Advancement in Vehicle technologies & increasing customer expectations, is putting tremendous pressure on component manufacturers to invest continually on advanced manufacturing processes, which, in turn requires heavy Capital Investments. Uncertainties erupting out of Geo-Political scenarios, provoked further by Covid- 19 pandemic threats are a major inhibiting factor in deciding a clear strategy towards making Capital Investments.

Highly uncertain & disruptive atmosphere demands robust & rigid strategies on one hand, but on the other hand, the low hanging fruits of business opportunities require flexible approach for reacting to short-term changes.

RISK MITIGATION

A constant monitoring of market trends and indications regarding the anticipated scenario will help to actively shape suppliers future and in a way that plays a significant role in the automotive supply chain of 2022 and beyond.

Risk management at RACL is an enterprise-wide function and a holistic approach has been adopted based on Enterprise Risk Management (ERM) Framework. The framework encompasses practices relating to identification, assessment, monitoring and mitigation of various risks towards achievement of business objectives. The ERM is aimed at dealing with uncertainty and to minimize adverse risk impact on business objectives and enables the Company to leverage business opportunities effectively. The Company relentlessly endeavors, not only, to minimize risks, but convert them into business opportunities that allow it to maximize returns for shareholders from diverse situations. The Company has aligned risk management process with every part of the critical business processes to ensure that the processes are designed & operated effectively towards the achievement of business objectives.

Risks are identified & assessed across all key business functions in a holistic manner.

INTERNAL CONTROL SYSTEMS AND ADEQUACY

The Companys philosophy towards internal controls is based on the principle of healthy growth with a proactive approach to risk management. The Company has a proper and adequate system of Internal Control to ensure all the assets are safeguarded and protected against loss from unauthorized use or disposition and the transactions are authorized, recorded and reported correctly. The Internal Control is supplemented by an extensive program of internal audits, review by management and procedures. It is designed to ensure that the financial and other records are reliable for preparing financial statements, other data and for maintaining accountability of assets. The Company ensures adherence to all statutes.

FINANCIAL PERFORMANCE

In the Financial Year 2019-20, the Company achieved an overall income of Rs 212.84 crore from operations as compared to Rs 190.96 crore in 2018-19. The Company achieved an operating profit of Rs 21.90 crore (PBT) as compared to Rs 17.34 crore (PBT) 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. However, there were significant requirements for new product development of existing clients. A wider product portfolio was important to build the export business.

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 rose to 67.05% of the total sales this year amounting to Rs 142.37 Crores. The global markets are under stress, RACL has miniscule share of the global pie and there is ample scope and opportunities to grow our exports aggressively.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES (HR)

People management is the backbone of your Company and it is regarded as one of the important resources for the success of RACL. Over the years, your Company has strengthened its HR processes to ensure continual development and growth of its employees. HR processes are fine-tuned and updated to attract and recruit talent into the Company.

The Company strongly believes in enhancing the value of its people asset consistently. The Human Resource agenda continues to support the business in achieving sustainable and responsible growth by building the right capabilities in the organisation. It continues to focus on progressive employee relations policies, creating an inclusive work culture and a strong talent pipeline.

The Company has well documented and updated policies in place to prevent any kind of discrimination and harassment, including sexual harassment. The Whistle Blower Policy plays an important role as a watchdog.

The Company currently has adequate man power and personnel to conduct the business without any complication or hindrances. The overall human and industrial relations have remained peaceful and composed during the period under review. As on 31st March, 2020, the total number of employees on the Companys payroll stood at 479.

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. change of 25% or more as compared to the immediately preceding financial year) has been provided hereunder:

S. No. Particulars Unit of Measurement 2019-20 2018-19
1. Debtors Turnover Ratio Times 3.95 4.15
2. Inventory Turnover Ratio Times 5.12 5.28
3. Interest Coverage Ratio Ratio 5.73 5.18
4. Current Ratio Ratio 1.26 1.18
5. Debt Equity Ratio Ratio 0.36 0.47
6. Operating Profit Margin i.e. EBITDA % 19.55 16.60
7. Net Profit Margin % 7.69 4.96
8. Return on Net worth % 19.21 14.10

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 STATEMENT

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and others may constitute ‘forward looking statements within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections and so on whether express or implied. Several factors could make significant difference to the Companys operations. These include climatic conditions and economic conditions affecting demand and supply, government regulations and taxation, natural calamities and other statutes over which the Company does not have any direct control.

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 of Directors
RACL Geartech Limited
Mr. Gursharan Singh
Chairman & Managing Director
DIN:00057602
Date: 31st July, 2020
Place: Noida