sundaram clayton ltd share price Management discussions


I. Industry Structure and Development:


World economy is passing through a difficult phase and India is no exception. The major concerns were sluggish GDP growth, high inflation, depreciation of Indian Rupee, high interest rates, high current account and fiscal deficit, multiple increases in fuel prices and non-availability of electric power. The constant change in the Indian and global economic landscape created uncertainty and risks to the growth momentum. Indian economy continued to languish, recording sub 5.0% GDP growth for the second consecutive year. However, economy witnessed some marginal improvement in the recent quarters -from four-quarter low of 4.4%, GDP growth moved to 4.8% in the second half of the year 2013.

Average WPI inflation for 2013-14 stood at 5.9% as against 7.5% recorded in 2012-13 (Source: CRISIL). On the other hand, CPI inflation declined only marginally to 9.6% from the previous year level of 10.2%.

Indian rupee has undergone significant transformation over the course of FY14. It has largely mirrored the change in the external sector fundamentals of the country. The Indian economy looked vulnerable on the external front, with the Current Account Deficit (CAD) peaking at 4.6% of GDP. India had witnessed a significant capital flight in view of US Federal Reserve hinting at tapering its monetary stimulus. The rupee plummeted from around 54.3 per USD in March 2013 to a low of 68 per USD in August 2013 - a depreciation of 25%.

RBI has initiated regulatory measures for improving the CAD by curbing imports - mainly gold, offering significantly higher rates for the NRI deposits and promoting exports. These measures helped in reducing the CAD to 1.7% of GDP for FY14 from the level of 4.8% in FY13 (Source: CRISIL)

Availability of electric power continued to be a major concern throughout the year.

These unfavorable macroeconomic conditions coupled with increases in fuel prices and higher interest rates had deep impact on the auto industry restricting the overall growth to moderate 4.3%.Segment wise performance is given in the following table:

Category FY 2013-14 Nos. FY 2012-13 Nos. Variance (in %)
Medium and Heavy Commercial Vehicles (M & HCV) 2,24,440 2,88,213 -22
Light Commercial Vehicles (LCV) 4,85,354 5,85,025 -17
Passenger Vehicles 30,97,192 32,24,429 -4
Two Wheelers 1,68,89,419 1,57,53,563 7

(Source: SIAM)


During 2013, GDP in US declined to 1.9% as against 2.8% in 2012 (Source: FTR / IMF). However, the US economy grew at a faster-than-anticipated pace in the second half of 2013, led by buoyant domestic demand, robust inventory accumulation and strong export growth.

Europes economic recovery, which began in the second quarter of 2013, is expected to continue spreading across countries and gaining strength. GDP growth was at -0.5% in 2013 as against -0.7% in 2012 (IMF).

The following table highlights the North American and European truck production figures in vehicle units:

Market Category 2013 2012 Variance (in %)
North America Class 8 Trucks 2,43,003 2,73,036 -11
North America Class 4-7 Trucks 1,52,826 1,42,742 7
Europe Medium & Heavy trucks 2,31,349 2,14,827 8

(Source: FTR & ACEA)

II. Business Outlook and Overview

Indian economic growth is likely to accelerate in the next fiscal in view of continued thrust on economic reforms. The pick-up will be aided by implementation of stalled projects, de-bottlenecking of the mining sector and a recovery in industry on higher external demand. Finally, a normal monsoon year is expected, which will cushion growth and help in taming inflation. In this background, it is expected that GDP will be at 5.4% for 2014-15, up from 4.6% for 2013-14 (IMF / RBI).

Auto component exports (USD 9.69 billion in FY 14) from India grew by 4.4% over last year. Component exports have grown at a strong CAGR of 40% during the last three years led by traction in supplies to Europe and America. Depreciation of Rupee turned India into a favorable destination for sourcing auto components over China. This is likely to continue in 2014, the trend getting stronger in the later part of 2014, a good signal for auto component suppliers that are exporting to Europe.

However, the major concerns would be inadequate power availability, high inflation, high current account and fiscal deficit.

The movement of rupee depends on capital flows in managing high levels of imports and exports in the global market. The Company, therefore, believes that rupee is not likely to appreciate significantly. While short-term spikes could happen, the currency will stay at a level that keeps exports supported, allows for replenishment of foreign exchange reserves and keeps the rupee safeguarded from vulnerableness because of global volatility.

Implementation of key structural reforms with emphasis on growth could revive the economy and provide the industries with the much-needed stimulus for growth.

In exports, the Company expects the overall demand in NAFTA and EU region is to be buoyant based on current indications.

III. Opportunities & Threats

The Company supplies aluminium castings either as cast or in machined condition for commercial vehicles, passenger cars and two wheeler segments of the automotive industry.

In the medium to long term, the projected growth of domestic auto industry, ambitious export plans of the Indian OEMs and increase in sourcing of components by Global OEMs are likely to benefit the Company.

In view of stringent emission norms and fuel economy regulations, the thrust for light-weighting is bound to increase leading to higher content of aluminum in all vehicle types. This factor will provide for increased growth opportunities, since the Company is already a preferred source for aluminium castings to major customers in India and abroad.

The Company has developed magnesium die castings and has completed tests and trials. The responses from prospective customers are encouraging. Magnesium being lighter in weight than aluminum is expected to find several applications for light-weighting in the years to come.

Our country is emerging as one of the major manufacturing hub because of availability of well-educated engineers and managers, skilled workforce and good supply base. The Company is well placed to leverage these emerging opportunities in India and abroad.

Several Indian die casting companies and OEMs are either setting up new capacities or expanding existing capacities resulting in increased competition and consequent price pressure which could affect the margins.

Excess capacity in the market makes it extremely difficult to seek price increases to compensate the effects of inflation. However, the Companys supply contracts provide for periodic price adjustments indexed to the international prices of aluminum and this should offer some protection against volatility of commodity prices.

IV. Risks and concerns


Going forward, Indias economic outlook remains challenging. Downside risks still persist, reflecting global headwinds and political uncertainty. The outcome of general elections could swing the medium term growth outlook either way.

US tapering can slow down the flow of money into Indian market and can put pressure on the Indian currency which will be a dampener to Indian market and economy.

Failure of monsoon would trigger further inflation and increase of interest rates. Hardening of interest rates and fuel prices will have adverse impact on sales of the automobiles in domestic industry. It will have negative impact on margins of the Company, owing to volume reduction and increased interest and energy cost.

Industry specific

The Company caters to the requirements of the automotive industry. The revenue of the Company is derived from M & HCVs (50%), followed by Car Industry (30%) and two wheeler industry (20%).

The Indian commercial vehicle industry has strong correlation with the agricultural growth, infrastructure development and the mining industry and is cyclical. The Companys presence in all the segments of auto industry will largely mitigate the segment specific risks.

Competition has increased significantly in the Indian market due to entry of new players and expansion plans of existing ones. The Company is aware of the increasing competition and is taking customer focussed measures to remain competitive in the market place.

The shortfall in the supply of power from the Government had forced the Company to resort to captive power generation using diesel generators and purchase of power from third parties at higher rates. The Government had also come out with regulations on Renewable Power Obligation, that is expected to increase the overall power cost. The power situation remains a concern with no major power generation capacity likely to get added to the system during the year. This may have an impact by way of higher costs and lower margins. However, the Company has made arrangements for ensuring the availability of captive power.


While the Company continues to pursue cost reduction initiatives, increase in price of input materials could impact the Companys profitability when they are not compensated by customers.


With significant exports, imports of raw material and capital goods and foreign currency liabilities, the Company is always exposed to currency fluctuations. However, the Company has a well-defined forex hedging policy to mitigate the risks.


The stipulation and requirements of the automobile industry demands high quality products. Quality is, therefore a key factor to be monitored closely. Although every reasonable precaution is taken, in rare cases, defects that escape may lead to incurring expenses for rework / product recall. Appropriate recall and product liability insurance in line with standard industry practice have been taken to minimize the risks. Just-in-time delivery is another important contractual obligation. Robust quality and project management systems are in place to avoid delay in deliveries due to quality issues or project implementation for minimizing risks.

Capacity utilization

The Company continuously steps up capacities to meet the projected demand of customers. The Company closely monitors the progress of customer projects/volumes and redeploys the assets, wherever possible, to minimize the risk of under-utilization of capacities.

V. Internal control systems and their adequacy

The Company has effective and adequate internal control systems covering all areas of operations. The internal control system provides for well documented policies / guidelines, authorisations and approval procedures. The internal control system stipulates a reasonable assurance with regard to maintaining of proper accounting controls, safeguarding and protecting assets from any loss and compliance of statutes.

The Company, through its own Internal Audit Department, carries out periodic audits at all locations and functions based on the plan approved by the Audit Committee. The observations, arising out of audit, are periodically reviewed and compliance ensured. The summary of the Internal Audit observations and the status on implementation of corrective actions are reported to the Audit Committee of directors for their review.

VI. Operations Review

A. Manufacturing

The Company has been using the philosophies of Total Quality Management (TQM) as the foundation of its management. The Company implemented the best practices of Total Productivity Management (TPM) and Lean Manufacturing in its manufacturing facilities. It also has in place best-in-class practices for safety, pollution control, work environment, water and energy conservation.

Continuous improvement projects are implemented to improve manufacturing quality and productivity in all the manufacturing locations. The Companys journey of achieving manufacturing excellence was recognized and rewarded by the following agencies / customers during 2013-14.

• TPM excellence award (category A) from Japanese Institute of Plant Maintenance (JIPM) for the factory at Hosur;

• Support in localization of complex machined aluminium casting from ZF;

• Excellence in New product development support from Cummins;

• Excellence in New product support from WABCO; and

• 4+ star quality rating by Hyundai.

B. Quality

Achieving customer delight by consistently providing products of excellent quality is the prime motto of the Company. This is achieved through state of art technology, training, effective quality system, continuous improvement and total employee involvement. Poka-yokes, process audits, use of statistical tools for process optimization and online process controls also contribute towards improving and achieving consistency in product quality. The quality system is certified for ISO/ TS 16949 requirements.

TQM is a way of life in the Company. 100% employee involvement has been successfully achieved for the 14th consecutive year.

Employees have completed 577 projects by applying statistical tools through Quality Control Circles (QCC) in 2013-14. The average number of suggestions implemented per employee in 2013 -14 was 45.

C. Cost Management

Total cost management is a continuous journey and the Company manages the same through deployment of costs to users. A full time task force is working on projects focussed on reducing process scrap and operational efficiency. TPM and lean initiatives are deployed Company-wide to achieve reduction in manufacturing cost.

D. Information Technology

The Company uses ERP system (SAP) that integrates all business processes across the Company. Suppliers and customers are also integrated into the system for better planning and execution. During the year, several dashboards were added to improve the productivity, quality and reduce the cost of operations. Projects were also implemented to further enhance the Information Security.

VII. Human Resource Development

Human Resource Development is focused and aligned to business needs towards improved performance and business results. The key focus areas of HR are - Employee engagement, Recruitment, Performance & compensation management, Competency based development, Career & succession planning and Organization building.

The Company focuses on attracting the best talent and enjoys a good brand image across leading educational institutions and industry. The Company blends successfully mid-career recruitment with internally grown talent.

Our engineers and executives are sponsored for structured program in both Indian and foreign institutions for developing competencies in the area of new technology and modern management practices. Industry experts are also hired for coaching our Executives and Engineers.

Career development workshops are conducted to identify high potential employees. A reward and recognition system is in place to motivate and also provide fast track growth for the high potential employees.

Customised management development programs have been developed with reputed educational institutions to hone the leadership skills of the senior executives.

An excellent industrial relations environment continued to prevail at all the manufacturing units of the Company during the year.

As of 31st March 2014, the Company had 4832 employees on its rolls.

VIII. Environment & Safety

The Company is fully committed to the ultimate goal of employee safety. Safety management is integrated with the overall Environment, Health and Safety (EHS).

The Company has been certified under Integrated Management System (IMS) combining ISO 14000 and OHSAS 18001 systems and procedures.

IX. Corporate Social Responsibility (CSR)

The Board at its meeting held on 29th October 2013, constituted a Corporate Social Responsibility Committee with Mr Venu Srinivasan, chairman and managing director as the Chairman of the Committee and Dr Lakshmi Venu, director - strategy and Vice Admiral P J Jacob (Retd.), director as its members.

CSR activities have already been textured into the Companys value system through Srinivasan Services Trust (SST), established by the group companies in 1996 with the vision of building self-reliant rural community.

SST over 18 years of service, has played a pivotal role in changing lives of people in rural India by creating self-reliant communities that are models of sustainable development.

At present, SST is working in 2,501 villages spread across Tamil Nadu, Karnataka, Maharashtra, Himachal Pradesh and Andhra Pradesh. Its major focus areas are: Economic development, Health care, Quality education, Environment and Infrastructure. Its significant achievements are:

• Through partnership with the community helped to form over 5,300 Self Help Groups (SHG).

• 100% enrolment in schools. 0% drop outs. 93% students pursue higher studies and over 60,145 adult women were made literate.

• Illiteracy amongst women reduced from 47% to 12%.

• 1,75,205 hectares under afforestation.

• 12,938 hectares covered for soil and water conservation.

• Proper solid and liquid waste management practices adopted in 1,418 villages.

• SHG members have a group savings of Rs.25.57 Cr.

• Over 1,47,136 of the families living in these villages have a monthly income of around Rs.15,000/- per family.

• 1,296 villages have access to safe drinking water.

• Enriching 2,501 villages across 5 states. Creating the most effective synergies for socio economic development in India.

X. Financial / Operational performance

The financial and operational performance for the year 2013-2014 as compared to the previous year is furnished in the following table.

Particulars Year ended 31st March 2014 Year ended 31st March 2014
Rs. in Crores % Rs. in Crores %
Sales 1,196.76 97.10 1018.56 96.39
Other income 35.78 2.90 38.12 3.61
Total Revenue 1,232.54 100.00 1056.68 100.00
Cost of materials consumed 596.10 48.36 525.07 49.69
Change in inventories of finished goods, work-in-process and stock-in-trade (1.62) (0.13) (7.15) (0.68)
Employee benefit expense 155.20 12.59 132.93 12.58
Stores and tools consumed 85.82 6.96 74.31 7.03
Power and fuel 66.39 5.39 59.02 5.59
Repairs and maintenance 38.74 3.14 29.01 2.75
Other expenses 148.09 12.02 115.62 10.94
Finance Costs 35.65 2.89 44.32 4.19
Depreciation 53.21 4.32 51.25 4.85
Total Expenditure 1,177.58 95.54 1024.38 96.94
Profit before exceptional items and tax 54.96 4.46 32.30 3.06
Exceptional Item - Income 5.83 0.47
Profit before tax 60.79 4.93 32.30 3.06
Provision for taxation
Income tax 5.50 0.45
Deferred tax 1.63 0.13 (3.12) (0.30)
Profit after tax 53.66 4.35 35.42 3.35

XI Cautionary statement

Statements in the management discussion and analysis report describing the Companys objectives, projections, estimates and expectations may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include, among others, economic conditions affecting demand/supply and price conditions in the domestic and overseas market in which the Company operates, changes in the government regulations, tax laws and other statutes and incidental factors.