sundaram brake linings ltd Management discussions

Global economic environment

The World bank estimates that the global GDP growth slowed to 2.9% in 2022 against the prior years 5.9%. The inevitable inflation that followed significant cash infusions by the West into economies they themselves had shut down necessitated their central banks steep interest rate hikes.

The US economy slowed the most with barely 0.9% growth compared to 5.9% in 2021. The forty year high inflation led to the steepest interest rate hike path in recent memory. The collapse of several banks and warnings of fragility in the remaining banks leave the US Fed with the unenviable task of tamping down excess money sloshing through the system without collapsing confidence in the consumer banking system. The continuing strength in retail sales and employment numbers provides some relief that a steep recession is not imminent though housing demand has cooled recently.

The European Union (EU) GDP growth of 3.6% was significantly slower than the 5.7% of the prior year. The diversity of response in the EU to COVID and Governmental actions would have created significant disparities in this growth had not energy price inflation overwhelmed the signal. The impact of US and EU sanctions from the conflict in Ukraine, natrual gas prices spiked over ten times its long term price. Given the requirement of stable, base load energy for an economy to funtion, the EU has sought creative methods to obtain its energy with the sanctions.

The Indian economy proved a rare bright spot in the global picture, with growth of 7% not far below its 8.7% in the prior year. The economic growth resulted in India becoming the fifth largest economy in its 75th year of independence. While domestic management of cash infusions and COVID responses allowed moderate interest rates, global inflationary pressures required RBI rate hikes and slowed growth in the latter part of the year. Indian inflation, at 6.7%, remains well within historic norms for itself and other developing economies.

For the year 2022-23, the automobile industrys annual production volume was 259.70 lakh

Industry and company trend

The automoative industry overcame rising commodity prices, the semi-conductor shartage, and transportation costs to deliver production volume of 259.70 lakh units (13% growth) and sales volume of 259.65 lakh units (12% growth) in 2022-23. Infrastructure spending and a buoyant economys freight requirement contributed to the surge in medium and heavy commercial vehicle demand. While passenger vehicle sales was buoyed by the post-pandemic demand for personal mobility and buoyancey represented by domestic growth and services exports. The already high base of a rural sector largely unaffected by the pandemic resulted in healthy but not spectacular growth.

The Auto-industry Production & Sales Volume data (in Lakhs / No.s)

Comparative Vehicle Production vs Sales

	Vehicle Production			Vehicle Sales
Vehicle category	2021-22	2022-23	Growth%	2021-22	2022-23	Growth%
M & HCV	2.72	3.79	39%	2.73	3.81	40%
LCV	5.33	6.56	23%	5.36	6.60	23%
Passenger	36.51	45.79	25%	36.47	45.56	25%
Three – Wheeler	7.58	8.56	13%	7.6	8.54	12%
Two – Wheeler	177.00	195.00	10%	179	195.14	9%
Total	229.14	259.70	13%	231.16	259.65	12%

Source: ACMA

The US market for class 8 trucks (which is the relevant segment for your company) was strong, registering a growth of 14%. Manufacturers were able to redesign systems to reallocate chips from smaller trucks to sustain their supply.

While freight remained robust till the end of 2022-34, falling home construction, decreasing factory output and soft retail sales all hurt contract freight tonnage with large drops seen in March, driving the freight in the last quarter down compared to a year ago.

Trucking serves as a barometer of the U.S. economy, representing over 70% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled over 10 billion tons of freight in 2021 and the carriers collected over 80.8% of total revenue earned by all transport modes. Thus any down turn here will likely soon appear in the general economic numbers.

The diversity of EU performance can be seen in the contrast between the 7% overall sales growth of heavy commercial vehicles and that of Germany -0.9%. The European economic picture remains mixed.

Your companys net sales increased by 21% as compared to financial year 2021-22, mainly due to good order inflow in the domestic segment (both OEM and Aftermarket) while slowed by sluggish sales in our Exports. The order inflows from domestic segments continued to be good throughout the financial year 2022-23 and further improvement is expected to continue during the first half of 2023-24.

Economic Outlook:

Global GDP growth is expected to decelerate further in the coming year to 1.7% with the continuing conflict in Ukraine, persistent localised inflation, and the fragile state of banks.

Whie the US market is expected to avoid an abrupt recession, the Fed will be constrained to raise interest rates to hold off inflation while balancing the risk of banking collapse. The sustained decrease in truck tonnage does not augur well for US eonomic growth and expectations for the year is for growth between 0 and 1%. Thus new HCV sales and truck tonnage are expected to fall.

The European market continues to face the dual challenges of inflation and mixed economic growth, the ECBs significant interest rate increases of over 3.5% in the last 14 months will likely result in very poor HCV sales growth.

The Indian market is again expected to be an exception to the gloomy global outlook with over 6% growth in GDP. The 33% growth in Governmental budget allocation to infrastructure augurs well for commercial vehicle demand. The highly disciplined budget promises a deficit of only 2-2.5% and thus frees up the RBI to deal with monetary policy without having the headache of mopping up fiscal indiscipline that other central banker have had to.

While Governmental schemes of production linked incentives and subsidies to select areas of the economy remain a concern in terms of ensuring a level playing field, the overall automotive outlook is positive with sales growth of 10% industry wide expected.

Opportunities:

With India becoming the fifth largest economy and the most populous country, the potential for the transport of passenger and freight is significant and growing. The push for streamlined logistics considering multi-modal connectivity (Gati Shakti) and dedicated freight corridors can further boost industrial and freight growth. 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 FY2022-23 and minimize geographically limited economic fluctuations.

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

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

The EV range and ICE mileage benefits of composite structures for lightweighting is heartening to your company whose products have for decades been functional composites and promises potential in product line extensions.

Threats and mitigation:

Key input raw material prices have increased significantly during the year and softened during the last quarter of FY2022-23. Your company has approached all the domestic OEMs with requests to neutralize the extra burden of raw material cost increase. OEMs have partially compensated your company for the raw material cost increases and efforts are being continued to ensure full neutralization. Intense competition makes it difficult to seek price increases and delays realisation of agreed increases. Your company continues to de-risk exports with a combination of natural hedge for imports and through price adjustment mechanisms for changes in forex and raw material cost.

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 companys extensive product range acts as a strong barrier to entry for many of these suppliers.

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. The transition to electic vehicles will require different friction formulation and your company has already worked to characterize and develop formula for India specific driving conditions.

Risk and concerns

Significant increases in key raw materials prices and fuel / power costs, pose a serious concern. The input raw materials in the companys homologated products with vehicle manufacturers cannot be changed without extensive time and testing. SBLs 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 DEFCON (Drivers Experience of Fiction CONditions) The local power prices have been unilaterally and suddenly increased, creating challenges to all industries in Tamil Nadu. We remaing concerned about the significantly higher prices charged to industry to subsidize non-economic interests. These may pose a significant drag in further growth in the coming years.

The developing El Nino system traditionally affects Indias agricultural and economic prospects and this may have significance in rural demand, agricultural goods transport, deficit, and headline inflation numbers. The 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.

Internal control system

The Company continues to maintain a system of internal control including adequate monitoring procedures. The internal auditors ensure operational control at various locations of the Company on a regular basis. Any irregularity or significant issues are brought to the attention of the Audit Committee of the Board and Managing Director of the Company and countermeasures are taken for complying with the system.

Quality and Quality Management Systems

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.

Human Resources / Industrial Relations

The Industrial Relations in all four plants of the Company continued to be cordial. Talent attraction in the apprentices category is posing a strong challenge and the dearth of employable candidates, at this level, has drastically risen over the last one year and our company is taking various HR initiatives in this area. The total number of employees on roll as on 31st March 2023 in all the Plants was 982.

The company has spent significant resources to ensure the health, safety, and well being of our employees- at home, at work, and in between the two.

We have rolled out grade elevation and salary enhancement letters to Managerial and Executive category employees during the Financial Year 2022 – 23.

Accounting Treatment

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.

Financial and Operational Performance

(Rs. in Lakhs)

Particulars	Year 2022-23	Year 2021-22
Revenue from Operations	35,483.84	29,520.03
Other Income	276.54	319.69
TOTAL INCOME	35,760.38	29,839.72
Cost of material consumed	21,701.36	16,938.20
Changes in inventories of finished goods & work-in-progress	(330.35)	(356.37)
Employee benefit expenses	4,289.65	4,201.32
Finance cost	371.57	180.72
Depreciation and amortization expense	610.82	599.15
Other expenses	9,657.08	8,489.80
Total Expenditure	36,300.13	30,052.82
Profit / (Loss) before tax before exceptional item	(539.75)	(213.10)
Exceptional items
(i) Reversal of liability towards contract with customers – 433.33 lacs		226.37
(i) Additional depreciation on tools due to change in useful life – (-)206.96 lacs
Profit before tax after exceptional item	(539.75)	13.27
Tax expense		-

 

Particulars	Year 2022-23	Year 2021-22
Current Tax		2.07
Prior Period Tax		-
Deferred Tax liability / (asset) (net)	(61.59)	3.43
Profit / (Loss) for the Period	(478.16)	7.77

Note: Previous year figures have been regrouped wherever necessary to conform to this years Classification.

SIGNIFICANT CHANGES IN KEY FINANCIAL INDICATORS (CHANGE OF 25% OR MORE AS COMPARED TO THE IMMEDIATELY PREVIOUS FINANCIAL YEAR)

Particulars	Year 2022-23	Year 2021-22	Remarks
Debtors Turnover (No. of days)	64	73
Inventory Turnover (Times)	6.8	7.1
Interest Coverage Ratio	(0.45)	1.07
Current Ratio	1.24	1.28
Debt Equity Ratio	0.37	0.31
Operating Profit Margin (%)	(-)0.47%	(-) 0.1%
Net Profit Margin (%)	(-)1.51%	0.0%

Cautionary Statement

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.