Setco Automotive Ltd Management Discussions.

Economic Outlook

Indias economy saw major setback during 2020-21, as an aftermath of spread of Covid Pandemic. It was very difficult time for the economy in general, and more particularly with respect to the automotive sector, which has suffered significant adverse impact as being one of the sectors which has been directly hit by the Covid 19 pandemic. This coupled with reduced investment in infra-structure created demand weakness in the economy. During lockdown phase and piecemeal withdrawal of lockdown in stages by various states, freight movement and passenger travelling almost stopped. In addition to the ongoing pressures on the automotive sector due to effects of the pandemic, some of the policy decisions of the government taken in FY 20 , such as implementation of the BS VI norms, allowing additional excel load etc. have also continued its adverse impact on financial strain on the companies operating in such sector. These factors have had a depressive effect on the total sales of new vehicles and a corresponding adverse impact on the demand for clutches. All this together had a major impact in 2020-21.

Globally, businesses were struggling to sail through external and sectorial disruptions that have shaken them up and with resilience, they are responding to the challenges by preparing for uncertainties in the months ahead to recover, as new variant of Covid has created a fear of further loss of business.

In FY2020-21, all OEMs continued to witness a sharp drop in sales particularly due to COVID-19 & related lockdown. Still, the economy is aiming to move towards a more stable regime, with a programme of reforms aimed at consolidating public accounts, proposed spending on Infrastructure and rural segment promoting investment and industrial development and improving the business climate.

The outlook for current fiscal is however positive.

Automobile Industry

Demand for passenger vehicles and commercial vehicles particularly MHCV declined sharply in 2020-21 due to Covid pandemic led to frequent plant shutdown and to cut production in the first half. Second half witnessed spread of second wave of Covid which had added fire to the fuel. Standstill of freight movement, growing unemployment coupled with economy slow down, stoppage of passenger travels and tendency among people to postpone vehicle buying decisions has reduced the demand. Further a wide range of issues burdened on the automotive industry - from industry-specific challenges to policy resets and macroeconomic changes - pressuring the auto sector sales to a large extent. The global pandemic caused by the novel coronavirus came at the time when both the Indian economy and the automotive industry were hoping for recovery. It witnessed an overall revenue impact and even after the lockdown was lifted, demand for commercial vehicles took a backseat. This coupled with the transition to BS VI norms made sailing through a chore to endure.

With the switch from BS IV to BS VI, a global-level transformation of this scale, the transition has so far been an exhausting task, needing massive investments in not only the auto sector but also in ancillary manufacturers industry. The private consumption, private investment, and exports - have slowed down significantly. The substantial fall in consumption - which is the biggest contributor to growth for the automobile industry - pointed to fragile consumer sentiment and purchasing ability. As such, the government had announced a slew of reforms to jump-start the economy.

It was also feared that with existing banking sector weakness, there was a risk of a self-sustaining negative loop in which adverse real economic developments and bank weakness reinforce each other and banks also remained away from funding for additional fleets by the operators. Reserve Bank of India, as a relief measures allowed extended time for repayment of interest and instalments by 1 quarter Kamath Committee appointed by Reserve Bank of India to study impact of Covid on various segment of industry has considered Auto manufacturing unis including auto components manufacturers as "industry under stress". Accordingly RBI covered the units under this segment for additional funding under Emergency credit line guarantee scheme where in funding was guaranteed by GOI.

The year 2020-21 has been a decisive and game-changing year for the Indian Economy as well as the automotive sector. Initial turbulence associated with the implementation of BS VI combined with continuing pressure from the competition from electric vehicles impacted business sentiment and growth rate. The auto industry, which was battling the impact of economic slowdown on falling demand, along with lower production with the transition to BS VI emission norms, witnessed further pressure by the Covid-19 outbreak in the country.

Due to severely hit by Covid and slow down during FY 2021, the company has been facing serious challenges like cash flow pressure as an aftermath of cash losses. This had a negative impact on the supply chain.

Transfer of Business under Slump Sale to Step down Subsidiary Setco Auto Systems Pvt Ltd

As mentioned above, the past year has been a very difficult time for the economy in general, and more particularly with respect to the automotive sector, which has suffered significant adverse impact as being one of the sectors having directly hit by the Covid 19 pandemic. In addition to the ongoing pressures on the automotive sector due to effects of the pandemic, some of the policy decisions of the government such as implementation of the BS VI norms etc., have also resulted in additional financial strain on the companies operating in such sector, at least in the near short term. These factors have had an overall depressive effect on the total sales of new vehicles and a corresponding adverse impact on the demand for clutches, which therefore has impacted the revenues and cashflows of the Company in last few years. In addition to the ability of the Company to manage the working capital requirements being adversely affected, the Company has also faced challenges in making additional capital expenditure for increasing production capacity and its ability to tap into new customers while continuing to service the increased demands from the existing customers.

Due to the combined pressures on the account of the aforesaid factors and the impact that they are having on the Company, it was imperative for the Companys continued well-being and the continued operations in the ordinary course that the Company re-finances its long term and shortterm borrowings and other liabilities and secures additional working capital and growth capital to further develop the Companys foray into the fast developing farm equipment sector, which diversification will de-risk the Company from the MHCV sectors OE cyclical consumption and to bolster the Companys development and production of new BS-VI variant for MHCV clutches.

The management is bullish about the overall long-term outlook of the Company and believes that there is a huge untapped potential in the business of the Company. The management also believes that the demand in the automotive sector has already picked considerably in the last few months and will further rebound in the coming months in the manner that it will offset any past losses due to pandemic etc. However, since the Companys finances have been constrained, it has not been able to meet the market demand and therefore was in need of additional capital in the coming future, to create sufficient production capacity for catering to its customers.

With a view to achieving this, the Company has in the ongoing financial year being FY 21-22, undergone a financial restructuring to unlock value of the Companys clutch manufacturing business as well as place itself on a much faster growth path. The Company has issued unlisted Non-Convertible Debentures worth Rs. 350 crores to schemes of the India Resurgence Fund managed by India Resurgence Asset Management Business Private Limited ("IRF") in the month of September 2021.The funds have been utilized inter alia to repay dues to all existing lenders including working capital lenders. Portion of the funds have also been utilized to meet overdue statutory liabilities and pressing creditors.

Simultaneously, with a view to unlock the value, the Company has executed a Business Transfer agreement on 31st August 2021, whereby the Company has transferred its clutch manufacturing business ("Clutch Business") (including all assets and liabilities pertaining to the Clutch Business, excluding inter alia the Companys investment in its subsidiaries (including Lava Cast Private Limited, which is engaged in the business of manufacturing and supplying machined ferrous castings) and associate companies, and guarantee obligations of the Company), to Setco Auto Systems Private Limited ("SASPL") a step down subsidiary of the Company. The transfer of the Clutch Business to SASPL will have the effect of ring-fencing the valuable Clutch Business from the other liabilities and obligations of the Company, and therefore have positive impact on the revenues from the Clutch Business which to an extent were being diluted while being retained in the Company. The ringfencing will made SASPL an attractive vehicle to raise both debt and equity funding required for the future growth and expansion of the Clutch Business. Consequently, SASPL was able to raise debt funding through issuance of listed non-convertible debentures for an amount aggregating to Rs. 215 crores from IRF. Simultaneously, SASPL was also able to raise equity funding for an amount aggregating to Rs. 50.00 crs against issuance of equity shares and certain convertible instruments which resulted in subscription of 35% shareholding of SASPL by the schemes of the India Resurgence Fund managed by India Resurgence Asset Management Business Private Limited. The management is of the view that with the aforesaid restructuring, the Clutch Business is well poised to be on a growth path which would result in creation of significant value for the stakeholders and will have huge long term positive impact on the prospects of the said business and therefore the Company and the entire Setco Group.

BS VI Clutch

Your company has transitioned to BS VI clutches fetching higher prices, so that all our new set of products meets the challenging requirements of future vehicles.

As one of the-largest MHCV clutch manufacturer globally with the largest design and validation facility, we have met all domestic MHCV BS VI vehicle model requirements of Tata Motors, M&M, Ashok Leyland and Daimler. Immediately after the introduction of BS VI, we successfully launched our line of fitting clutch variants to meet the public demand. Production ramp-up for BS VI clutch was also smoothly managed amid pandemic break-out.

Clutch product requirement with BS VI implementation has gone more challenging with working conditions like Limp- home mode and Torque reduction modes to meet the emission regulations and we at Setco raised to the occasion in developing Clutch to meet these challenges with almost twice the life of Disc assembly with cerametallic material for better customer value proposition with the same comfort level of Organic clutch. It is under the advanced stages of field testing with Indias leading CV customer support for implementation as an industry-first concept in India.

We have successfully retained our domestic market share in the MHCV segment of around 85 per cent amid the challenging market conditions.

We also expanded our portfolio by developing the new generation 22 dual and double clutches for tractors which passed every rigorous field testing in different farm applications and its highly demanded in the agricultural sector with the surge in the global growth.

At Setco, we always took BS VI transition as a welcoming change from the perspective of greener and cleaner environment. We are sure that our significant achievements would further reinforce and alter our product portfolio in future to meet modern automotive needs. With our efficient engineering, and the drive for innovation, design and technology, we hope to continue this domination, going forward.

Original Equipment Manufacturer (OEM)

During FY21, our OE Segment contributed 33% of the total revenue. MHCV sales were down by ~30% bringing the Industry to a decade low, this impacted in lower sales for your company. Despite steep OEM slowdown, we continue to enjoy over 85% market share and are poised to reap the benefit with the business cycle turns to growth.

Implementation of Higher Axle load notification and BS VI norms has resulted in CV manufactures to come out with products with higher power and higher load-carrying capacity. The clutch products used in this model of CV would be of bigger size resulting in higher realisation for us.

Replacement Market

Our companys aftermarket business comprises two segments; sales of clutch assemblies and service kits through the service and spare sales network of Original Equipment Spares (OES) and sales to the Independent aftermarket (IAM) network of distributors/dealers and local garages under LIPE brand.

Aftermarket is a vital part of our plan. As a strategy, the aftermarket, being a more profitable segment, was carefully developed and nurtured over the years. In FY 21, our after market segment constituted almost 65% of our revenue. The segment ensures not only sustainable growth but also decreases the vulnerable nature of the industry due to cyclical OEM demand. The already-peaked OEM cycle in the past is expected now to boost the aftermarket replacements, coming up from FY22 onwards.

Though the Aftermarket Demand for both OES and IAM were there, the company had been facing challenges in increasing top line because of production constraints.

During the lockdown period of COVID-19 pandemic, our Aftermarket channel (OES & IAM) partners (distributors and retailers) continued to work and deliver the parts to the workshops for the urgent repairs of the vehicles transporting the essential supplies.

International Business

Your company has always laid special emphasis on its international markets through its overseas subsidiaries as it considers international business opportunities as an important growth driver for the company. Our three strategically located overseas subsidiaries which cover the European, North American and Middle Eastern market are an integral part of Setco Group, and we believe its presence will help the company achieve its growth vision.

However, the COVID-19 pandemic which saw the entire world shut down for several months impacted the businesses.

Despite the challenges and uncertainty in the current economic environment; we remain very optimistic about our companys growth and future.

Setco Automotive (UK) Ltd - SAUL

While SAUL has been an integral part of the Setco Group as a Research & Development hub for the company it has also served as a marketing face in the European Continent. SAUL has been promoting our LIPE brand of clutches across Europe. However, the COVID - 19 pandemic had hit topline in the financial year ended approx. 23 per cent below last year. However, taking proactive steps your company has implemented many internal measures to reduce costs and set up some new distributors to be able to capitalize on this in the coming years. Our European presence remains one of the key growth drivers for Setco Group.

Setco Automotive (NA) Inc. - SANAI

The North American market is a lucrative growth driver for your company and we have always had a dedicated focus on the North American operations. We launched a new range of ASD clutches towards the second quarter of the financial year which were very well accepted by the market and also saw good demand in the North American market. Though the supply chain disruption impacted the supplies from India. The COVID-19 pandemic has affected The United States worst and it had the highest number of COVID-19 cases in the entire world. Under mandatory Government instructions, SANAI had suspended operations for several weeks during FY21 due to supply chain issues, weak customer demand and employee safety.

However, with our new range of ASD clutch products and our ability to penetrate into newer markets of the North American continent. In addition, we have also implemented many internal measures to make the operation leaner and this will also help in achieving our growth strategy for the American Markets.

Farm Tractor Market: An Agriculture-driven Economy:

India is the biggest producer of tractors. In fact, we are producing more tractors than commercial vehicles if you take only the medium and heavy vehicles into account. Interestingly, tractors that are being manufactured today have a powerful engine with high horsepower and accordingly, they need new types of clutches. Thus, there is a shift or even a vacuum in the market and we are entering that space and expect to reap a good growth, from both OE and aftermarkets.

The agriculture sector in India has traditionally been one of the largest employment generators employing almost 45 per cent of the population and contributing to almost 15 per cent of the GDP; a situation unlike most developed and emerging economies where these numbers are around 3 per cent-5 per cent and 1 per cent to 3 per cent (GDP contribution) respectively. Also, with the reduction in the farmland sizes held by the farmers, there is a lingering impact on the overall productivity, efficiency and output, leading to a need for efficient farming practices and mechanization based on custom-built solutions for the Indian agricultural market.

Additionally, the governments support to farmers in the form of credit and finance / subsidized loans to drive farm mechanization is the key reason for the growth of the farm equipment market.

The farm equipment market also witnessed a downturn in 20-21, owing to the start of COVID-19 lockdown and reluctance of farmers to purchase expensive high-powered farm equipment. However Govt allocating higher funds in budget proposals for Agri and rural sector coupled with good monsoon conditions and governments support to the agricultural industry and the farmers are likely to restore momentum to a great extent by the end of the current fiscal year.

At Setco, OE supplies to be started with major OE farm tractor customer from second half of FY22. Production ramp-up is in place to meet these OE requirements. Additional new customers requirements are getting focused to cater to the growing segment demand now. Extension on this important agriculture segment which is the backbone to the Indian economy is part of the growth story at Setco. Our continuous R&D efforts have resulted in the development of advanced farm tractor products within a short span of time with the focus on efficiency and productivity to drive business growth.

Presently, our facilities are equipped to meet the projected surge in demand for new tractors, manufacturing capacity expansion, introduction of new tractor models as well as technologies and growing international exports. Your company has successfully forayed into the Farm Equipment Sector.

Lava Cast Private Limited

Lava Cast was established with the vision to help Setco in its growth which is dependent on the supply of castings as it has been consistently facing shortage of quality castings over the past 3-4 years.

Lava Cast is focused on manufacturing of ready to assemble ferrous machined casting products for the automotive industry and has got approval from major OEMs for the supply of castings for external business.

Lava Cast which due to sudden downturn in the OEM production resulted in lowest capacity utilisation since inception and thus was unable to service the Debt obligation. The account has been restructured by Bank of Baroda, which gives Lava Cast benefit of elongated repayment along with lower Interest cost. As an aftermath of spread of Covid Pandemic and low offtake by M&HCV market, demand from Setco also was reduced. This has also affected sales of casting at Lava cast Pvt Ltd


Financial Analysis Rs. in Crs
Particulars FY 21 FY 20 YOY Change (in %)
Operating revenue 314.06 418.07 -24.88%
EBIDTA 14.17 60.08 -76.41%
EBIT (Operating) Margin 12.87 22.07 -41.69%
Profit Before Tax -96.29 -18.71 414.64%
Profit After Tax -105.15 -16.45 539.21%

Key financial Ratios

Particulars FY 21 FY 20 YOY Change (in %) Reasons for Change
EBIDTA Margin 4.51% 14.37% -9.86% Because of sluggish market due to Covid19, top line reduced by 25%. This has affected EBIDTA and EBIT margin
EBIT (operating) margin 4.10% 5.28% -1.18%
PBT Margin -30.66% -4.48% -26.18%
PAT Margin -33.48% -3.93% -29.55%
Debtors Turnover 0.04 0.03
Inventory Turnover 2.04 2.04
Interest coverage ratio 0.29 1.52
current Ratio 0.47 0.68
Debt Equity Ratio 2.74 1.22
Return on net worth



Rs. In Crs
Particulars FY 2021 FY 2020
Sales 38.22 55.49
EBIDTA -6.29 -3.87
Profit After Tax -27.52 -39.68


Particulars FY 2021 FY 2020 FY 2021 FY 2020
In GBP mn In GBP mn In INR Crs In INR Crs
Sales 2.36 3.07 22.97 27.35
EBIDTA -0.56 -0.17 -5.48 -1.56
Profit After Tax -0.58 -1.04 -5.67 -9.26


Particulars FY 2021 FY 2020 FY 2021 FY 2020
In USD mn In USD mn In INR Crs In INR Crs
Sales 4.60 5.99 34.07 42.45
EBIDTA -0.31 0.20 -2.31 1.41
Profit After Tax -0.39 -0.20 -2.92 -1.44