Subros Ltd Management Discussions.

1. Industry Outlook

We are going through unprecedented times. The Indian auto industry has witnessed unusual performance across all segments in FY 2019-20. The segment has been facing a prolonged slowdown with buyer sentiments at an all-time low. The COVID-19 pandemic and subsequent lockdowns at the tail-end of the financial year only compounded the grave situation.

In the just-concluded fiscal year, Indias Passenger Vehicle industry reported its bleakest performance of five years. The segment observed worst ever decline of 23.56% in sales unit in H1 of FY 2019-20 from corresponding period in 2018-19. The H2 of FY 201920 was showing signs of recovery as monthly sales picked-up, however, COVID-19 pushed March 2020 sales to a historical worst.

The sale of Passenger Vehicles (PV) declined by approx. 18% in FY 2019-20 over the same period last year. It is expected Passenger Vehicle sales will continue to decline by (-) 15% to (-) 18% in FY 2020-21 but expected to show strong growth post recovery. Mobility preferences for personal mode of transport are also expected to have a significant impact on demand. Segment downgrade is anticipated since consumers that buy PV may opt for one segment, one vertical lower.

The main factors, behind such dismal performance, are lack of consumer spending power, increase in purchase cost and distress in rural markets, volatile fuel prices, tight liquidity and BS6 norms migration confusion. A crisis among shadow banks, a key source of funding for small businesses, frail rural spending, and a global slowdown have been responsible in pulling down growth steadily.

In Commercial vehicles, the economic slowdown has coincided with an increase in freight carrying capacity of trucks, which led to a sharp fall in sales as fleet owners could carry more freight on their existing trucks. Lower demand from agriculture and other sectors also contributed to the weak market as fleet owners witnessed a drop in rentals.

FY 2019-20 was a tough year for Indian economy. Indias GDP growth in Q3 2019 fell to a six year low to 4.5% from 5% in Q2, and from 7.1% a year ago resulting from lowered consumer spending and reduced private investment. Collapse in shadow banking lending and NPAs in banks and NBFCs put Indian financial sector in doldrums. COVID-19 pandemic has further disrupted the economic backbone. Service sector does account for contracted, passenger, and commercial vehicle sales, but domestic air passenger traffic and foreign tourist arrivals have slumped in March 2020.

1.1 The GDP growth in 2020-21 is expected to remain in the moderate territory with some pick up in second half. Combination of fiscal, monetary, and administrative actions will create conditions for revival of economy in the second half of FY 2020-21. Recovery in economic activity is expected to begin in Q3 FY 2020-21. There should be a gain momentum in Q4 FY 2020-21 as supply lines are gradually restored to normalcy, and demand gradually revives.

1.2 To reverse the slump in economy, the government slashed corporate tax rates, withdrew higher taxes on foreign investors, set up a special real estate fund and merged state-run banks.

1.3 The automotive industry plays an important role in Indias GDP growth. It has a strong multiplier effect and is capable of being the driver of economic growth. India has the distinct global advantage of being the high quality, low-cost producer of auto components. As a result, India is seen as a major sourcing hub for auto components by developed economies. Almost every global auto major has set up facilities in the country, making Indian automotive industry one of the most competitive in the world. Therefore, the growth potential for the Indian auto component industry looks to be promising.

1.4 The automobile industry continues to expect tepid demand in near term as it believes that normalcy in businesses may not be restored immediately, even if the lockdown is lifted completely. Automotive rural demand may be under stress majorly due loss of income in agriculture and informal sectors impacting demand. The sector is expected to witness a decline by (-) 10% to (-) 15% across the segments. Industry is expected to pickup in quarter four of financial year.

1.5 RBI rate cuts coupled with festive season buying could give a boost to sales from September to November. The Supply Chain is expected to adapt quickly as other countries are coming back faster than normal, however, extended Supply Chain visibility at Tier 2 & Tier 3 level is the biggest risk mitigation factor that vehicle companies will need to work on.

1.6 The overall Commercial Vehicles segment registered a degrowth of (-)28.75% in FY 2019-20 as compared to the same period last year. A slowing economy, overcapacity, and a tight financing environment are likely to shrink the demand for trucks and buses in 2020-21. With logistics disruptions continuing in hot zones, and customers not in investment mode, this sector will show a delayed recovery. Segment is expected to decline by (-)20% to (-)25% in this fiscal year. Consumption demand, in both rural and urban areas, will play a major factor in revival of commercial vehicle segment.

1.7 The Government aims to develop India as a global manufacturing, and research and development hub. It has set up National Automotive Testing and R&D Infrastructure Project (NATRIP) centres, and a National Automotive Board to act as facilitator between the Government and the industry.

1.8 The vehicle scrappage policy, which awaits clearance from the finance ministry, aims to eliminate the fleet of old polluting vehicles and boost demand. The situation warrants stimulus to regain growth momentum and there could not be a better time to introduce a scrappage

fluctuations in geo-political environment. On the other side, this would be an opportunity for us to push localisation in India and become self-sufficient to meet our demand. The Company has continued its efforts to improve the level of localisation of imported parts. Various VA/VE activities were initiated along with active participation of suppliers to improve efficiency of operations. This has contributed greatly in reduction of material cost and exposure to foreign exchange fluctuation. Few major localisation projects are in implementation stage.

2.6 The Company values the contribution of and its relationship with vendor partners in achieving operational excellence. For long-term strategic direction of the business, Supply Chain and its up gradation through cluster programmes, is given due focus to work closely with vendor partners. Tier II up gradation is the key for de-risking and meeting future technology requirement and capacity augmentation of the Company.

2.7 Ratios where there has been a significant change from FY 2018-19 to FY 2019-20: Despite all bleak market effect on Company performance, there is significant improvement in company ratios. The debt equity ratio has improved to 0.19 in the financial year 2019-20 as against 0.36 in the previous financial year on account of repayment of loans and efficient management of funds. Also the net worth has improved from Rs. 680.13 crores to Rs. 752.30 crores in the financial year ended 2019-20 on account of repayment / reduction in borrowings. There is no change in the return on networth during the financial year 2019-20 as compared to the previous financial year.

3 Research & Development

3.1 There is emerging technology upgrade need as per customer programmes. The Company is engaged in all such activities with the help of our technology partner DENSO Corporation, Japan and also with our own Research and Development activities. Subros Technical Centre (STC) is fully geared up to make Subros "Make in India" designs competitive, while meeting global specifications. Through another Design joint venture company with DENSO i.e. DENSO Subros Design Engineering Centre (DSEC), the Companys main focus is to localise the design activities and develop local skills to design Indian and global design products.

3.2 At present, new programmes introduced in the Company have achieved 75% localisation (Indian) design content. As India moves towards increasing "green" standards, roadmaps for future technologies are focused towards making energy-efficient, environmentally-friendly products. Our teams are dedicated, and work proactively towards meeting these anticipated requirements through advanced technologies. Additionally, the Company is happy to have the active support and expertise of collaborators for meeting customer and product demands.

3.3 The Company maintains continuous investments in state-of-the-art testing facilities for all aspects of vehicle thermal management systems. These include vibration, noise, thermal performance etc. Concomitantly, our scheme to provide a much-needed stimulus to the industry.

1.9 In addition, big changes in fuel price differentials between petrol, and gasoline, and de-regulation in diesel prices have impacted the demand between petrol and diesel-based vehicles. This development holds positive potential for the Company, as consumer purchase decisions are majorly influenced by considerations of fuel economy and demand for greater fuel efficiency.

1.10 The automotive industry is already feeling the effects of electrification or e-mobility, both globally, and in India before COVID-19 outbreak. We need to wait for next move in this transformation. We believe that there would be review of this changeover and may be few years of delay initially.

2 Financial & Operational Performance

2.1 Net sales have decreased to about INR 1,993 crores in 2019-20 as compared to last years figure of INR 2,124 crores; registering a decline of (-)6.20%. The operational profit (EBIDTA) has sustained due to operational efficiencies, and material cost reduction. As a direct consequence of various strategic initiatives taken by management, profitability (PBT) has increased to 6.21% in 2019-20, which is a significant improvement as compared to 5.36% in the previous year.

2.2 Commercial Vehicle segment is going through a big transformation. The regulatory introduction of Blowers in Truck application has opened up a new business avenue for the Company. Customer preference for Air-Conditioned trucks has started showing marked increase. There is significant impact on Truck ROI when running per day is increased due to driver comfort is taken care of bbusiness development activities with all OEMs show healthy progress. We see a good future of this segment for the Company.

2.3 Business expansion in Railways and Bus Airconditioning is progressing on track. This year, the Company is gearing up to expand customer portfolio. The Governments decision to replace all Diesel engines with Electric engines serves as a boost for the business. The Company has developed an electric kit for electric engines and has emerged as a strong contender in the segment. As part of the long-term strategy, plans to foray into the Coach AC segment are on the anvil. The production of Coach AC units based on customer approvals shall start. Product development activities are in progress for this new segment.

2.4 The Companys decision to expand business in Home AC domain has resulted in substantial growth opportunities for the Company. This is also one of de-risking aspect for the company performance from vulnerable performance of auto sector. The business development activities and product development activities are in place as per market demand. During the year, the Company has finalised purchase of land and building for this business expansion in Nalagarh, Himachal Pradesh, and setup all plant and machinery there.

2.5 Imports would continue be challenge for the Company in view of volatility in foreign exchanges and also superior CAE (FEA and CFD) capabilities help reduce lead times, and, "Do it right the first time." These capabilities position your Company as a trusted partner for all customers components and systems validation.

3.4 We are continuously focussing on bringing new technologies for the domestic market. After REC (Regional Efficiency Condenser) and RER (Regional Efficient Radiator), the Company has launched new Vane Rotary Compressor last year and now we are stabilising the product. Soon new series of Vane Rotary Compressor will be launched for which business engagement activities are in progress.

3.5 FY 2020-21 promises to be stimulating with a considerable activity. Over decades, consistent innovation, constant learning, and benchmarking of best-technology in all endeavours have been the cornerstone for our sustained and consistent growth. Your Company will continue to strive to remain on this path of growth and operational excellence.

4 Information Technology

4.1 Information Technology plays an important role in business continuity. The critical significance of IT was felt during this pandemic outbreak. The world moved to virtual platforms and ensured business continuity other than production activities. Your Companys investments in strengthening Information Technology system and facilities have adequately and effectively supported us during this challenging time.

4.2 New and emergent technologies bring unprecedented threats to Internet connected devices, and data security becomes a growing concern. The rise in global hacking incidents indicates increase in cyber-attacks. The Company has taken cognizance of vital aspects such as locations of information storage, how can it be moved, access controls, and systems of data processing. In addition, sufficient measures have been taken to safeguard crucial databases.

4.3 A large number of initiatives have been undertaken to address the risk identified under each element. Substantial investments have been made in advanced IT tools to enhance the Information Security capabilities. The Company also has a clear roadmap for each of the aspects mentioned. Disaster Recovery (DR) has been given significant attention considering the growing dependence on IT systems within the Company.

4.4 The Company has extensive leverage of Information Technology (IT) in its business processes. Many business processes are performed in SAP ERP system, Design Tools etc. which are strong IT-enabled processes and Decision Support Systems. This helps generate process efficiencies, and streamlines operations. It also helps manage complexity and scale, both in-house, and with vendors.

4.5 The Company also uses IT for capturing process information, traceability of the components being used in the end product being supplied to customers, digitalisation, and customer service modules for capturing customer feedback.

4.6 The Company is continuously working on Information Security and Disaster Recovery Management System by strengthening the hardware architecture.

5 Internal Controls and their Adequacy

5.1 The Company has an adequate system of internal controls in place. It has documented policies and procedures covering all financial and operating functions. These controls have been designed to provide reasonable assurances with regard to maintenance of proper accounting controls. This will ensure reliability of financial reporting, monitoring of operations, protecting assets from unauthorised use or losses, and compliance with regulations. The Company has continued its efforts to align all its processes and controls with global best practices.

5.2 Further, in order to meet the robust internal control system in the organisation, the Company has adequate policies and procedures in place for its current size, as well as for growing future needs. These policies and procedures play a pivotal role in the deployment of internal controls. They are reviewed at periodic intervals to ensure relevance and comprehensiveness, and compliance is ingrained into the management review process.

5.3 The Company believes that every employee has a role to play in fostering an environment in which compliance with regulations, and ethical behaviourr are accorded due importance. Towards this, sessions are periodically held to increase employee awareness on the Companys code of conduct.

5.4 The Audit Committee of the Board of Directors, comprising of independent directors and functions, regularly reviews audit plans, significant audit findings, adequacy of internal controls, compliance with accounting standards, etc. The documentation of major business processes and testing thereof including, financial closing, computer controls, and entity level controls, is executed as part of the compliance programme.

6 Risks and concerns

6.1 The Company is exposed to external and internal risks associated with business. The operations of the Company are directly dependent on the growth of the Indian automotive industry. General economic conditions that influence the automotive industry, in turn, play a critical role in impacting the operations of the Company.

6.2 New players have entered the industry, while existing competitors have stepped up their expansion plans. Naturally, the intensity of competition in almost all the segments of the Indian automotive market has gone up exponentially. The Company is aware of heightened competition and is taking adequate measures to remain competitive in the market place.

6.3 The Company continues to grapple with strong competitive pressures from both, domestic, and overseas suppliers. It is also susceptible to financial risk from volatility in interest, foreign exchange rates, and commodity prices. The Company also faces challenges with regard to fast-changing technology, reducing life cycle of new vehicles, and supply constraints from Tier II suppliers. As a result, implementation of processes to sustain cost efficiencies is brought into the system. Capacity expansion plans are on the anvil to address these changing patterns.

6.4 To counter these risks, the Company continues to broaden its product portfolio, increase customer prohle, and geographic reach. Keeping this in mind, the Company has ambitious expansion plans to explore the Commercial Vehicle segment such as, Bus Aircon, Railways, Refrigerated Trucks, and Engine Cooling Module. This will enable de-risking, and a reduction of dependency on the Passenger Car segment.

6.5 Enterprise Risk Management framework in the Company is well in place and all the key risks are reviewed on a regular basis. The Company has also a Risk Management Committee at the Board level to review the risk framework, all major risks impacting the Company and plan/actions to mitigate such risks.

6.6 In addition to this, there is constant monitoring for any new risks that may arise due to changes in external or business environments. While the possibility of negative impact due to such risks cannot be totally ruled out, the Company proactively takes conscious, and reasonable steps to mitigate signihcant risks that may affect it.

7 Human Resources

7.1 Building organisational capability is the key focus of the Company. Observing future technological advancement and enhanced customer preferences, employee capacity and capability are key challenges. The Company is preparing for the same as developing human capital continues to be a key area of strategic focus. With the launch of new programmes for employees, your Company is keeping pace with the changes in the use of technology in education. The continuous focus on leadership development programmes lays emphasis on enhancing the relevance and effectiveness of learning.

7.2 The way forward is through concrete steps for employee engagement and motivation. The Company has enlisted services of professional tirms for assessing and improving employee effectiveness scores. These are assessed through annual surveys leading to focus on retning employee policy deployment and engagement, and strengthening various areas of employee satisfaction.

7.3 Competency mapping and mitigation of competency gaps are important for customer delivery and quality processes. They are key focus areas for the Company. Each function is working on this KPI and ensuring the skill enhancement for all processes.

7.4 For Human Resource Development, the Company has setup DOJO centers in plant locations, i.e., Noida, Manesar, Pune, Karsanpura, and Chennai. The training is imparted to the local community for industrial experience. The Company has trained over 6000 young people through skill development at these plants.

8 Marketing

8.1 Customer delight is key strategic initiative by the Company. The Company is focusing on enhancing customer satisfaction through QCDD (Quality, Cost, Delivery, and Development) parameters. The strong belief maintained is that with higher customer satisfaction, the market leadership position can be retained in the long term.

8.2 The overall strategy of the Company entails increase in the Commercial Vehicle or Non-Car segment as part of the business expansion and de-risking agenda. As this segment has tremendous potential, the Company has augmented resources to acquire share of the market.

8.3 The Company has forayed into the Indian Railways Driver cabin business in the last few years. The business is progressing well by securing future tenders as a result of sustained delivery, quality, and cost-efficient performance. The Company has emerged as a strong player in this segment, and plans future growth by meeting all Air-Conditioning requirements of Diesel Locomotive, and Electric Engine Cabins.

8.4 Developing business in Home Air-Con market is another key initiative of the Company. Product development and business development activities are in place and we have good order booking situation in this segment.

9 Product Range

9.1 With a wide range of products, which include complete thermal solution for cars, buses, refrigeration vehicles, railways, home ACs, tractors, and trucks, the Company is the only backward integrated business for all AirConditioning systems and components in the country. Due to strong Research and Development capabilities, the products are developed based on emergent needs of customers.

9.2 Intrinsic to the core of Company philosophy, products are created to not only address the requirements of the future, but are also green and sustainable. The staunch belief of scaling up the business in tandem with accountability towards the environment propels the Company forward on the path to excellence.

10 Corporate Social Responsibility

10.1 As an automotive thermal and energy management solutions provider, the Company is committed to driving positive change that brings value to people, customers, environment, and communities. At the same time, the Company maintains outstanding professional, operational, and environmental standards, and strives to understand and incorporate stakeholders interests in areas of strategy. The aim is to build a positive and sustainable future for all involved.

10.2 The Company has adopted schools around the vicinity of plants and provides improved education. The local communities welcome this initiative. Key focus at this stage is to improve the infrastructure of schools and also improve the level of quality of education in the schools. With collaboration of Step by Step education society, many such initiatives are deployed and successfully implemented to these areas.

10.3 Empowering women for self-entrepreneurship and developing skills for tnancial independence, the Company is running skill development center at a village in Manesar. The Company has provided infrastructure and imparting training to several village women in the vicinity.

10.4 The Company has partnered with local NGOs under the umbrella programme of CSR for Community development & Skilling up of Human resources by supporting education and socio-psychological wellbeing of children of incarcerated parents.

11 Future Plan

11.1 Post COVID-19 outbreak, we have re-aligned our priorities. The Company focus is to revive old conditions and revive the healthy company performance to set it back on track as it was in pre-COVID-19 time. With this objective, the Company has put forth austerity action points for short-term recoveries in addition to aggressive marketing plans to generate growth for our businesses from existing or new customers.

11.2 To safeguard ourselves from the global economic climate volatility, uncertainty, and geo-political risks; viewing growth opportunities in the domestic market and proactively observing the cost pressures, your Company has put in place extensive localisation plans and VAVE plans for key components. The objective is to develop and augment capabilities to provide latest technology product to the customer at low costs. Further, this will help the Company sustain growth profitably, and minimise the impact of fluctuation in economic indicators.

11.3 Post COVID-19, the experience of business continuity planning will be a key area for us in this financial year and for the long term. Managing liquidity, Supply Chain risk, workforce management, and IT readiness will be focus area of your Company. The Company has already made actionable plans for preserving and strengthening cash position, creating liquidity, assessing Supply Chain disruption, monitoring/managing risks, safeguarding employee welfare, and scaling up IT resources to meet business requirement in the coming months as businesses resume operations.

11.4 Last year Karsanpura plant was completed and production has commenced. At present, the Company is planning to utilise the plant to its full capacity in view of Suzuki Motor Corporations imminent plans for expansion in Gujarat.

11.5 The Company has undertaken various new projects ranging from development of new models and new segments. These projects are at various stages of planning and execution. Though the Company employs sophisticated techniques and processes to forecast the demand of new products, yet the same is subject to margins of error. Timely introduction of new products, their acceptability in the market place, and managing complexity of operations across various manufacturing locations are the key factors to sustain competitiveness. is exploring the potential for introduction of AirConditioning in such vehicles, which will certainly add to revenues in subsequent year(s).

12 Mid-Term and Long-Term Plan

12.1 The Company is focusing on sustaining and further improving the performance for mid-term and long-term objectives. Geographical expansion, product positioning, and efficiency improvement are the pivotal aspects for future growth in the face of competition.

12.2 Based on customer demands, the Company is working on new technology development in-house or by acquiring it from technology partner. The long-term technology roadmap is already envisaged to meet emerging customer expectations, and work is in progress to launch the roadmap at an opportune moment.

12.3 Competency build up to meet the future technology challenge is another strategic aspect wherein the Company is putting in aggressive efforts. Leadership development programmes and middle level management development are key focus areas.

12.4 COVID-19 outbreak will definitely impact the industry and our business as well. As we have stated Indian auto industry mainly Passenger Vehicle segment will have significant impact in the range of 15- 18% during the year 2020-21. H1 performance would be even more dismal, and H2 has some hope of improvement. It is estimated that it will take about two years to return to the pre-COVID market situation. However, for the Company the impact would not be so significant due to our de-risking strategy, which was launched four years ago. Few sectors like Railways, Home AC, and Bus AC markets are not expected to perform the way other segments are predicted. We anticipate a better positioning in these markets, which will cushion the impact on our business.

Cautionary Statement

The Company Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be "forward looking statements" within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important factors that could affect the Companys operations include a downtrend in the automobile sector, significant changes in the political and economic environment, exchange rate fluctuations, tax laws, litigation, labour relations, interest cost, changes in Government regulations and other incidental factors.

11.6 The Company is enhancing its presence in the Commercial Vehicle segment with a view to consolidate its position and increase market share.