Sundram Fasteners Ltd Management Discussions

Industry structure and developments

The Indian economy has registered a stellar performance reporting an average annual growth rate of 8% over the last three fiscal years. The GDP for the current fiscal year is set to grow by 7.6%, making India the fastest-growing major economy in the world. With a GDP size of about USD 4 trillion, India is the fifth-largest economy in the world and is expected to become fourth-largest economy by FY 2025-26. The Government has continuously increased the allocation for infrastructure development in the last three years creating a multiplier effect on the economy. The eight core sectors which have a weightage of 40% in the Index of Industrial Production have grown by 7.5%, though the weakness in external demand has impacted a few export-oriented sectors.

The economys growth has been aided by stability in the macroeconomic fundamentals. The Reserve Bank of India (RBI) has kept inflation within its target range of 4% to 6% through a prudent monetary policy. The calibrated increase in policy rates under the liquidity adjustment facility has ensured that the inflation is aligned to the target. The crude oil prices have remained relatively stable during the fiscal keeping the inflation under control. Better expenditure control and the tax buoyancy have helped the Government to rein in the fiscal deficit. Indias consumption story is intact as evidenced by GST collections of more than Rs.20 trillion during the year.

The Indian Rupee has remained range-bound throughout the year and closed at 83.40 against the USD, compared to 82.17 levels on March 31,2023. The RBI has also built up sizable foreign currency reserves, which has given a cushion against currency volatility arising from political or economic incidents. FDI inflows and FII investments have also bolstered Indias foreign exchange reserves. With other major economies slowing down, India has become a favourable destination for global investors.

India experienced a deficiency in the monsoons due to the impact of El Nino. This resulted in erratic and uneven rainfall distribution, causing significant deficits in some regions and surpluses in others. The monsoon impact has affected the agricultural sector, rural purchasing power and sentiments.

Indias passenger vehicle (PV) industry has had another year of robust growth of 8%, with the sector touching a mark of 4.2 million car sales during the fiscal year. This growth has come on the back of a high base of FY 2022-23. The triggers for the growth are the new model launches, high safety standards, enhanced product offerings to meet the evolving consumer expectations. The need for personal mobility, rapid urbanization and the availability of easy financing options have further supported the growth of the passenger vehicle segment. There has been a shift in consumer preferences from sedans to SUVs with demand for entry-level vehicles having plateaued. SUVs share of PV sales is about 60%. The Electric Vehicles (EVs) sales continue to gain traction given the increased environmental awareness, support from the Government like Make in India initiatives, incentives for the adoption of EVs, and the development of charging infrastructure. The EV sales accounted for 4% of the total passenger vehicles sales during the fiscal year.

The Commercial Vehicles (CV) segment had a stable year, with a growth of 3% during the financial year 2023-24. Rural demand was affected by a below-par monsoon, and the urban demand has been driven by manufacturing momentum and fleet expansion of logistics players. The bus segment registered a good growth owing to the mandatory scrappage policy for Government vehicles, which drove the replacement demand.

Tractor sales which had crossed 1 million mark last year registered a sale of 0.97 million units in FY 2023-24. The demand for tractors has been tepid due to a sub-normal monsoon.

The two-wheeler (2W) sales are nearing pre-pandemic levels. The segment continued the recovery path with double-digit growth reporting a sale of 21 million units. The EV sub-segment has made an impressive stride of 30% growth encouraged by the Government incentives.

Segment-wise or Product Wise Performance

The following table depicts the production trend of various segments in the automotive industry.

Category	Production
Segment/Sub-segment	April-March
	2023-2024	2022-2023	% Change
I Passenger Vehicles (PVs)
Passenger Cars	19,79,911	21,84,844	(9.40)
Sports Utility Vehicles (SUVs)	27,77,051	22,61,749	22.80
Vans	1,44,882	1,40,523	3.10
Total Passenger Vehicles (PVs)	49,01,844	45,87,116	6.90
II Commercial Vehicles (CVs)
M&HCVs
Passenger Carrier	55,067	43,807	25.70
Goods Carrier	3,37,407	3,35,452	0.60
Total M & HCVs	3,92,474	3,79,259	3.50
LCVs
Passenger Carrier	73,229	45,011	62.70
Goods Carrier	6,00,726	6,11,356	(1.70)
Total LCVs	6,73,955	6,56,367	2.70
Total Commercial Vehicles (CVs)	10,66,429	10,35,626	3.00
III Three Wheelers
Passenger Carrier	8,43,161	7,23,524	16.50
Goods Carrier	1,16,141	1,00,221	15.90
E-Rickshaw	29,830	28,185	5.80
E-Cart	3,803	3,766	1.00
Total Three Wheelers	9,92,935	8,55,696	16.00
IV Two Wheelers
Scooter	63,91,272	56,01,501	14.10
Motorcycles	1,45,89,393	1,34,21,208	8.70
Mopeds	4,87,862	4,36,300	11.80
Total Two Wheelers	2,14,68,527	1,94,59,009	10.30
Grand Total of All Categories	2,84,29,735	2,59,37,447	9.60

Source: Society of Indian Automobile Manufacturers

Revenues

Domestic Sales:

Domestic sales of the Company grew at 3.14% from Rs 3,237.42 Crores in the previous year to Rs 3,339.20 Crores for the year ended March 31,2024. The increase in domestic sales is attributable to strong demand from the domestic Original Equipment Manufacturers (OEMs).

In the aftermarket (Retail), the Company continued to witness surge in the order inflow for the industrial and the auto segments. Export Sales:

The headwinds in global markets impacted the export performance of the Company. The Company recorded export sales of Rs 1,409.43 crores in comparison to Rs 1,528.95 Crores in the previous year.

Operating Revenues:

The operating revenue of the Company was at Rs 4,905.65 Crores (PY: Rs 4,921.61 Crores).

Financial Performance:

Steel is one of the principal raw materials used by the Company. During the year under review, the steel prices have softened both internationally and domestically. The Company mitigates its raw material price risks through identification of alternate sources of suppliers, alternate usage of materials, price negotiations and localisation efforts. Further, the yield improvement projects have helped to reduce raw material consumption.

The Company continues to procure cost effective renewable sources of power under group captive scheme. Further the Company has installed roof-top solar panels in its factories to optimise the power cost. The share of renewable power has increased from 39% to 47% in the current financial year.

During the financial year 2023-2024, PBIDT (Profit before interest, foreign exchange fluctuation, depreciation, exceptional income and tax) was at Rs 825.37 Crores as against Rs 797.18 Crores in the previous year, recording an increase of 3.54%.

Finance costs amounted to Rs 17.99 Crores (PY: Rs 24.63 Crores). The Company continues to exercise prudence in its borrowings and management of working capital requirements.

Profit before tax was higher at Rs 639.07 Crores (PY: Rs 615.30 Crores). After providing for taxes, the Profit after Tax amounted to Rs 479.71 Crores (PY: Rs 463.74 Crores).

Summary of Operating Results:

Rs in Crores

Particulars	2023-2024	2022-2023
Net Revenue from Operations	4,905.65	4,921.61
Other Income	47.33	29.83
Total Income	4,952.98	4,951.44
Total Expenditure	4,127.61	4,154.26
Profit Before Interest, Depreciation and Tax (PBIDT)	825.37	797.18
Finance Cost	17.99	24.63
Depreciation/Amortization	168.31	157.25
Provision for impairment of investments in subsidiaries	-	-
Profit Before Tax (PBT)	639.07	615.30
Provision for Tax	159.36	151.56
Profit After Tax (PAT)	479.71	463.74

Details of significant changes in key financial ratios:

No Key Ratios	Unit of measurement	Current year 2023-24	Previous year 2022-23	Significant change compared with previous year i.e. 25% or more	Detailed explanation for significant change
1 Debtors Turnover	Days	78	70	N.A.	N.A.
2 Inventory Turnover	Days	59	58	N.A.	N.A.
3 Interest Coverage Ratio	Times	37.92	33.86	N.A.	N.A.
4 Current Ratio	Times	2.04	1.90	N.A.	N.A.
5 Debt Equity Ratio	Times	0.11	0.15	*	*
6 Operating Profit Margin (%) (PBT before exception item / Revenue from operations)	%	13.03%	12.50%	N.A.	N.A.
7 Operating Profit Margin (%) (EBITDA / Revenue from operations)	%	16.82%	16.20%	N.A.	N.A.
8 Net Profit Margin (%)	%	9.78%	9.42%	N.A.	N.A.

* Due to higher networth and reduced borrowings, the debt equity ratio was lower.

Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof:

Particulars	2023-24	2022-23
Return on Net worth	15.50%	17.00%

Due to higher net worth compared to the previous year, the return on net worth was lower.

Consolidated Performance:

The total revenue of the Company and its subsidiaries on a consolidated basis during the year under review was at Rs 5,720.47 Crores as against Rs 5,707.60 Crores.

Capacities and Capital Expenditure:

During the year, the Company incurred Rs 230.15 Crores towards capital expenditure on existing and new projects. The capital investments were incurred in tandem with the production plans of key customers.

Awards:

During the year under review, the Company received Awards for its various units as given hereunder:-

S. No. Units	Awards
1 Metal Forms Division, Hosur	"Capable Supplier" and "Consistent vendor performance" Award from Endurance Technologies Limited
	"Quality" Award from Bajaj Auto Limited
	"Supplier Quality Excellence" Award from General Motors
	"Zero PPM" Award from Mahle Electric Drives
2 Fasteners Division, Chennai, Madurai and Puducherry	"Green Champion" Award from Tamil Nadu Pollution Control Board
	2nd Prize in 18th Quality Circle Competition from Automotive Component Manufacturers Association (Southern Region)
	"SQ Mark Certification" from Hyundai Motor
	Winner of Automotive Component Manufacturers Association Excellence Awards 2023 at ACMA Excellence Awards & 9th Technology Summit 2024 at New Delhi
	Platinum Award in National Lean Competition by Confederation of Indian Industry
	Second Prize in Engineering Category in Kaizen Mela Competition by Quality Circle Forum of India-Madurai Chapter
3 Hot and Warm Forgings, Puducherry	"Zero Defect Champion" Award from SKF India Limited
	"Zero Defect" and Industry 4.0 Techniques implementation" Award from John Deere
4 Autolec Division, Chennai	Special Award for contribution in Proprietary Parts from Volvo Eicher Commercial Vehicles
	"Best Supplier" Award in the category of Continual Improvement from Mitsubishi Heavy Industries
5 Radiator Caps & Assembly Division, Chennai	"Supplier Quality Excellence Award" from General Motors "Excellence in Safety Management" from Hanon Systems
6 Powertrain Components, Chennai and Sricity	Appreciation Award from Ford, Sanand - Engine Plant

Total Quality Management, Human Resources, Industrial Relations, Learning and Development:

The Company continues its focus on the principles of Total Quality Management (TQM). During the Financial Year 2023- 24, the Company has focused on sustaining the strong manufacturing processes through the "cant receive the defect, cant make the defect and cant flow off the defect" system to ensure the supply of zero-defect products to the customers. The Company further initiated digitization activities (loT - Internet of Things) in the processes to improve its internal quality besides sustaining its existing Total Quality Management (TQM) activities. This has aided the Company to reduce the complaints from customers and a decline in internal rejections.

The Company is dedicated to fostering an environment conducive to attracting, nurturing and retaining talent while cultivating a positive workplace environment. Various programs are in place to bolster overall employee well-being, encompassing mental, physical, and financial health wellness. Each employee participates in giving back to the community by actively participating in both monetary contributions and volunteering activities, enriching not only the community but also nurturing strong engagement among employees. The Company places great value on its workforce, recognizing them as invaluable assets essential to its success. Employees are involved and contribute towards continuous improvements.

The Companys Human Resources Development framework includes Workforce planning, Employee engagement, Performance and rewards, Learning and Development, Career and Succession Planning and Organization Development, which have a structured approach, policies and standard operating procedures that are reviewed and updated periodically. Emphasizing the importance of continuous learning and development, the Company invests significantly in educational programs tailored to enhance employee skills and expertise. Leveraging the expertise and experience of internal trainers, who are subject matter experts, the Company focuses on upskilling employees to meet higher responsibilities. The Companys strategic approach identifies key competencies essential to organizational growth, with individual development plans tailored for high-potential employees, grooming them for future leadership roles through targeted leadership development programs.

Across all manufacturing units, industrial relations remain harmonious, fostering a work environment conducive to productivity and growth.

Health, Safety and Environment:

Ensuring the safety and well-being of the employees remains paramount for the Company, with various measures in place to uphold this commitment. The business processes are meticulously designed with full regard and adherence to health and safety protocols. Comprehensive safety training is provided to all employees, underscoring Companys dedication to maintaining a secure work environment.

Furthermore, all the manufacturing facilities are equipped with round-the-clock medical facilities.

Recognizing the importance of mental health, the Company offers robust support through an Employee Assistance Program, providing access to counsellors to ensure the well-being of the workforce. Mental wellness programs are regularly conducted.

All the Companys manufacturing facilities comply with occupational health and management safety systems.

Internal Control Systems:

All business-related transactions are handled through Systems, Applications and Products (SAP) system. To facilitate and ensure consistency in working, relevant policies and standard operating procedures have been documented, reviewed periodically, and revised wherever necessary.

All transactions relating to major processes, i.e. sourcing, procurement, production, sub-contracting, sales and dispatch, costing and finance, are handled through the SAP system, wherein necessary checks and controls have been built to facilitate the users in handling such transactions seamlessly.

Internal controls are benchmarked with industry standards, continuously monitored, and periodically reviewed for improving quality and effectiveness. Internal controls relating to key areas, i.e. operations, inventory, fixed assets, financial records, reporting, and compliance with requirements under various statutes, are reviewed by the Audit Committee for adequacy and effectiveness. The present internal control framework is adequate and provides assurance to the management that they are effective.

Prospects. Risks and Concerns:

Indias GDP is estimated to grow by 7% in financial year 2024-25 driven by strong domestic consumption. The exogenous factors may moderate the GDP growth. The outcome of the general election in India may have an impact on the market sentiment and the continuation of Governments economic and investment policies. However, GDP growth is expected to be secular and broad based.

The monetary transmission of repo rate hikes is fully reflected in the current interest rate structure, giving policy headroom for RBI to cut interest rates. The benign interest rate environment will spur economys growth with inflation subdued. The favourable policy framework of the Government and RBI will propel India to GDP of USD 7 trillion by 2030. The demographic profile, large working population with high disposable income are the structural tailwinds that would facilitate the expansion of the economy.

The price of crude oil and the USD/INR exchange rates are expected to be stable in FY 2024-25. This augurs well for the balance of payments position as it will keep the current account deficit low. The stability in currency rates will encourage merchant trade and enhance export competitiveness in the global market. With the inclusion of India in the Global Bond Index, the rupee may have an appreciation bias owing to the likely inflow of funds from foreign investors.

India is expected to benefit from above-normal monsoon this year. A good crop yield and higher minimum support price will improve rural cash flows and spur rural demand. The Fast Moving Consumer Goods (FMCG) and Auto sectors are expected to benefit from the bounty rainfall and the positive rural sentiment. The automobile sector which is a barometer of the economy is expected to have another strong year. The dominance of India in the automotive sector is established as India is the largest manufacturer of the two-wheelers in the World. India also ranks as third-largest heavy truck and fourth- largest car manufacturer in the World.

The CV segment is expected to benefit from higher government spending in the second half of the financial year with focus on infrastructural development.

The PV segment may witness a moderate growth with a significant uptick in the luxury segment shaped by affluent buyers in Tier-II cities. The continued transition towards electric vehicles is likely to pave the way for India to become third-largest EV market by 2025. India is expected to emerge as a manufacturing hub for export of cars to the global markets.

The tractor segment is expected to rebound with favourable monsoon, timely start of sowing season, arrival of agricultural produce in the mandis and launch of features-rich new models with higher HP. This segment has the potential to scale previous peak of 1 million units achieved in 2022-23.

The downside risks to the positive outlook are extreme temperatures, monsoon failures, geopolitical uncertainties, disruption in supply chain and inflation in commodity prices. Despite these challenges, India with its talent pool, is well placed to offer sustainable growth in future.

Cautionary Statement

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 developments that could affect the Companys operations include developments in the global or domestic or both fronts, significant changes in the political and economic environment in India or key markets abroad, tax laws, litigation, labour relations, foreign currency fluctuations and interest costs.