Rane Brake Lining Ltd Management Discussions.

1. Company Overview

The Company manufactures and markets auto components viz., safety critical friction material products such as brake linings, disc pads, clutch facings, clutch buttons, brake shoes and railway brake blocks for passenger cars, utility vehicles, commercial vehicles, two wheelers and railways. The Company operates predominantly in a single reportable segment viz., components for the transportation industry.

2. Economic Review

2.1 Global Economy

According to the International Monetary Fund (IMF), Global economy growth is estimated to have grown at 2.9% in 2019, slower pace compared to 2018. This was primarily driven on the back of increasing trade tensions between US and China which led to decline in global manufacturing activity and trade. The slowdown in activity was severe across emerging market and developing economies, including Brazil, China, India, Mexico and Russia, as well as a few economies suffering from macroeconomic and financial stress. Increasing uncertainty in the economic environment amid rising tariffs and rapid shifts in trade policies resulted in deteriorating business confidence and dampened investment growth across most region. Sluggish demand for durable goods led to sharp decline in capital spending and international trade flow was severely impacted.

According to the IMF, the global economy is projected to contract sharply by 3.0% in 2020 amid the spread of the novel coronavirus which has significantly disrupted economic activity leading to weakening global demand and massive decline in investment and global trade. However, the IMF believes that there will be revival in growth after the impact of pandemic fades during the second half of 2020 and that the global economy is projected to grow by 5.8% in 2021. In an attempt to limit the economic and financial fallout from the coronavirus pandemic, various countries have adopted monetary easing and fiscal stimulus to revive the economy. Though the economy is likely to remain under stress in the near term, containment of ongoing contagion risk, pause in trade war, improving liquidity condition coupled with low oil prices is likely to bring stability to the battered economy.

2.2. Indian Economy

According to IMF, Indias economy is estimated to have grown at 4.2% in FY20, significantly slower rate than in FY19. The slowdown can be attributed to ongoing stress among non-banking financial companies (NBFCs), which resulted in credit squeeze and negatively impacted consumption, investment and exports. The government announced several measures to revive the economy which includes capital infusion into public sector banks to improve liquidity and push credit offtake, merger of public sector banks to enhance credit capacity, reduction in policy rates, sharp cut in corporate tax rate, sops for real estate for last mile funding for stalled projects and support to NBFCs under the Partial Credit Guarantee Scheme.

The Covid-19 pandemic has disrupted trade and manufacturing activity and brought the economy to a standstill. The Central Bank reduced policy rates and injected liquidity in the system to counter the looming threat of slowdown and kick-start the economy. The current estimates from various agencies suggest that Indian economy is expected to decline in FY21 on concerns over the impact of deadly coronavirus on the manufacturing and trading activity.

3. Indian Automobile Industry

The Indian automobile industry faced major headwinds during the fiscal year as demand environment remained severely impacted by slowdown in economy. The industry continued to face severe challenges in terms of credit availability owing to liquidity crisis in the NBFC sector, rising cost of vehicle ownership and stiff competition from growing organised pre-owned vehicle market.

The Passenger Vehicle (PV) segment experienced decline of 15% affected by weak consumer sentiment, credit availability, higher purchase prices on account of insurance regulation and confusion around BS VI and EV transition. The decline in PV demand could also be partly attributed to the rising penetration of shared mobility and marginal shift toward pre-owned cars especially in entry-level segments. Slew of innovative launches amid growing preference for Utility Vehicles (UV) resulted in slight growth of 2% whereas the Passenger Cars volume declined by 20%.

The Commercial Vehicle (CV) segment volumes declined by 33%. The weaker economy resulted in lesser cargo demand and slower pace of infrastructure projects. Upward revision of axle load norms coupled with falling freight rates dented demand environment. The medium and heavy commercial vehicles (M&HCV) segment was significantly impacted with volumes declining 47% due to increased capacity post axle load norm revision along with poor freight availability, falling freight rates and slowdown in execution of infrastructure projects. The Light Commercial Vehicles (LCV) segment reported volume decline of 22% owing to slowdown in private consumption and weak finance availability. The Small Commercial Vehicles segment reported volume decline of 25%.

The farm tractor segment experienced decline of 14% owing to low yield of rabi crops in 2019, erratic monsoon resulting in delayed sowing and lower demand from non-farm and export markets.

Two-wheeler segment experienced 14% decline due to sharp price increase on account of insurance regulation, poor consumer sentiment and credit availability.

Industry Segment Growth in %
(Production figures) (YoY change)
Vehicle Segment FY20 FY19
Passenger Cars (PC) (20) (1.3)
Utility Vehicles (UV) 2 0.5
Multi-Purpose Vans (38) 20.6
Passenger Vehicles (PV) (15) 0.1
Small Commercial Vehicles (SCV) (25) 39.7
Light Commercial Vehicles (LCV) (22) 12.4
Medium & Heavy Commercial
(47) 28.4
Vehicles (M& HCV)
Commercial Vehicles (CV) (33) 24.1
Farm Tractors (FT) (14) 11.3
Two-wheelers (14) 5.8

Source: Society of Indian Automobile Manufacturers (SIAM)

4. Business Review

4.1 Domestic Market

The Company reported 8.4% decrease in the domestic sales. The overall demand environment remained challenging in FY 20 and COVID 19 pandemic resultant lockdown in March end further affected the sales of the Company. The Company reported drop in all segments i.e., 10.6% in Brake Linings, 5.6% in Disc pad and 13.8% in other automotive parts.The break-up of the domestic sales by products is given below:

Products 2019-20 2018-19 Growth in %
Brake linings 184.85 206.79 (10.6)
Disc Pads 230.59 244.36 (5.6)
Other Automotive Parts 34.35 39.86 (13.8)
Total 449.79 491.01 (8.4)

The sales to Original Equipment Manufacturer (OEM) and Aftermarket (AM) declined 12.7% and 1.6% respectively. In OE segment, the market drop was partially mitigated through volume enhancement in Two Wheeler segment. Despite, adverse market condition, the Company was able to manage sales in aftermarket segment through new product launches, new business and range expansion across Brake Linings, Disc pads including Two Wheeler products.

Market 2019-20 2018-19 Growth in %
OEM 264.31 302.60 (12.7)
Aftermarket 185.48 188.41 (1.6)
Total 449.79 491.01 (8.4)

4.2 Exports

The export for the year was Rs20.28 crores, a decrease of 7.8% compared to the previous year. To revive the growth in export market, the Company is reviewing overall exports strategy by looking at various regions and products.

4.3 Operational and Financial Performance 4.3.1 Financial Review

The Company registered a turnover (net sales) of Rs470.98 Crores which was 8.4% lesser than the sales reported for fiscal 2019 with new products generating 8.4% of the revenues. The profit before tax was Rs44.68 Crores registering a decrease of 9.4% over the previous year. The profitability growth was affected owing to adverse forex movement, key raw material price and specific cost increases in product validation expenses. The significant change in respect of Inventory turnover is due to lower despatches as a result of the COVID-19 lockdown, which led to accumulation of inventory at the year end. There is no significant change in other ratios. The return on networth declined to 15.66% for FY 20 as against 18.36% for FY 19 due to drop in revenue on account of disruptions in despatches at the year end due to the complete lockdown and also general slowdown in the automobile sector during FY 20.

4.3.2 Operations and Manufacturing Review

Negative demand environment in Indian automotive sector led to severe drop in the overall business for the Company. The Company was able to partially mitigate the sales drop by focusing on new businesses and new product segments. The Company registered new business worth Rs39.68 Crores during the financial year and the growth in two wheeler disc pad business was 18% against previous year. Energy conservation continued to be a key focus area. In this regard, Company added 1.2 MW Solar capacity in-house at our Puducherry Plant during the financial year. Considering potential demand for disc pad segments covering both 4 wheeler and 2 Wheeler segments, Company has been proactively creating capacities with special focus on quality enhancement through latest technologies at our Plants at Trichy and Puducherry.

People development initiatives continued to have specific attention and yielding positive benefits. Long Term Settlements (LTS) with our team members at

Puducherry Plant concluded successfully well within timelines. Successfully completed key customer audits across all locations of the Company. Continued to have process audits by our technical collaborator Nisshinbo Brakes Inc., Japan (NISB). Some of the other key operations and manufacturing highlights include: i. In-house solar project of 1.2 MW in Puducherry Plant ii. Quality enhanced capacity creation and simple automation projects at Puducherry, Hyderabad and Trichy Plants. iii. Enhanced formulation library to cope up with present and future vehicle technologies iv. Special focus on AM with improved coverage on vehicle parc and new launches v. "Health and Safety Committee" formed at Group level and specific initiatives taken up primary focus on employee health and safety vi. ‘Great Place to Work Certified organization - for a consecutive period of fourth year vii. Total revamp of R&D testing facilities

4.4. Pursuit of business excellence

Total Quality Management (TQM) principles continued to rule as a basic mantra and enhanced ‘Business Excellence Model helping us to have a win-win situation. Customer continued on top of the mind and specific proactive measures helped us to gain ratings across all Tier 1 customers during the year. Further, following are the awards won during the year:

• Best Supplier 2019 – Friction from Brakes India Private Limited

• HR Excellence award from ACMA

• Various Outstanding / Platinum / Gold awards from QCFI; ABK - AOTS in different categories and

• Noteworthy to mention that our union members stood at first category in ‘Best Supporting Union award from Arghaa Consultancy, Chennai

4.5 Opportunities and Threats

India is a growing economy, with an ever-increasing need for a robust transportation network to link its various metros and rural areas. Increase in working-age population, rising prosperity, easier access to finance and increasing affordability is expected to boost demand in the auto component industry.

Economic slowdown due to the Covid-19 pandemic which has paralyzed manufacturing and trading activity has posed serious challenges for the industry in the current year. Moreover, technological changes and environmental regulation continue to weigh on sector. The main threats to which auto component industry is exposed to are:

• Economic slowdown leading to contraction in demand remains one of the major threats which could lead to decreased volumes and capacity utilization.

• Continuing cost reduction demand from OEMs from whom the major portion of the future growth is expected to come

• Increasing commodity prices and volatile forex movements.

4.6 Outlook

The spread of the Coronavirus pandemic is likely to result in severe contraction in global economy resulting in job losses, weak demand environment and stress in financial markets. The auto sector which has been going through its worst slowdown with slump in demand amid weak consumer sentiment and an uncertain regulatory environment is likely to face further headwinds during the first half of the fiscal 2021 owing to adverse economic impact of Covid-19 and cost push from new emission norms. Moreover, exports could be impacted owing to challenges being faced by the global auto industry in terms of slowing demand. However, the impact of the pandemic is likely to remain in the short term. In the medium term the Indian auto component manufacturers have the opportunity to establish themselves as preferred manufacturing suppliers to the global auto industry.

5. Risk Management

The Company has laid down well-structured procedures for monitoring the risk management plan and implementing the risk mitigation measures. The risks are broadly classified into strategic risks, operational risks, financial risks and statutory compliance risks. These risks are rated based on factors such as past year experience, probability of occurrence, probability of non-detection and its impact on business. The top management reviews the strategic risks, the risks with high probability and high impact every quarter and presents its report along with risk mitigation plan to the Board of Directors on half-yearly basis. The strategic risks are taken into consideration in the annual planning process with their mitigation plan. Other risks are covered as part of internal audit process and presented to the Audit Committee every quarter. The business processes risks and the related controls are subjected to internal audit and reviewed on a quarterly basis. The risk ratings are revalidated with the top management as part of the internal audit process every quarter. The overall re-assessment of risks at company level is carried out and presented to the Board of Directors once in two years for their review.

Risk Nature of Risk Risk Mitigation Strategies
The Company constantly strives to:
Strategic Industry / Market risk Around 90%+ of revenue is derived from Indian Automotive sector. Hence, any drop in vehicle production will have a significant impact to companys business a) Improve presence in Aftermarket segment which is sizeable portion of the revenue and presents opportunity to compensate for any drop in OE segment
b) Increase revenue from international markets (outside of India)
c) Add new products to increase organic revenue and diversify customers across vehicle segments
Technology Obsolescence Risk Auto Industry and customer preference undergoes changes resulting in technology obsolescence The Company has consistently delivered cutting edge technology products with:
a) Technical collaboration with the global majors
b) Enhanced R&D capabilities, localization of testing and validation capabilities
Competition Maintaining market share in the Competitive market and availability of unorganized players further pose challenge The Companys long standing relationship with OEMs, state-of-the-art facilities and best-in-class processes help deliver superior value to the customers. We periodically conduct customer survey to understand customer feedback and work in furthering our relationship.
Quality / Processes Quality and Delivery are sacrosanct for safety critical products supplied by the Group Skilled workforce, imparting job skill enhancement training, enhancing supplier capabilities and robust manufacturing processes help us to mitigate quality and delivery risk.
Operational People Risk Attrition of key personnel could impact business operations and growth. The Companys HR processes are constantly upgraded to attract, retain and develop talent. The policies are people-centric and industry accolades on HR practices help attract talent. The dedicated training centre supports to build functional capabilities and develop strong leadership pipeline. The performance management system and other employee engagement initiatives help to develop and retain talent.
The Company constantly strives to mitigate the input cost increases by:
Raw Material (Input) Price Risk Material cost is significant part of the cost and volatility in the price of raw material costs will erode margin a) Procurement function will work on cost reduction initiatives through alternate sourcing, localization, etc.
b) Further, negotiating to pass through specific input cost increases suitably to the customers.
c) Work on process improvements, yield improvements, etc.
The Company uses multi-pronged approach as suitable to the scenarios
Financial Currency Risk Exposed to foreign currency exchange risk as we export our products to various countries and import raw materials. a) Optimally balance the import and export to create natural hedge.
b) Work with customer to index prices to mitigate currency fluctuations.
c) Taking simple forwards on a rolling basis to protect its export realization.
Interest Rate Risk Use of borrowings to fund expansion exposes to interest rate risk The Company manages interest rate risk on the following basis:
a) Use of internal accruals to fund expansion
b) Constantly optimize working capital to reduce interest costs

6. Human Resource Development and Industrial Relations 6.1. Talent Development Initiatives

In FY20, the Company focused on the following competency enhancement initiatives:

Leadership Development

• Young Leadership Development (YLD) Batch-3 was rolled out for first time managers and matured individual contributors. 4 participants underwent 4 days of facilitator led workshop delivered in two modules. The third module, an online learning plan curated from various open sources of learning, based on the conceptual underpinnings of the outbound experiential learning.

• As part of High Potential Leadership Development (HPLD) Batch-6, 7 participants are working on action learning projects in teams within their respective businesses. Few of the high impact projects are Setting up Digital Passenger Car Lining (PCL) manufacturing facility and profitability enhancement of friction material plant. These projects were reviewed continuously by senior executives and peer learning session was organized to facilitate cross-learning.

• "Leader as Coach" Batch – 2 was launched to cultivate appreciation of behavioural change and encourage the culture of development. Leaders were provided with insights on the elements of individual development through the concept of breakdown, skill, practices & reflection and four different dimensions of individual development as part of facilitator led sessions. 2 leaders are undergoing the 10-month learning journey and have completed the first module comprising of 2 days of classroom session and one-on-one interaction with the coach.

Rane Manufacturing Systems Professional Programme (RMSP)

10 participants from Batch-2 completed their 18-month learning journey. As part of course completion, the assessors were invited to share their feedback on the various projects handled by the participants. 3 participants were awarded with cash prize and merit certificate on the basis of final evaluation by Jury. 12 participants from Batch 4 completed the course and are due for final evaluation. 11 participants from Batch 6 are undergoing their RMSP learning journey.

Managerial & Technical Competency Development Programs

58 programs were organized during the year comprising of manufacturing systems, general management, soft skills and business specific design for manufacturing, QC methodology, customized SAP programs were organized as part of business specific programs. Manufacturing systems programs such as low cost automation, noise, vibration & harshness, value engineering were also organised. Plant &functional heads underwent "Making an Informed Choice" program and were provided with insights and skills on talent assessment & demonstrating Rane employer brand promise with the candidates.

6.2. Employee Engagement and Well-being

The Company believes in enhancing employees everyday experiences and in building meaningful workplace relationships. Employee feedback surveys and discussions help us by providing insights on what is important to employees. The follow up mechanism ensures that change and progress occur. In recognition of our efforts, four of our Group Companies including the Company have been certified as Great Place to Work (GPTW) companies with the Company retaining this recognition for three consecutive years and all business units GPTW score has increased in comparison with the previous year.

With an objective to promote a culture of well-being and improving health outcomes, the Company organises wellness events, renders wellness services and provides supplementary resources. The Company rolled out an app based workplace wellness program where employees compete in wellness goals through challenges such as stepathon.

6.3. Digital Initiatives

Learning Management System (LMS) - To transform the learning experience of employees and fast track the competency enhancement, Rane Institute for Employee Development (RIED) rolled out LMS. The platform will facilitate the learning cycle of employees through enabling self-nomination, supporting multiple learning methods and identifying & tracking individuals developmental needs thus promoting a learner centric approach culture. This new age platform provides several features such as virtual classrooms, 360- degree feedback, digital library and tracking of learning effectiveness.

Kick-start is a mobile application that provides consistent induction experience to all the new hires. The platform provides micro learning content on Rane Groups mission, products, policies etc. leading to better learnings results and business outcomes and improving the engagement levels significantly.

To facilitate the whistle blowers to report instances of unethical behaviours securely, a workflow was rolled-out. The entire cycle of reporting to resolution compliance has been addressed through the whistle blowing management system.

6.4. Industrial Relations

During the financial year, long-term wage settlements with the employee union were signed in one of the plants. The industrial relations were generally cordial in all the plants. A group level industrial relations council was constituted with the objective of co-creating a healthy working environment by promoting peace and harmony among all the segments of employees. The focus areas for the council includes interpretation and implementation of legislations, workforce mix planning for optimal deployment and sharing best practices.

7. Corporate Social Responsibility (CSR)

RBL continues to be a very responsible corporate citizen and places significant weightage on carrying out its Corporate Social Responsibility duties and create a positive impact on the society. The Company is committed to make meaningful contribution to the society as part of our CSR initiatives.

RBL contributed to Rane Foundation (RF), the CSR arm of Rane Group, which primarily focused on Education and Healthcare in 2019-20.

Education

The Rane Polytechnic, established at Trichy in the year 2011, under the aegis of Rane Foundation has stepped into its ninth academic year. The institution was accredited by the National Board of Accreditation (NBA) for its Diploma in Mechanical Engineering program in 2017 and re-accredited for 3 years till 2022 in 2019–20. Over the last few batches, 1284 students have completed their diploma program, of which, 212 students will complete the program in last academic year. Over 90% of the students were placed through campus interview. The institution endeavours to offer quality technical education and sustainable development to the rural youth.

Rane Foundation embarked on its next major project, opening of a school named ‘Rane Vidyalaya in Trichy in June 2018. Rane Vidyalaya is recognised by Directorate of School Education, Tamilnadu and is affiliated to the Central Board of Secondary Education, New Delhi. In 2019-20, it operated with a student strength of 235, in standards Kindergarten to V.

Healthcare

In the healthcare space, the foundation extended support for the following initiatives:

• To physically challenged people in and around Tiruchirappali through Freedom Trust. With the help of qualified Doctors and paramedical staff, a disability assessment camp was conducted in Spastics Society Campus, Tiruchirappalli District and mobility aids were distributed to 35 beneficiaries as part of this project.

• Towards constructing a state of the art hospital that will lay emphasis on improving diagnostics and treatment options for breast cancer, by Shri Dhanvantri Trust. The name of the upcoming hospital is "Chennai Breast Cancer Research Foundation".

Other major CSR activities carried out by the Company during FY20 are as follows:

• Special focus on Government primary schools infrastructure development like toiletries for girls school at Srigiripally near our Hyderabad Plant and other initiatives at Nolambur Chennai, Puducherry and Trichy Plants

• Engaged in supporting education for children at SOS Childrens Village of India and conducted motivational talks, career guidance and annual sports meets at schools

• Continued green initiatives such as greenery development, lake restoration, etc.

8. Internal Control Systems

The Company has put in place robust internal control system to prevent operational risks through a framework of internal controls and processes. These controls ensure that the business transactions are recorded in a timely and complete manner in the financial records, resources are utilised effectively and the assets are safeguarded.

The internal audit function is carried out by a professional firm of independent assurance service providers. The Audit Committee and the Board in consultation with the internal auditor, statutory auditor and operating management reviews and approves the annual internal audit plan. The scope also covers the internal financial controls and internal controls over financial reporting. The internal audit findings are placed before the Audit Committee at each of its quarterly meeting for review. The managements responses and corrective measures are discussed in the Audit Committee meetings. This process ensures robustness of internal control system and compliance with laws and regulations including resource utilization and system efficacy.

9. Cautionary Statement

The information and opinion expressed in this report may contain certain forward-looking statements, which the management believes are true to the best of its knowledge at the time of its preparation. Actual results may differ materially from those either expressed or implied in this report.