Sundaram Brake Linings Ltd Management Discussions

Global Economy

The Global economy remained resilient to multiple conflicts and shocks with the IMF predicting a 3.2% expansion in 2024, after similar growth in 2023. Meanwhile inflationary pressures eased from record high levels in FY 2022-23. Disparate growth rates of the US, EU, China, India and other emerging economies were based on their exposure to crises in global supply chains, real-estate collapses, food and energy, and cost of living, and the resultant Governmental and Central Bank reactions.

In 2023-24 the major global crises included a flare up of Iranian sponsored actors attacking shipping in the Red Sea, Hamas-Iran-Israeli conflict, the continuing conflict in the Ukraine, and China?s apparent preparation for conflict in Taiwan.

The US economy?s growth of 2.5% in 2023-24 was a surprising increase from its 1.9% growth the prior year and was accompanied by moderation of its historic inflation surge. This was in stark contrast to the EU, whose growth cratered to 0.4% in 2023-24 from 3.4% year before. China too delivered sub-par growth and was severely impacted by the collapse of its real estate sector and geo-political friction with both the US and the EU.

The Indian economy maintained it strong growth with GDP increasing 8.2% in 2023-24, the third straight year with over 7% growth. Consistent Government policy, fiscal prudence, and a proactive Central Bank allowed India to deliver growth with moderate inflation and a stable currency. The stability of crude oil prices, the RBI?s significant currency reserves, and FDI inflows have allowed Indian policy makers to weather global crises far better than most other nations.

Inflation has remained in the 4-6% band (higher than RBI?s target level of 4%) due to high food inflation caused by an El Nino driven poor monsoon. With the IMD predicting a higher-than-average monsoon in FY 2024-25, food output should hopefully increase. This will not only help the rural, agricultural sector but also control food price inflation. With this, interest rates are expected to decline and support the revival of private capital deployment. Until that time the Government has provided support with capital expenditure on infrastructure to build overall total factor productivity.

The global automobile industry saw significant growth in 2023. Vehicle sales rebounded from previous lows, with global sales volume reaching approximately 85.5 million units (5.1% growth from 2022). This included a nearly 10% growth in new vehicle sales of medium duty (Class 5-7, 7T-15T) trucks in the US and heavy trucks in the EU(>16T). Class 8 Trucks in the US registered no growth, but significantly better than feared as truck tonnage declined compared to the prior year and new housing starts fell 9%. Light vehicle sales grew 12.4% in the US and 13.9% in the EU.

Overall sales are expected to surpass 90 million units by 2025, representing a growth of 3.6%. Key trends driving this growth include the increasing popularity of electric vehicles (EVs), advancements in autonomous driving technologies, and a shift towards more sustainable and connected vehicle solutions. Asia-Pacific remains the largest market for EVs, followed by Western Europe and North America.

The Auto-industry Production & Sales Volume data

Source: ACMA

While India?s automobile industry also experienced strong overall growth of 9%, this was largely driven by increases in passenger vehicle sales (7%) and two-wheeler (10%). The commercial vehicle segment returned tepid 3% growth as haulage was affected by the sub-par monsoon but bus demand was boosted by Government vehicle replacement driven by their new mandatory scrappage policy.

Electric vehicles (EVs) showed a particularly strong performance in India, with sales increasing by 90% for electric passenger vehicles and 30% for electric two-wheelers. The total number of EVs sold in India during FY 2023-24 reached over 1.3 million units. The demand for this segment is spurring development of range-extending light weighting and advanced material technologies.

Your Company?s 2023-24 net sales of Rs 350.22 crores was a slight decline from the previous year?s Rs 353.10 crores. While your Company increased its export turnover by 13.90%, there was a drop of 8% in Domestic segment.

The global economy in 2024-25 is expected to feature uncertain growth- with over half the world?s population voting in 70 countries, the potential for changes in policy have never been greater. Key factors influencing these voter include lingering effects of high inflation, geopolitical tensions, and sustained tight monetary policies. While the International Monetary Fund (IMF) forecasts global GDP growth of around 3%, this is primarily driven by emerging markets and developing economies, with advanced economies expected to grow at a much slower pace.

A significant shift towards low pollution transportation is anticipated, with major investments in green technology and infrastructure. This transition is expected to drive growth in sectors such as renewable energy, electric vehicles, and energy efficiency technologies.

It is hoped India?s economy will continue its robust growth- expected to be between 6.6% and 7.8% in fiscal year 2024-25. This growth has seen it poised to overtake Japan and become the world?s fourth largest economy, while remaining the fastest-growing major economies in the world. However, most growth expectations are supported by increased Government investment in infrastructure and rural development and the hope of increased private sector participation in capital investment.

Much of the past decade?s performance has resulted from consistent Government policy and any deviation from this threatens to derail the outlook. It is hoped the Government will continue to focus on infrastructural provision, ease of doing business, and promoting Governmental efficiency through digitization and other initiatives. The Reserve Bank of India (RBI), under the current leadership, can be trusted to manage inflation, banking risk, and other macro-economic threats like consumer credit bubbles. The impact of past rate hikes will continue to influence demand, but ongoing disinflation is expected to support consumer purchasing power and election spending to spur rural demand.

Overall, while the global economic outlook remains cautious with moderate growth expectations, India is poised for significant economic expansion driven by strong domestic demand, private sector investments, and strategic government initiatives as long as priorities do not change.

India is the most populous country, currently the fifth largest economy and the fastest growing economy in the world and the demand for the transport of passenger and freight is significant and growing. Streamlined logistics with multi-modal connectivity (Gati Shakti) and dedicated freight corridors could further boost industrial and freight growth.

OEM CV business growth is expected to sustain in the coming year and your company will continue to provide the best solution to the vehicle manufacturer?s needs. The development of next generation friction materials for BS VI compliant vehicles, has continued to help your company remain the preferred OEM / OES supplier in BS VI variants. Your company has become one of the very few suppliers of friction materials approved as OEM fitment for all the Indian commercial vehicle manufacturers across all BS VI models as well as continuing to supply prestigious global commercial vehicle manufacturers overseas, helping your company to grow during the FY 2023-24 and minimize geographically limited economic fluctuations.

Your company sees significant untapped potential in the aftermarket and will put in enhanced efforts to strengthen its aftermarket offering and grow its share and the segment as a whole. As a part of this increased focus on the independent aftermarket, your company will introduce new lines of business viz., two wheeler products, four wheeler lined stores, premium disc pads for passenger vehicle segment, etc.

The increasing CAFE 3 requirements for India coming into force in 2027 pose a tremendous challenge for the Indian automotive industry but represent a significant opportunity to your company. Your company has recognized that is has been manufacturing a functional composite (glass fiber infused phenolic epoxy with friction modifiers and lubricants) for the last four decades and has many of the capabilities required to address the market?s demand for lightweight structural composites as well. To that end, your company will leverage its production and research and testing capabilities and reputation for quality and production processes with Automotive OEM?s to meet their customer?s requirements for EV range increases, boosted fuel economy, increased strength and reduced weight by manufacturing composites that use carbon and glass fiber. We believe that these products in automotive, aerospace, industrial, and consumer goods will be a significant growth driver for your Company in the near, medium, and long term.

While the US and the EU face significant risk of recession, your company believes it has strong market presence and new product growth potential with recently developed, innovative new products to capture a larger portion of the opportunity. Additionally, customer sourcing diversification away from China provide additional new opportunities among these customers.

Raw materials comprise nearly half the sales value of your company?s friction product and key input raw material prices? volatility represents a significant threat to our profitability. Your company faced a major issue post COVID when prices for RM and shipping increased by nearly 200% but domestic vehicle manufacturers took nearly two years to neutralize the extra burden of raw material cost and logistics increases. The input raw materials in the company?s homologated products with vehicle manufacturers cannot be changed without extensive development and testing and thus changes in costs are sticky in the near to medium term.

While your company has been able to de-risk exports for decades with a combination of natural hedge for imports and through contractual price adjustment mechanisms for changes in forex and raw material cost, domestic manufacturers remain a challenge. The lack of established practices to have indexation clauses for non-exchange listed materials and intense competition in the automotive friction space makes it difficult to seek price increases and delays realization of agreed increases.

Increased logistics costs and lead times affect both raw material and finished product costs. Ongoing geopolitical conflicts, such as the Russia-Ukraine war, Israel Hamas Iran war and tensions in the Asia-Pacific region, pose significant risks to global trade and economic stability. The most recent concern was the increased transit times and expenses caused by the Red sea conflict and your Company took necessary counter measures (including pipeline stock and vendor managed inventory) to alleviate the situation so that customers receive the goods on time. Future conflicts could disrupt supply chains and increase energy prices.

Local power prices have been unilaterally increased, creating challenges to all industries in Tamil Nadu. We remaining concerned about the significantly higher prices charged to industry to subsidize non-economic interests. These may pose a significant drag in further growth to your company and the state of Tamil Nadu in the coming years.

Exports constitute nearly 40% of your company?s turnover and while the RBI has managed to maintain rupee USD movement within a narrow band, the continual strengthening of USD leads to hard currency shortages in various Middle Easter and African markets, leading to potential delays in repeat orders and customer demands for price adjustments. The depth and duration of potential recessions in the US and EU may significantly impact exports and will be closely monitored.

In the domestic OE market, a few friction material manufacturers in the organized sector continue to try to manipulate pricing and work with braking suppliers with questionable ethical practices to gain a foot hold with Indian OEMs. We do believe that the unique Indian duty cycle and your company?s extensive product range acts as a strong barrier to entry for many of these suppliers. SBL?s in-house development of materials allows your company increased ability to suggest material alternatives and demonstrate the trade-offs in real-time and real-world driving conditions and duty cycles with the support of in-house developed and patented DEFCON (Drivers Experience of Friction Conditions) Some established players in the organized and unorganized sector, continue to provide low priced asbestos linings in the aftermarket for M&HCV applications, despite the known deleterious health effects of asbestos and its ban in over sixty seven countries. Your company continues to advocate both publicly and privately, in industry fora, with Government, and in the market for eliminating the known carcinogen that is asbestos. The transition to electric vehicles will require different friction formulation and your company has already worked to characterize and develop formula for India specific driving conditions. We believe our DEFCON tool allows a unique insight on different driving duty cycles and the development of ideal friction to meet those needs.

The Company?s system of internal controls for business processes, operations, financial reporting, fraud prevention, and compliance with applicable laws and regulations is sufficient. The audit function of the Company provides reasonable assurance on the effectiveness and efficiency of operations, protection of assets, accuracy of financial records and reports, and the observance of applicable laws and regulations. Regular internal audits and inspections guarantee that responsibilities are carried out successfully. The Audit Committee, conducts periodic reviews of the performance of statutory/internal auditors, the adequacy and effectiveness of internal control systems, and suggests improvements for strengthening the existing control system in the light of changing business requirements.

Your Company is continuing its focus on improvements to sustain quality management systems through Total Employee Involvement at all levels with a view to achieve enhanced level of customer satisfaction in Domestic as well as Overseas markets. Your company continues to closely monitor and focus on various cost reduction activities and cost control initiatives to achieve planned targets during the year.

The Industrial Relations in all four plants of the Company continued to be cordial. Talent attraction and retention in the apprentice category is posing a strong challenge and the dearth of employable candidates, at this level, has drastically risen over the last one year and your company is taking vari-ous HR initiatives in this area. The total man power as on 31^st March 2024 in all the Plants was 966.

The company has spent significant resources to ensure the Safety, Health, and Well-being of our employees- at home, at work, and outside.We have rolled out grade elevation and salary enhance-ment letters to Managerial and Executive category employees during the Financial Year 2023 – 24 so that all of your company?s employees may share in the enterprise?s success.

The Company has followed all the applicable Indian Accounting Standards (Ind AS) issued by the Ministry of Corporate Affairs (MCA) in the preparation of financial statements.

Note: Previous year figures have been regrouped wherever necessary to conform to this Year?s classification.

Certain statements in the "Management Discussion and Analysis Report" may be forward looking and are as required by applicable laws and regulations. Many factors may affect the actual results, which could be different from what the Directors envisage in terms of the future performance and outlook.