SNL Bearings Ltd Management Discussions.

Industry structure and development

Your company operates in the Antifriction bearing industry and the major user industries of antifriction bearings are automobiles, general engineering, railways, electrical equipment etc. Your company manufactures needle bearing products and operates in the following market segments:

1. Automotive OEM 2. After Market 3. Exports

For your company, the demand is approximately 90% from original equipment manufacturers (OEM) and the balance is for supplies to the replacement market / exports. The demand for roller bearings has been subdued with the global automotive industry experiencing a challenging phase in 2019-20, and

OEMs especially facing multiple obstacles all over the world. China faced its first ever decline in vehicles sales in over 20 years, the USA market grew marginally, the shockwaves of Brexit are expected across global markets. With the global pandemic crisis forcing the automotive industry to shutter-down across the world, the post-lockdown scenario is bound to pose more unprecedented challenges to respond and adapt to new circumstances.

The automotive industry is the largest consumer of bearing products and your company supplies to the

2/3 wheeler, passenger cars, commercial vehicles and farm equipment segments. Overall demand from the Automotive industry during F.Y. 2019-20 has shown de-growth in almost all segments as the Indian economy slowed affected by events like liquidity crunch, policy uncertainties and the costs/pricing pressures arising from the implementation of the BS-VI emission norms. De-growth in production volumes have ranged from 14% to 30 % in various segments. The Company has de-grown by 15%, though the Companys market share in the Needle bearing segment continues at an estimated 6-7%.

Roller bearings have wide ranging applications and are critical to industrial progress. Benefiting lower oil prices and a slower pace of monetary tightening than previously expected, and easing of inflation pressures, With the worlds industrial nations planning to move their supply chain away from China and India likely to be one of the beneficiaries of such a move, it would continue to remain a fast growing major economy in the world and is expected to be one of the top three global economic powers over the next decade. Market growth in the Indian mobility industry for both people and goods has a very large potential given the geographical spread and size of population- an aspirational young population spurs personal mobility while the need to establish strong supply chains between producers and markets drives growth for goods mobility. Also new vehicle models are being constantly introduced; there is expansion of the public transport systems, dedicated freight corridors for movement of farm produce.

Your Companys installed manufacturing capacity will enable it to continue offering a wide range of products to its customers once demand revives. Customer relationships and contact are the focus areas to re-assure them that quality products delivered in a timely and cost efficientmanner will be our priority.

Economic Environment/Outlook

The COVID 19 pandemic and the stringent nationwide lockdown from March 25, 2020 has severely impacted the economy and business. Different containment measures such as sealing borders, closing public places, suspending transport services and state-specific lockdown still continue in affected areas, disrupting supply chains for the manufacturing sector. Indias automobile industry seems headed for another year of double-digit sales decline duringthecurrentfiscalF.Y. 2020-21. Overall sales volumes are likely to plunge to multi-year lows, with job-loss, pay-cut fears and restrictions on intra state & interstate movement dampening consumer sentiment and freight demand remaining low. However, tractors and two-wheelers are likely to see relatively faster recovery from Q2 of this current fiscal. It is expected that both the segments benefit from the forecast of a normal monsoon, which augur well for rural incomes. It is expected that things will gradually improve in H2 of fiscal 2021. Volume demand from OEMs is expected to decline by 13-24 per cent across segments. Demand from the replacement market is expected to decline by 15-20 per cent (in value terms) due to limited movement of vehicles in fiscal 2021 amid the lockdown imposed.

With forecasts of a normal monsoon, government spending in the economy to strengthen infrastructure and reforms augur well in mid to long term. Supported by higher minimum support prices and liberal lending policies for the farming sector, there are positive signals of the rural markets coming back on track. Increase in disposable income in the hands of the rural populace is expected to raise the demand for 2/3 wheelers and tractors in the country. Your company will continue to leverage its competitive strength to capture opportunities presented by the implementation of BS-VI norms.

Opportunities and Threats

The long term prospects for the Indian economy remain bright owing to the growth of internal consumption. Demand for personal vehicles will be driven by the aspirations of the rising middle class with improving purchasing power and disposable incomes. Rapid urbanization will drive the need for public transportation. As India addresses the twin challenges of inclusive growth and sustainability, even a normal monsoon, with improved availability of rural finance, will positively influence for motor cycles as well as agricultural tractors. The overall mobility sector is expected to benefitfrom continued growth in the longer term.

The domestic bearing industry is facing the following threats: a. The menace of spurious bearings continues to adversely affect the industry. As per estimates roughly one in every four bearings sold in the replacement market is fake/ of inferior quality presenting a threat to unsuspecting users. The problem continues owing to the slow legal process, in spite of industry wide efforts to thwart the unscrupulous suppliers. b. With global demand weakening resulting in idle /low utilization of installed capacities, the industry has to work on enhancing operational efficiencies and flexingcosts further with Supply chain readiness to help counter these additional costs. c Regulatory demands on emission levels, improved safety norms and higher expectations for improved reliability of the vehicles may result in need for investments in newer technology, ed costs.fix R&Dinvestments.Thiscouldcauseahigherburdenof

Of course, the industry and your company have to continuously explore ways and take all measures to produce consistently high quality products cost effectively to counter the threat of cheap imports.

Financials

After a good beginning in Q1, the automotive demand slowed with shrinking volumes finally and the Covid-19 pandemic and the containment measures in March 2020 affected last quarter sales.

Your Companys Revenue (net) was at Rs. 3414.18 lakhs in F.Y. 2019-20 (Previous Year: Rs. 4064.17 lakhs) representing a de- growth of 16 %. Profit after tax was at Rs. 416.61 lakhs (Previous Year: Rs. 814.36 lakhs), a fall of 49%, with margins being impacted by the lower volumes resulting in unutilized capacities and resultant fixed expenses and other cost increases.

There has been a renewed focus on liquidity and working capital management to sustain generation of free cash flow for the long term strategic objectives of the company and working capital has been reduced by Rs. 384.76 lakhs. With overall leveraging of operational efficiencies and under the given market conditions, the financial results during the year are considered satisfactory.

Risks and risk mitigation

To sustain long term competitive advantage for the company, the company has comprehensive risk management processes for identification, assessment and mitigation of all potential business risks which include operational, financial, legal and strategic risks. Depending on probability of occurrence and extent of potential damage, these risks are categorized as material risks and noncritical risks. These are periodically presented to the Board. Risk mitigation measures and their implementation are regularly reviewed and discussed, and after evaluation, improved and updated.

The macro concerns which could significantly impact industry performance during the year are inflation, fiscal deficit and currency risks, governments inability to build and expand critical infrastructure, and the adverse impact of the FTAs which have resulted in higher imports of auto components and could therefore negatively impact the industrys plans to achieve the targeted size of US$ 200 billion (12% of GDP) by 2026 under the Automotive Mission Plan. On the positive front, we have the generous package announced by the Government to boost demand, the key measures being cut in corporate tax rates, reforms in banking and financialservices, liberalized lending norms at substantially reduced rates, higher crop prices for farmers for their agricultural produce. The silver lining is the good monsoon forecast which should lead to rise in rural incomes and result in higher consumer demand, and the possible shift in manufacturing from China with India being one of the major beneficiaries.

Companys internal auditors review the internal controls, risk assessment and mitigation procedures, independently as part of their internal audit process and their observations and findings are presented, reviewed and discussed in the audit committee meeting.

The Plant head and his team with continuing interactions with the functional heads of the holding company, is charged with driving operational efficiencies and optimizing efficient allocation of financial resources prudent & judicious capex, better inventory management and minimizing overdues.

Internal control systems and adequacy

The company has in place adequate internal control systems which ensures reliable financial reporting, safeguarding of assets, adherence to management policies, the detection and prevention of frauds and errors, adequacy and completeness of accounting records and timely preparation of reliable financial information. The efficacy of the internal checks and control systems are validated by Internal as well as

Statutory Auditors. The upgrade of the ERP system to NAV 16 has helped the company to implement latest world class processes and make it more analytical.

The management assesses the appropriateness and effectiveness of the Controls in place on yearly basis.

Some of the significant features of the internal control systems are: a. Internal auditors who in addition to transaction audit cover operational audit and review business processes and performance b. Standard operating procedures and guidelines have been reviewed in the light of the ERP upgrade to ensure tighter controls. Improvements / modifications are being effected to meet with changes in business conditions, statutory and accounting requirements

The Audit Committee closely interacts with and guides management and along with statutory auditors and internal auditors reviews significant findings and follows up thereon.

Segment wise Performance

During the current year, ball and roller bearings have been the primary business segment for the company.

Industrial Relations and Human Resource management

The companys industrial relations with employees at its Ranchi plant continued to be cordial and peaceful. The settlement with the workmen has been renewed on July 24, 2019, wherein the managements proposal for an overall production rise of 10% has been accepted and also deductions for bad quality products produced. This helps in keeping employee costs under check. With uncertainty regarding sales and production volumes during F.Y. 2020-21, negotiations are underway to adjust employee strength.

The company has continued its efforts towards strengthening Human Resource by providing employees a better working atmosphere and creating a culture which nurtures personal and organizational growth. Following the Covid-19 pandemic and lockdown relaxations, the Companys utmost priority has been health, safety and well-being of its employees and partners. The Company has rapidly implemented protocols for safe operations. Strict standards of access control, social distancing in supply and use of

Personal Protection Equipment (PPE) as well as strict hygiene and sanitization procedures are active across all operations and adequate training has been provided to the workforce. However, compliance with the restrictions on number of employees and the shift working hours permitted, has resulted in non-optimum capacity utilisation, which your Company expects will improve as lockdown conditions are gradually relaxed. Permanent employees directly employed by the company currently are total 160 nos.

Cautionary Statement

Statements in this Management Discussion and Analysis describing the companys objectives, projections, estimates and expectations may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ materially from those either expressed or implied.