Rasandik Engineering Industries India Ltd Management Discussions.

AUTO COMPONENTS INDUSTRY IN INDIA

The Indian auto industry is one of the largest in the world. Not to mention, India is currently worlds second largest two-wheeler manufacturer. The auto component industry contributes 2.3% to National GDP, providing direct employment to 1.5 Million people. The automotive industry is an engine of growth for the Indian economy. The Make in India campaign of the government has enthused the entire manufacturing sector. Focus on ease of doing business, implementation of GST and other reforms augur well for the component manufacturing industry.

A stable government framework, increased purchasing power, large domestic market, and an ever increasing development in infrastructure have made India a favourable destination for investment. It is poised to become fourth largest manufacturer of automobiles globally after China, the US and Japan. Aimed at an holistic growth model for the automotive industry, the Automotive Mission Plan (AMP 2026) has set a target of a turnover of US$ 200 Billion by 2026 for the auto component sector backed with strong exports.

• The Passenger Vehicle Industries domestic sales decline in last two quarters of 2018-19 and specifically during last quarter. The rise in fuel prices, inflation and an increase in interest rates dampened, the enthusiasm generated by the slew of new model launches by leading Original Equipment Manufacturers (OEMs).

• After a slow 4% growth last year, the Commercial Vehicle Segment bounced back strongly with a 20% growth in domestic sales.

• In the 3/4 Wheeler market, domestic sales grew at nearly 12% compared to 6% last year. Two-Wheeler sales have seen a robust growth at 15% compared to a modest 7% growth last year.

• Revenues have risen at a CAGR of 6.8% from US$ 26.4 Billion in FY08 to US$ 51.2 Billion in FY18.

• Domestic OEM supplies contribute 55.9% of the industry turnover followed by exports (26.2%) and domestic aftermarket (17.8 %). As per Automobile Component Manufacturers Association (ACMA) forecasts, automobile component exports from India are expected to reach US$ 80 Billion by 2026. The Indian auto component industry aims to achieve US$ 200 Billion in revenues by 2026.

The auto-component industry in India is today entering a new phase in terms of global exposure and adoption of technology. The priorities for the future would be to put much greater focus on R&D, to help generate intellectual property in India where world class production quality will be given. It is important to acknowledge that a transformation is round the corner and we will have to gear up to it.

MARKET SIZE

The Indian auto-components industry can be broadly classified into the organised and unorganised sectors. The organised sector caters to the OEMs and consists of high- value precision instruments while the unorganised sector comprises low-valued products and caters mostly to the aftermarket category. The Indian automotive aftermarket is expected to reach Rs 75,705 Crores (US$ 13 Billion) by the year 2019-20, according to the Automotive Component Manufacturers Association of India (ACMA). These estimates are in sync with the targets of the Automotive Mission Plan (AMP) 2016-26.

According to the Automotive Component Manufacturers Association of India (ACMA), the Indian auto-components industry is expected to register a turnover of US$ 200 Billion by 2026 backed by strong exports of US$ 80 Billion by 2026, from the current US$ 11.2 Billion.

ROAD AHEAD

It is no secret that the pain of slowdown in the auto sector will trickle down to auto component makers, albeit with a lag. Component makers need to brace up for sharp production cuts in the near term, with their large customers cutting production. They could also face cost pressures because of technological changes in the industry.

With environmental pollution concerns mounting across the world, the push for vehicles running on alternative fuel sources has gained momentum. With battery costs plunging in last few years, Electric Vehicles (EVs) are fast emerging as a desirable option.

Indias automobile industry is set to change significantly with the implementation of BS VI emission norms and proliferation of electric vehicles (EVs). While the BS VI emission norms will have a more near-term impact, the effect of EVs will be felt in medium to long term.

CHALLENGES

Indian passenger vehicle sales started on a healthy note in 2018, but weak consumer sentiments pulled down the festive demand and tweaked fiscal growth to mere 2.7 per cent to 3.4 Million units sold till March 2019. Lower sales coupled with weak outlook have impacted the demand for components too that are already facing renewed pressures from a set of new safety and emission regulations. Auto experts say its because demand for new vehicles has been tapering off for the past few months, and negativity over the future of diesel engine may flip the $51.2 Billion industry into a negative zone.

Indian component makers are gearing up to meet the challenges of supplying new technology and equipment for stringent BS-6 emission norms coming from April 2020, and the much publicised transition to Electric Mobility, vociferously advocated by the Central government and crash test requirements for cars where overall architecture of existing vehicles will undergo a massive change. As per estimates by the Society of Indian Automobile Manufacturers (SIAM), an investment of र1 lakh Crores is required for upgrading to BS-VI, with 30-40% coming from component manufacture. Besides, bigger car manufacturer Maruti Suzuki has already announced plans to stop making diesel cars from next year.

Overall vehicle production in the country was 18.5% lower year-on-year in March, compared with the 18.6% increase in the year-ago period. This reaffirms that the auto sector slowdown is here to stay for some more time. Interest rate cuts and festive seasons have also failed to lift auto sales in the second half of FY19.

OUTLOOK:

India is expected to become the 4th largest automobiles producer globally. The auto components industry is also expected to become the 3rd largest in the world by 2025.

• With the launch of "Make in India" initiative, the government is expected to vitalise a substantial investment in the auto component sector. Auto component sector is expected to invest around US$ 4.5 Billion for upgradation of products & keeping up with the new industry regulations.

• Indias projected production is around 8.7 Million passenger vehicles per year by 2020 (with most of them being compact cars).

• The auto-components industry is expected to follow OEMs in adoption of electric vehicle technologies. The global move towards electric vehicles will generate new opportunities for automotive suppliers. The mass conversion to electric vehicles may generate a US$ 300 Billion domestic market for EV batteries in India by 2030.

RISK AND CONCERNS

To be sure, a significant increase in insurance expenses, fuel costs and liquidity tightening after the IL&FS crisis affected demand locally in the second half of the year. Industry insiders are confident, however, that growth will revive in FY20, with customers advancing purchases ahead of the anticipated price increases on account of implementation of BS VI emission standards from 1 April 2020. Auto ancillary face pricing pressure from OEMs. In order to negate that these players have a challenge of continuous cost reductions through innovations to stay innovative.

SWOT ANALYSIS

Strengths Opportunities
• Including proven manufacturing capabilities • Massive growth Prospect in Auto Sector specially in EVs
• Improving design abilities • Sourcing hub for global automobile majors
• High production efficiency • Export opportunities
• Flexibility of Small Batch production • Low cost advantage primarily because of low cost high skilled manpower
• Use of latest technology
• Operating smaller plants efficiently scheme • Rising Per capita income and easy finance boost auto sales
• State-of-the-art Tool room • Rising working population
• Scaling up capacities, products and processes • Recovery in the European and American is anticipated to give
• Cost competitiveness markets
• Adheres to strict quality controls market
• Customised solution

 

Weakness Threats
• High interest rates • Trained man-power shortage
• Very high fuel prices • Indian auto component industry faces direct threat from China and Other Asian Countries
• Cyclical downturns in the automotive industry • Raising steel and other raw material prices
• Volatility in the prices of metals and other inputs could erode the industrys cost competitiveness • Cost Cutting is putting pressures component maker
• Intense competition from counterparts in other emerging economies may add pressure on margins of manufacturers • Pricing pressure is an industry norm globally and the same trend is continued in India
• Low level of research and development capability • Influx of spurious parts
• The rejection rate for Indian auto components • Shorter product life cycle
• This fragmentation Indian auto components industry is preventing players to meet large volumes demand of global auto majors • Rapidly changing technology
• Looming inflation and sharp rise in input costs
• Labour Unrest
• Indian per capita incomes are still way below Asian peers • Import of Chinese auto components into India

PRODUCT ANALYSIS & REVIEW

Your company caters to the following Product Sectors:

• Sheet Metal Components for Cars, Trucks, Tractors, Two Wheelers

• E-Rickshaw

• Die & Tools

• TWB

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The Company has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition, and that transaction are authorised, recorded and reported correctly.

The Company has established the internal control system by standardising and documenting policies and procedures for all the major processes and associated key controls, for credible reporting of the financial and operating results.

OPERATING RESULTS AND PROFITS

Strong economic growth, low interest rates and continued focus on several measures undertaken by the Company like new product introductions, cost cutting and quality and process improvements have all resulted in the Company achieving a satisfactory performance.

FINANCE CHARGES

The Finance Costs were र124.60 Million in the year 2018-19 as against र164.63 Million in the year 2017-18.

DEPRECIATION

Current Year Depreciation was at र140.61 Million in comparison to र138.45 Million in previous year.

TAX

Tax Expenses for current year is 15.11 Million and Deferred Tax amounting to र21.04 Million as compared to ( र2.74) Million and Deferred Tax amounting to र5.29 Million in the previous year.

NET PROFIT

Net Profit after tax for the year 2018-19 is र29.03 Million as compared to Net Profit of 2017-18 is र12.73 Million in the previous year.

PERSONNEL

Industrial Relations at all the plants remained cordial and peaceful throughout the year. The focus of the previous year was continuous organisational development and various training programmes introduced for skill up-gradation. The Companys focus during the year has been to improve productivity and information sharing.

CAUTIONARY STATEMENT

Statements in this Management Discussion & Analysis that describe the Companys objectives, expectations and predictions may be forward looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors could make a difference to the Companys operations include raw material availability and price, demand and pricing by the Companys major customers, change in the Government regulations, tax regimes, economic development and other incidental factors.