The Hi-Tech Gears Ltd Management Discussions.

Brief about the Company

The Hi-Tech Gears Ltd. is an auto component manufacturer (Tier 1 supplier) of world class repute. The Company has a foothold in US and Canada with aggregate revenue of Rs. 7334.94 million on consolidated basis in FY 2019-20. It is a listed on countrys premier stock exchanges, i.e. BSE and NSE and is regularly traded scrip. It has manufacturing facilities in Bhiwadi and Manesar with some subsidiary companies in North America.

The Company spans a spectrum of products, including transmission and engine components, driveline components, engines design services and advanced technology-enabled products and solutions at the fore front of cutting-edge technology.

The Micro Economic environment

The world is going through a crisis situation due to trauma commonly known as novel corona virus pandemic (‘COVID19). The outbreak of the deadly virus firstin December 2019 and thereafter it spread Chinawasreported in no time to the entire globe. The outbreak was initially recognised as a medical emergency by WHO and soon identified as a pandemic on March

11, 2020. US and Now India have now become the new epicentre of the pandemic after Europe. To counter the problem of spreading further, various countries took steps to close borders and issued advisories to suspend visits to/from other countries. Effects of the pandemic includesocial and economic instability, postponement or cancellation of trade & business events along with sporting & cultural events. This viral outbreak posed a major destabilizing threat to world economy that could last for many quarters. Stock markets also behaved in same manner and posted their sharpest falls since 2008 on COVID-19 fears in closing sessions of FY 20.

The economic impact of COVID-19 is very disturbing. No one has been spared of its ill effects. Most economies have been badly impacted out of which some of them have asked for monetary help from IMF. Businesses across the world in manufacturing and service etc have seen a major negative impact. The COVID-19 outbreak led to several instances of non-availability of manpower due to respective governments mandate for complete lockdown of entire nations. Social distancing, supply shortages, panic buying and disruption to factory, logistic operations, delays to shipments and the situation continued to evolve till the end of June quarter.

Covid-19 has disrupted global supply chains, and this is generating spill over effects throughout different levels of supplier networks. Global trade in 2020 will fall in every region of the world and will affect all sectors of the economy. This will impact countries that are strong exporters (no output for their local companies), but also those that are importers (lack of raw materials). WTO expects global trade to fall up to 35% this year due to the coronavirus pandemic.

Growth is projected at 2.8% in 2019 on continued benign global financing conditions and modest recovery in emerging market and developing economies (EMDEs). Global growth in 2020 is expected to be heavily in negative zone due to great slowdown, weaker-than-expected trade and investment, weakness in trade and manufacturing across all economies and effects of COVID-19 on business and humanity. It is expected to further reduce in view of heightened US-China trade tensions, weaker global economic growth, volatilityinfinancial . markets

The outbreak of the Covid-19 pandemic is an unprecedented shock to the entire world, including Indian economy. The economy was already in a parlous state before Covid-19 struck. There are various measures that India as a country taking to curb the spread of the Pandemic. This has resulted into complete Lock down effective from March 24, 2020. The Central and State Governments are into battle mode and taking significant measures in response to contain the virus.

With the prolonged country-wide lockdown, global economic downturn and associated disruption of demand and supply chains, the economy is likely to face a protracted period of slowdown. The magnitude of the economic impact will depend upon the duration and severity of the lockdowns and the manner in which the situation unfolds once the lockdown is lifted. On Governments revenue side, it faced a huge decline in government revenues and growth of the income for at least two quarters as the coronavirus hits economic activity of the country as a whole. A fall in investor sentiment impacts ambitious privatization plans of various government entities. Indias economic slowdown shows very ordinary signs of abating, with a sizeable number of indicators of domestic demand still flashing red upto recent time. Consumption has always been a strong and major driver of growth in the economy, however from last few months, there has been continuous fall. The overall scenario remained unchanged despite some improvement on the external front largely because of fresh incoming data on the current account balance as a share of GDP, which narrowed sharply in the quarter ended June 20 and recorded a severe decline of 23.9% compare to minor 3.1% growth in March quarter and 4.2% growth for the FY20. This decline is the worst since 1996, when the quarterly reporting of

GDP first started.

Indian Foreign Trade

India has been the favourite destination for trade since ages. India exports ores and minerals, auto, textile, gems & jewellery, handicrafts, leather, agriculture and food products and at the same time imports, petroleum, crude, gold & silver, coal, capital goods and machineries.

On international trade front, India has reasonably done better with decline in trade deficit to US $ 70.02 billion as compared to US $ 103.32 billion last year. The major reason was increase in export of services and fall of oil imports. The worrying reason for economy is that despite fall of oil prices, still the oil bill takes a toll and is valued at US $ 129.43 billion comprising 8.15% of the total import bill. As automobile and component export has a considerable chunk in the total exports, data relating to auto is important for analysis. Overall, automobile export reached 4.77 million vehicles in FY20, growing at 6.94 per cent during FY16-FY20.

Automobile Sector and Production Trends

The Indian auto industry is one of the largest in the world and is also regarded engine of growth. It roughly accounts 7.5% of national GDP. However, the growth momentum enjoyed by it is grossly disturbed, and the sector is slowing down with unprecedented rate. There are trade and Government policies, which may be responsible for slowing business in addition to continuing, structural slowdown in international growth, technological changes and tensions emerges from US China and India China border face off in recent past.

As per SIAM figures, the performance of the auto industry underperformed in FY20. In the wake of the ongoing crisis, many uncertainties have come into the picture across industries. The repercussions of nationwide lockdown announced in March 2020 was already visible in the March 2020 sales figures of the Indian auto sector.

The industry produced a total of 26,362,284 vehicles in FY 20 as against 30,914,874 vehicles in previous year, registering a decline of 14.73%. The production of Passenger Vehicles declined by 14.76 % (3,434,015 vehicles). Within the Passenger Vehicles segment, Passenger Cars deteriorated by 19.77% with 21,75,242 vehicles, Vans also declined by 38.49% however the Utility Vehicles registered a nominal growth of 2.29% with 11,24,975 vehicles. In 2019-20 there was fall everywhere and in Commercial Vehicle segment, it was the most. It was at 32.40 % with total vehicle production to 752,022 vehicles (PY 1,112,405 vehicles). Again, M&HCVs was affected the most and declined by 47.34% and LCV declined by 22.45 % with 2,33,979 and 5,18,043 vehicles respectively. The Two-Wheeler segment registered a degrowth of 14.14% in FY 20 by recording total production of 21,036,294 units (PY 24,499,777 units). Within this segment, Scooters/ Scooterette also registered a de-growth of (-) 15.05 % and Motorcycles and Mopeds also registered a decline of 12.97 % and 28.23 % respectively in FY 20 over FY 2019. In recent time, the major attraction is the quadricycle, which grew by 13.12% at 6095 units due to its easy maintenance and city driving convenience.

Overall domestic automobiles sales decreased by 17.96% in FY20 with 21,548,494 vehicles. During FY 20, major de-growth in domestic sales among all the categories was recorded in Commercial Vehicles at 28.75% followed by 17.82% de-growth in sales of Passenger Vehicles. The total of Indias automotive exports stood at 4,765,754 vehicles in 2019-20 as compared to 4,629,049 vehicles in the year 2018-19 registering a minor growth of 2.95%.

The COVID-19 pandemic has brought forth unprecedented challenges to every sector. The automobile industry, which was already battling its worst slump in two decades, has had its share too. The manufacturers of auto components are unable to manage their working capital as they have to bear fixed costs with stressed short-term viability. The lockdown could further lead to job losses, salary cuts and freeze on hiring over the next few quarters, distressing industry employability.

The crisis further makes it highly concerning for the Indian auto industry. Experts believe the pandemic may not recede in the second half of the year and this could lead to longer containment periods, worsening financial conditions and leading to further breakdowns in global supply chains. According to industry estimates, the lockdown could result in losses to the tune of INR 48,000 crore. Society of Indian Automobile Manufacturers (SIAM) estimates plant closures of various auto OEMs and components companies could lead to a loss of more than INR 2,300 crore in turnover for each day.

Automakers should now review their supplier strategy across geographies and possibly rely more on indigenous suppliers. The impact for India will have to be re-assessed continuously based on spread and containment of COVID-19.

Risk & Concerns in Automobile and Component Segment

The automobile industry is at that point, where it is facing many disruptions at the same time. Though, it just passed the urgent test, i.e meeting the technological changes as BS VI emission norms and now have to apply the Fuel Efficiency norms on one side and increased period of return of investment on the other side.

Fortunately, the confusion of ambition of NITI Aayog and Governments intent is cleared with respect to having only electric vehicles being sold in the country in phased manner. This has been deferred, but the electric vehicles will definitely become popular due the low maintenance and running cost by itself, instead of any mandate. Vehicle manufacturing is the backbone of many economies and is dependent on China for growth. As trade tensions exacerbate Chinas economic weakening, manufacturers in other economies, including India pay the price. On the other side, there is an opportunity for ‘Make in India to flourish, post discouragement to import from China.

The auto component industry is regarded as a low operational cost and low margin business. The auto component industry has been battling with its industry specific issues/ challenges such as:

Infrastructure Challenges & Cost

Higher cost due to employment and other issues during and post lockdowns

Problem of counterfeit parts

Availability of skilled manpower

Payment of heavy royalty fee to foreign partners on designs and IPRs

Building R&D competence and Ecosystem

Fast technological changes

Heavy capex cost due to fast technological changes for EV.

The auto component industry is not new to the above challenges and it is dealing with them at its best from quite some time. It has almost overpowered the under capacity utilisation and excessive imports of raw material and capital goods. However, from last year it is experiencing the heat of high energy and fuel cost, extreme volatility of currency and availability of finance at competitive rates post emergence of NPAs of Bank and debacle of major NBFCs.


The rapidly globalising world is opening newer avenues for the transportation industry, especially while it makes a shift towards electric, electronic and hybrid cars, which are deemed more efficient, safe and reliable modes of transportation. Over the next decade, this will lead to newer verticals and opportunities for auto-component manufacturers, who would need to adapt to the changes via systematic research and development. The Global automotive industry is undergoing a cascade of disruptions that will reshape it in unexpected ways and India is no exception to it. India is now acting as a global hub for manufacture of commercial vehicles, small & mid size cars and two wheelers. Rapid increase in sales of the small car segment in India has prompted a number of global automobile companies to enhance their capacities for domestic as well as export market.

The effects of demonetisation and teething problems of the initial rollout of

GST have been diminishing and are now rather helping the economy and the industry to grow. However, it has to pass the major test of survival and then back to normal post COVID-19 shocks. On oil side, falling oil price during worldwide lockdown due to COVID-19 has brought transportation across to a standstill. Consequently, theres been a fall in oil demand.

Weakness in oil prices implies lower fiscal revenues, lower spending by the government, lower support of the non-oil sectors, lower revenues flowing to the sector. On positive side, India has taken lead in the directions of using the renewal energy. India now stands at 4th in wind power, 5th in solar power. Share of renewables in total electricity generation increased from 6% in to 10% in four years. On liquidity front, benchmark policy rates are reduced by 135 bps to boost the economy. Above normal monsoon will help in sowing and harvesting more yield. Various schemes under the ambitions ‘Atmanirbhar Bharat is expected to further boost the business in post COVID-19 era. Additionally, increasing rural demand, growing urbanization, swelling replacement demand etc. may further accelerate the growth of the automobile industry and in turn the auto component industry.

Opportunities, Threat and Mitigation Strategies

At the operational level there are several risks that are inherent to the business of the Company. These are typically transactional in nature. These risks are managed through internal processes and controls. In addition, the Company has to deal with certain major micro risks that affect the Companys strategy implementation, some of which are enumerated below: Impact of COVID-19: Like any other auto component company, we are also severally impacted, since our manufacturing facilities were stopped due to government mandated lockdown. After easing, we started, but our suppliers, vendors showed their inability to perform due to various restriction. Due to the contractual obligations a lot of fixed expenses had to spent. Additionally, the company had the contractual liabilities towards it customer, which required immediate mitigation. We are successful to an extent to mitigate the loss and impact. We assessed and kept on watching the situation. We informed our customers, who were also facing the similar situation and together invoked force majeure clause to avoid any contractual liability. We resumed supplies with limited resources of our quality products and do whatever possible to meet, what was required. In doing so many measures were taken, including cutting the establishment and fixed costs. The promoters Directors also waived off remuneration in order to keep the company going. We expect that the bad time is over, but to become the situation normalised, it may take a longer time than expected.

Steps taken to ensure smooth functioning of operations

Thermal Screening of all employees and visitors

Sanitizing the premises and vehicles on regular basis Maintenance of social distancing at all work places

Enforcing wearing of masks and regular cleaning of hands

Strictly following the social distancing at workplaces, factories, canteen etc.

Regular health updates of all the employees and their families

Promoting awareness through do and dons posters for all its employees

Ensuring use of Arogya setu app

All customers and vendors have been communicated with about the measures taken by the Company

Supply Chain is being monitored to ensure availability of material

Staggered time schedules and encouraging work from home for the employees, wherever possible.

Foreign Exchange Fluctuation: The volatility in foreign exchange is now a major concern for the Company for the repayments of the ECB loans. To mitigate the risk, the Company has a natural edge, as the Company is receiving almost 25% to 30% of its revenue in foreign exchange through its export sales. Additionally, the management has taken another source of mitigation i.e. fixing LIBOR component in total interest rate agreed for the External Commercial Borrowings to avoid the risk of fluctuation.

Input material: Steel is the primary source and raw material for the products of the Company. It is an important part of the cost of the finalproduct. Rising steel prices continue to be a challenge & pose a threat to the margins of the Company in this competitive auto component sector. To mitigate the risk, the Company continues to strive to improve its operational performance and develop new components, which are technologically superior and have an edge over its competitors. Additionally, the Company is not dependent upon a single source/ supplier. A core team is constituted which has expertise in vendor management and keeps a track on the price of steel. This team negotiates the price in the best interest of the Company.

Power: The other major cost in production is the energy cost. Presently the Company is getting power from the State Electricity Board as per the prevailing tariff. The current tariffs are very high and occupy a major portion in the overall costing of the product. To address the energy cost, the Company has implemented a process, whereby it is purchasing electricity through the Electricity Exchange by getting competitive quotes. Further, solar power plants of 400 KW & 250 KW have been successfully installed to reduce the energy cost. Additionally, there have been major progress for putting up a solar plant under captive consumption scheme, which will reduce the cost considerably.

Customer profile : The Company is primarily a gear & transmission equipment manufacturer and supplier. The Company has a large focus amongst a few groups of customers and industry segment. This limited focus adds to market risks and also highlights the fact that one or some customers moving out could leave a large impact on the operation and financials of the Company. To mitigate this risk the Company is focusing on widening its customer base, entering new user segments and spreading operations across geographies to mitigate the market risks.

Two-Wheeler business: A major share of the Companys business is still generated from the two wheeler segment and is evident from the financials. Competition in the business has also increased significantly. This has had a serious adverse impact on the margins of the component manufacturers. To overcome the risk of dependency on its two wheeler business, the Company has been developing clients for engine and transmission components in India and abroad.

Technology Risk: One of the major challenges for the industry is to build R&D competence and an ecosystem. OEMs have been working on various technologies simultaneously. OEMs expect Tier-1 suppliers for technology updation and material changes. Thus, the Company needs to continuously stay in touch with such progress & needs to evaluate ways to address these issues as well as develop technologies which are affordableand accessible.

To mitigate the risks, the Company has always invested in upgrading its technology to meet the changing customer demand.

Geographical limitations: Auto component companies have another issue that is geographical limitations. Practically, it is difficult for them to expand beyond certain geographies. Expanding beyond such limits will provide more fruits in terms of revenue and profits. However, tapping into such markets is also not easy due to many factors such as acceptability, quality of the product, regulations, lack of capital, limited manpower and other resources. To address the above mentioned concern, the Company has been regular in reaching out to other geographies. It has almost achieved the exports to the tune of around 30% of the total exports. We are committed to increase this number. Further, the Company has acquired few entities in the NAFTA region which will be a progressive step in the right direction.

Regulatory Change: Regulations are changing to accommodate the awareness about environmental responsibilities. Stringent emission and safety norms are playing an increasingly important role globally. In the recent past, the government has focused on tighter emission norms. Now, the focus is also coming on to battery and hybrid vehicles to promote green vehicles. Of late, safety has also been attracting governmental attention. The Company is committed to comply with all applicable environmental and related regulations by gearing up for the technological changes in the products, so that it meets the requirements. Keeping this in mind, Company has invested some funds in a South Indian entity in research and advancement of leading edge expertise in the design and manufacturing of high reliability motors, drive system, long battery life for the electrification of road transport, carbon free electric vehicles.

Brief of Financial Results

On standalone basis, the total turnover stood at Rs. 5,155.28 million compared to Rs. 6,634.52 million during the previous year. The total turnover from operations stood at Rs. 5,093.25 million as compared to Rs. 6,472.15 million in FY 2018-19, registering a de-growth of 21.30%. Due low demand and in the absence of clarity on policy regulation, de-growth in all verticals was clearly visible. The profit before tax stood at Rs. 153.02 million as compared to Rs. 531.22 million in the previous year, recording a decrease of 71.19%. EPS stood at Rs. 4.13. Similarly, the net profit after tax stood at Rs. 77.42 million as compared to Rs. 354.84 million in previous year, which is decreased by about 78.18 % compared to the previous year.

The Company recorded an export turnover of Rs. 1,334.44 million compared to Rs. 1,912.1 million during the previous year, recording a sharp decrease of 30.21%. The total exports are now 26.20% of the total turnover.

On the consolidated side, the turnover was recorded till the close of the financial year at Rs.7,334.94 million compared to Rs. 9,306.81 million during the previous year. The profit before tax stood at Rs. 189.82 million as compared to Rs. 585.27 million in previous year. The consolidated financials of the Company with its subsidiaries are attached at the relevant part of this Report.

Despite the stressed economy, industry and company results, still the company was able to release funds towards the dividend. An amount of Rs. 65.69 million was paid out by way of interim dividend for the year 2019-20.

To improve the revenue the company not only the domestic, but new export programs are also being launched to gain momentum. Overall, the focus will continue to be on quality delivery at optimum costs. Company is also considering in launching the ‘After Market division to strengthen the revenue position. New initiatives are taken in North America to integrate into the Global Value Chain, with our footprints in both Canada and the USA. The objective of these initiatives is to further strengthen our processes, build better relationships with our customers and consolidate our position as a manufacturer of quality products for the auto sector.

Further, the Company will leverage its positioning, in view of the technological changes, it is already BS VI compliant due to superiority on technical aspects. It is also relying on building its relationships and product development plans to grow further. The Company believes that FY 2021, while being challenging, will be a year when not only the take back its lost glory but will continue its growth momentum.

Key Ratios

Key financial ratios are given below:

Particulars Unit 2018-19 2019-20 Change over previous year Reason for material change
Debtors Turnover Times 5.9 8.6 45% Decrease in sales volumes in 2nd half of FY due to slow down and Covid 19 in March 20.
Inventory Turnover Times 8.7 9.1 4% Decrease in sales volumes in 2nd half of FY due to slow down and Covid 19 in March 20. It improved due to control the working capital.
Current Ratio Times 1.5 1.3 (13%) Due to decrease in current assets over current liabilities.
Debt Equity Ratio Times 0.95 0.72 (23%) Mainly due to repayment of working capital loan.
Particulars Unit 2018-19 2019-20 Change over previous year Reason for material change
Interest Coverage Ratio Times 3.9 1.7 (56%) Due to decrease in Sales volumes, resulting decrease in profits.
Operating Profit (EBIDTA) Margin % 15.2 12.6 (17%) Lower EBITDA is due to lower sales volume and increase in fixed cost.
Net Profit Margin % 5.5 1.5 (72%) Lower net profit due to lower sale and increase in fixed cost.
Return on Net worth % 13.3 2.9 (78%) due to decrease in PBT

Operational Excellence, Awards & Recognitions

We follow world class manufacturing systems, as manifested in its vision statement. In this drive, our efforts have been recognized by our esteemed customers, who have continuously appreciated our quality & efforts and supported us from time to time. Customer recognitions are the strongest testimony to a companys excellence. The ECOFAC Plants at Bhiwadi and Manesar are unique & one of its kind. These Plants have been conferred the Platinum category by the Green Building Council.

ECOFAC means a sustainable green manufacturing plant. The Companys Plants have all features of safety, energy & water conservation, & waste management etc.

The Company has successfully installed two roof top Solar Power Plants of 400 KW and 250 KW in Manesar and Bhiwadi manufacturing units respectively as part of its commitment to conserve the environment and reduce the energy cost. All modern concepts of Lean, TPM and TEI for best utility are being implemented in these Plants from the initial stage. Our efforts have not only been appreciated by the concerned authorities but by customers and will become a model for future sustainable manufacturing growth.

CRISIL Limited has rated The Hi-Tech Gears Ltd. (HGL) as ‘BBB+.

The outlook continues to be stable. It continues to reflect the promoters established presence in the auto component manufacturing industry and healthy relations with reputed original equipment manufacturers (OEMs).

The rating also factors in the companys comfortable financial risk profile.

Segment Reporting

The Company is primarily engaged in the business of gears and transmission components, & the inherent nature of both the activities is governed by the same set of risk and returns, & these have been grouped as a single segment in the above disclosures. However, for the purpose of geographical segment, it is divided into three segments and provided in the Financials.

The financial treatment is in accordance with the principle provided in the relevant Accounting Standard on Segment Reporting.

Internal Controls & their adequacy

The Company has a properly designed and consistently enforced system of internal control to safeguard the Companys properties, interests and resources, Further, to have better and sustainable control, a new ERP system has been implemented which is showing the desired results. The same are supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures. Internal Auditors conduct the Audits and report directly to the Audit Committee and the Board. M/s. Grant Thornton India, LLP a renowned and one of the largest assurance, tax, and advisory firms working as Internal Auditor of the Company.

The Company has also in place adequate internal financial controls with reference to financial statements. During the year, such controls no reportable material weakness in the design or operation was observed. The Company is committed to strengthen the system in a more stringent manner. Further, the Company has always efficiently used the various components of working capital cycle. It has also effectively controlled the inventories and receivables.

Human Resources

Managing human resources effectively and efficiently plays a critical role in ensuring that a satisfied, motivated work force delivers quality services. It also plays an important role in increasing staffperformance and productivity, enhancing an organizations competitive advantage, and contributing directly to organizational goals. Satisfied highly-motivated and loyal employees represent the basis of a competitive company. The growth of satisfaction is to be reflected in the increase of productivity, improvement of the products quality or rendered services and higher number of innovations. During the period under review cordial relation were maintained at all levels. Detail of number of employees and other material information is provided in Directors Report.

The Company continues to maintain its track record of peaceful industrial relations ever since its inception. It sustains and fosters its unique paternal culture across all operating locations. Several health and safety initiatives have been introduced as part of a structured program to enhance the safety and health of its workmen and other associates. Performance measurement and skill up gradation programs are widely deployed within the Company.


This report contains certain statements that the Company believes and may be considered as forward-looking statements. These forward-looking statements may be identified by their use of words like ‘plan, ‘hope, ‘will,

‘expect, ‘aim or such similar words or phrases. All such statements are subject to risks and uncertainties which could cause actual results to vary materially from those contemplated by the relevant forward-looking statements.