Ucal Fuel Systems Ltd Management Discussions.

1. Company Overview

UCAL Fuel Systems is one of the leading players in the Indian Automotive Industry when it comes to Fuel Management Systems. Founded in 1985, the Company has set its strong foothold by becoming a preferred and a leading supplier of Carburettors and offers a comprehensive Fuel Management Systems for Automotive Sector. The Company now also offers a wide range of mechatronic components and systems for all modern mobility needs, including products for Indias BSVI regulations, as well as answering to technological trends like electrification and flex-fuel. Alongside its impressive manufacturing footprint, UCAL Fuel Systems provides excellent customer value through its capabilities in innovation, design, and validation hosted at its best-in-class R&D center in Ambattur, Chennai - an NABL and DRDO accredited facility specializing in joint development with OEMs, drawing upon a wealth of in-house expertise. UCAL Fuel Systems has made great investments in optimizing its own supply chain, bolstering world class assembly with in-house die-casting and machining.

The Company is undergoing a technological transformation as it prepares to expand the e-Carb system to meet OBD II requirements and continues to invest in its Research and Development activities towards this end. The Companys focus on marketing Electronic fuel Injection System (EFI) and mechanical Throttle Body Assembly has augmented the addition of new customers for this product range. The Company is working towards establishing itself as a supplier of mechanical, electronic carburettors and fuel injection systems with special focus on Oil Pump and Vacuum Pumps for the 4W segment.

The Companys long-term vision is to become a one-stop shop solution provider for all engine and vehicle management requirements of the twowheeler industry and major supplier of vacuum and oil pumps for the four-wheeler industry and efforts are continuing towards achieving this objective.

2. Economic Overview - Global

FY 2021-22 displayed the resilient strength of the human race with global growth peaking at 6.1%, the highest in four decades, on the resumption in manufacturing activity, a revival in market demand and an uptick in investments driven by consumer confidence, on the back of supportive Government policies and the assurance of the safety net provided by the mass vaccination programmes.

The resurgence of the second wave of the pandemic however changed the growth trajectory leading to a global economic upheaval and a large humanitarian crisis. The lockdown and the resultant disruption in operations led to Global GDP decelerating to 3.2% in 2021-22 and according to IMF is estimated to remain stagnant till 2022-23. The receding of the virus brought a glimmer of hope only to be negated by the emergence of the Omicron variant and the geopolitical tensions which exacerbated with the Russia - Ukraine hostilities. The escalation in war brought in its wake problems of mammoth proportions beginning with a large exodus of displaced people, together with surging costs of raw materials, commodities, fuel and oil prices, especially since the warring nations were the major suppliers of wheat, metals, fuel and edible oil. Inflationary pressures and tightening of financial channels further added to the burden of vulnerable communities and stressed economies across the world.

3. Economic Overview - India

The Indian Economy was impacted by the second wave of the pandemic and the resultant lockdown disrupting operations, with muted customer demand and rural offtake slowing economic growth. The geopolitical tensions further brought with it a surge in raw material, commodity and fuel prices, and together with inflationary pressures dampened market growth. The RBI pegged the countrys GDP growth at 7.2% for 2021-22 with a downward revision of its earlier estimate of 7.8%. Key economic indicators however reflect a revival of the economy and a buoyancy in the market demand.

The Central Governments measures for a speedy economic recovery was given a big impetus with the large budgetary allocation for the ‘PM Gati Shakthi programme with its focus on the 7 engines of growth: the development of the rail, road, mass transport and national highway infrastructure, enhancing rural prosperity, the productivity incentivization programmes for building world class manufacturing capabilities and a focus on key industries and sunrise sectors all augur well for the economy and for the automobile industry, offering a huge growth opportunity.

4. Industry Outlook

The Automobile industry witnessed an upward trend in production and sales across all categories in the first half of the year catering to the pent-up demand pipeline. According to SIAM the industry produced a total 22,933,230 vehicles as against 22,655,609 units in April 2020 to March 2021.

In April 2021 to March 2022, Passenger Vehicle Exports increased from 404,397 to 577,875 units, Commercial Vehicle Exports increased from 50,334 to 92,297 units, Three Wheeler Exports increased from 393,001 to 499,730 units and Two Wheelers Exports increased from 3,282,786 to 4,443,018 units in April 2021 to March 2022 over same period last year.

The year recorded an upward trend in vehicle sales across all categories, except in the two-wheeler segment which de-grew by 2.5% compared to the previous year. Exports of Two Wheelers however increased during the year. While the first half of the year saw good traction, driven by the pent up demand, the second half of the year came with challenges

Sales of automobile components, according to ACMA (Automobile Component Manufacturers of India), recorded the highest demand across all segments in the first half of the year, with an increase of 66% from April to September 2021. While component sales to OEMs in the domestic market grew by 76%, the Aftermarket increased by 25%. Exports recorded a significant growth of 76%.

The Auto sector was beset with multiple challenges in the second half of year, recording a de-growth across segments. According to ACMA, the overall automotive industry degrew by 4% in FY2021-22 with a 15% decline in domestic sales. Exports proved a silver lining with a significant growth of 33%.

Inflationary pressures and rising commodity and fuel prices muted customer demand and rural offtake. Retail fuel prices in the international market touched a record high of $ 130 bbl in a single day, with the seismic effect felt across economies. The rising cost of vehicle ownership due to pass-over of the escalation in raw material prices by OEMs, affected sales especially in the entry level motorcycle segment. In addition, supply chain disruptions and lean inventory holdings by OEMs led to an acute shortage of semiconductor chips halting production lines of Auto Majors. Semiconductor shortage is estimated to have impacted production numbers of 2Ws and 4 wheelers and led to nearly 1000 Crore loss in business opportunity during the year.

According to industry analysts, the Global Automobile Carburettor Market is expected to reach USD 1.29 billion by the end of 2027. The growing global trend of downsizing Engines for better fuel efficiency and performance is enhancing the demand for lighter and efficient carburettors. In addition, stringent global emission norms around the world are key drivers of market growth for carburettors. The population-dense Asia Pacific region is estimated to be the largest market by 2027 with a growing and affluent middle class with large disposable incomes, providing a captive customer base for the automobile market.

One of the recent trends in the automotive industry is engine downsizing, which is done by using upgraded technologies such as turbochargers, superchargers, and direct injection technology. OEMs are increasingly focusing on using small engines with power equal to or greater than the existing engines.The global automotive pump market is projected to grow at a CAGR of 4.1%. from USD 14.8 billion in 2022 to USD 18.0 billion by 2027.

The global automotive ECU market is valued at $ 87 Bn. by 2027 and is forecast to grow at a CAGR of 6.1% from 2021 to 2027 with the APAC becoming the dominant region. The major drivers of growth for this market are increasing electronic content per vehicle, increasing vehicle production, and increased stringent government regulations for passenger safety. The global automotive ECU market is projected for significant growth with opportunities in the passenger car, light commercial vehicle, and heavy commercial vehicle segments.

India is one of the largest manufacturers of automobiles in the world. The automobile industry in the country is on the cusp of a major transformation with its attempt to universalization of standards in accordance with Global Regulatory Mandates. The country leapfrogging to BSVI from BSIV norms in 2018 was a quantum jump compressing the timeline for migration to advanced safety and fuel efficiency standards. This has, despite the challenges, opened access to global markets and has positioned the country as a destination of choice for OEMs in their China Plus One Strategy. The Governments Automotive Mission Plan (AMP) 201626 with its decadal focus on making the country the manufacturing hub of the world, together with the impetus provided by the PM Gati Shakthi Plan with its large budgetary allocation in 2022 for building the rail, road, mass transport system, enhancing rural prosperity, and the PLI scheme incentivizing productivity in manufacturing and supporting sunrise sectors all augur well for the automobile sector.

In addition, the Battery Swapping Policy for the EV industry, the Vehicle Scrappage Policy which aims to phase out old polluting vehicles in an environmentally-safe manner are positive pointers to the growth of the industry in the country.

The Indian auto industry is expected to record strong growth in 2022-23. The industry, including component manufacturing, is expected to reach Rs 16.16-18.18 trillion (US$ 251.4-282.8 billion) by 2026. (IBEF)

5. Business Review

A. Manufacturing

UCALs state-of-the-art manufacturing plants are equipped with the advanced process systems and production facilities to address the stringent demands of global OEMs and Auto majors.

Despite the challenges of the second wave of the pandemic and the resultant lockdown disrupting operations in the beginning of FY 2021-22, the Companys manufacturing plants recorded the highest production across segments, meeting a burgeoning market demand with great commitment to quality and delivery timelines. Stringent safety protocols were implemented and vaccination camps were conducted for all employees to ensure safe and seamless operations.

As part of its capability building strategies, and to meet the growing market demand, the Company embarked on a prudent capex spend on expansions, line additions and infusion of advanced process systems at its manufacturing plants at Marimalai Nagar and Bawal, for throttle body parts, fuel injections systems, boxer carburettors and oil pumps.

Optimizing internal efficiencies, prudent cost management, reduction of inventories and better working capital management proved crucial in a challenging year with rising raw material and fuel prices denting growth margins. A total saving of Rs 602 Lakhs was achieved due to inventory reduction during the year.

During the FY 2021-22, UCAL has established the state-of-art facility for Electronic Fuel Injection system (EFI) for Snow Bike application keeping in mind the huge business potential available for EFI systems and for manufacture of Boxer Carburettor, two models of Oil Pumps (K10 DITC & K15B) for catering to the requirements of its major customers.

B. Operational Performance

UCAL Fuel Systems Limited (UCAL) is among the leading manufacturers of an extensive range of critical components and fuel management systems for the automotive industry which includes carburettors for two wheelers, gasoline fuel injection system products, engine management systems, products for diesel applications and emission control, pumps to high pressure die casting and precision manufacturing products. The Companys e- carburettor is an innovative product that has become a game changer in the industry.

Six decades and more of industry experience, UCAL has earned a reputation for its value-led innovation and engineering expertise. In line with its vision, the Company has positioned itself as atotal Mechatronic solutions partner tomore than 35+ large OEMs and Auto Majorsworldwide.

Keeping pace with the dynamically evolving automotive landscape, UCAL is accelerating its momentum for a quantum leap in growth and globalization.

C. Marketing

Deepening customer engagement, building a strong portfolio of value added, differentiated products, strengthening the channel network and expanding global footprint, enabled the Company to record a robust growth in sales across segments.

Despite the sectoral de-growth of 5% of the automotive industry, UCAL recorded a creditable rise in sales of 14% in FY21-22. While the two-wheeler segment degrew by 2.5%, sales of UCALs two-wheeler components rode an upward growth trajectory of nearly 24%. The aftermarket recorded a significant growth in sales during the year.

In line with Indias commitment to the global mandate on reducing Greenhouse gases and emission levels as per the UN Sustainability Goals- 2030, the auto industry is focusing on active development of engine systems, including Electric Vehicles to replace Internal Combustion Engines (ICE). However according to industry analysts the transition from Internal Combustion Engines (ICEs) to Electric and other alternate systems will take a longer period of time than envisaged, since Internal Combustion Engines (ICEs) power the entire transport systems which accounts for more than 99.9% of the usage and petroleum-derived liquid fuels currently provide around 95% of transport energy.

Despite the advent of EV and alternate fuel technologies, the market for ICE systems is still strong and robust, and is slated for greater growth in the near future.

The Companys R&D is continuously developing innovative products In line with the changing demands of the automotive industry, both for the domestic and export markets. In line with this a slew of new, value-led, and differentiated products were launched in mechanical and e-Carburettors, Fuel and Breather Rail Assemblies during FY 2021-22 contributing to nearly 10% of total sales.

Enlarging the customer roster with differentiated products, focusing on value-led innovation and engineering expertise, and expanding global presence in adjacencies and new product segments are some of UCALS key strategies outlined for accelerating momentum and achieve greater growth.

D. Technology

The Company through product / technological innovations offer engineering solutions and provides value to its customers. The focus for R&D in the financial year 2021-2022 has been to develop new products like intake throttle valve, HC Doser for the commercial vehicle segment, mechanical carburettors for the 2 & 3-Wheeler export segment, non-automotive segment, Oil pumps for the passenger car segment, FI system for the global power sport application, electronic throttle control for the CNG, 2-Wheeler segment. Focusing on the technology changes in the mobility segment - electrification, hybridization, engine downsizing (Gasoline Direct Injection with Turbo charge) UCAL R&D is developing products like e-Coolant pumps, e-Vacuum Pump, Motor controller, sensing of the throttle response. UCAL R&D is installing / upgrading its facilities to develop and validate the new products/ technologies and the R&D validation lab continues to have the accreditation by NABL and the recognition from the Department of Scientific and Industrial Research, Ministry of Science and Technology. The key products/ technologies developed by UCAL in the financial year 2021-2022 include electronic air- fuel management system, engine management system integration and calibration, electric air suction valve, mechanical carburettor and throttle body assembly, intake throttle valve, electronic throttle control, e-Coolant Pumps and e-Vacuum Pumps. Strategic investments were also made to implement advanced manufacturing capabilities and process technologies on par with global standards.

E. Global Footprint

UCALs products are supplied to OEMs and Auto Manufacturers in the country, who export their vehicles to more than 75 countries across the world. The Company also exports its products directly to large OEMs and Auto manufacturers in Japan and Poland, in addition to Distributors for the Aftermarket in ASEAN, Latin American and South African countries.

F. Sustainability

Keeping pace with the changing global demands, the Company continued to design and manufacture products that were enviro- friendly, energy efficient and sustainability centered.

6. Financial Performance

During the year, your Companys total standalone revenue was Rs 54,393.51 Lakhs as against Rs 49,263.43 Lakhs in FY 2020-21 representing an increase of 10.41% over that of the previous year due to increase in the customer requirements. The Consolidated revenue of the Company has also witnessed increase from Rs 68,672.52 Lakhs in FY 2020-21 to Rs 78,229.95 Lakhs registering a growth of 13.92%. The PBDIT has decreased from Rs 5,855.52 Lakhs (FY 2020-2021) to Rs 4,985.40 Lakhs (FY 2021-2022) due to overall increase in the total expenditure of the Company. The Company has netted a Profit After Tax (PAT) of Rs 793.50 Lakhs contributing 1.46% of the turnover of FY 2021-22. The Consolidated net profit during the year was Rs 3,488.62 Lakhs in comparison with previous year which stood at Rs 2,885.95 Lakhs resulting in an increase of 21%.

The Finance Cost has reduced from Rs 2,356.18 Lakhs for the year ended FY 2020-21 to Rs 1,927.90 Lakhs in FY 2021-22 mainly on account of re-payment of term loans and Companys efforts on reduction of interest rates with the Banks.

The Depreciation stood at Rs 2,212.37 Lakhs for the year ended 31st March, 2022 under study when compared to Rs 2,108.15 Lakhs in the previous year 2020-21.

EBIDTA (Earnings Before Interest, Depreciation, Tax and Amortization) for the year ended 31.03.2022 stood at Rs 4,985.39 Lakhs as against Rs 5,855.52 Lakhs in the previous year.

PBT (Profit Before Tax) for the financial year 2021-22 stood at Rs 845.12 Lakhs, as against Rs 1,391.20 Lakhs, in the previous year.

PAT (Profit After Tax) for the year ended FY 2021-22 stood at Rs 793.50 Lakhs, as against Rs 3,532.92 Lakhs in the previous year.

The borrowings of the Company have decreased from Rs 21,831.06 Lakhs in FY 2020-21 to Rs 18,761.53 Lakhs in FY 2021-22 resulting in the net reduction in borrowings during FY 2021-22 to the tune of Rs 3,070 lakhs.

During the year ended 31st March 2022, the Company has made addition to fixed assets to tune of Rs 395 lakhs including net assets capitalised from WIP and Capital Advances.

6.1 Sales Performance

Innovation-led value engineering and new product launches, intensive market storming initiatives for expanding geographical footprint, and deepening customer engagement enabled the Company to record a creditable growth in sales across all product categories.

7. SWOT Analysis

• UCAL brand name

• Operational Excellence.

• R&D Facilities certified by Government of India. • Technology in carburettor (mechanical and electronic) fuel injection systems, Intake throttle Valve, HC Doser Oil pumps, ETV and EGR.

• Capabilities (both technology & infrastructure) to develop products for meeting emission norms.

• Electronic design, development and manufacturing capability.

• Facilities in pressure die castings, plastic and rubber molding.

• Capability in frugal engineering.

• Well-trained and disciplined workforce.

• Good work culture.

• Preferred supplier of OEMs

• Flexible in Product development and Supply chain to meet the customer demand

• Low IT penetration.

• Slow growth in export business.

• Limited products for the EV Segment

• High employee cost

• Entry into the EV segment with new products.

• Penetrate Export market with existing products.

• Entry into new markets like South America, Africa and ASEAN.

• Entry into Commercial and Tractor segments and electric mobility vehicles.

• No or few new developments of Engine platform in IC engines

• Competitive pressure on pricing policies.

• Rising input cost.

• Relentless pressure to reduce prices by OEMs thereby affecting profit margin.

• Increased emphasis on electric mobility vehicle

9. Risk Management

The Company has devised a suitable framework to identify and evaluate risks. Periodic assessments to identify the risk are carried out and the management is briefed on the risks in advance to enable the Company to control the risk through a properly defined plan. The risks are classified as financial risks, operational risks, market risks and statutory compliance risks. The risks are evaluated based on previous experience, probability of occurrence, probability of non-deletion and its impact on business and are taken into account while preparing the annual business plan for the year. Insurable risks are covered by insurance policies to protect the Company interests. The Board is also periodically informed of the risks and the actions taken to manage them. The Company manages its risks by incurring prudent capital expenditure, by ensuring that customers underwrite the capacities created specifically for their requirements, by determining the prices of its products on a scientific basis based on detailed studies, by prudent financial management, by localization to protect itself from exchange risks, constant R&D efforts and by spreading its markets and manufacturing facilities geographically. The committee assists the management in assessing the market risks, competitors risks, product obsolescence risk and devises strategies to overcome the same.

10. Human Resource Development and Industrial Relations

The Human Resource development had a challenging year behind us. The Covid-19 pandemic has impacted all of us and called for a rapid and yet well-considered action plan, including the area of HR. The health of our employees is our highest priority and we ensured that all the employees were vaccinated and covered them through an exclusive Covid-19 Insurance protection, to ensure a risk-free shop environment and to protect the interest of all employees. Our employees are the key to success. Strengthening a positive employee experience and thus achieving a high degree of engagement also means continuously developing and fostering employees and managers. A high level of enthusiasm, energy and motivation are essential in achieving greater job performance, creativity, productivity and innovation. Attaining this goal is our top objective at UCAL.

The Human Resources (HR) department is driven by the guidelines:

• To help our employees realize their potential - to develop, grow and achieve their purpose

• To build the right culture and capabilities

• To make the Company the great place to work for passionate, innovative people who wish to make a difference

HR Management at the Company goes beyond the set boundaries of compensation through a meticulous performance management system which includes performance reviews and development. The Company looks at the employees entire work- life cycle, to ensure timely interventions that help build a long-lasting and fruitful career. With this in mind, the Company has initiated several positive changes in HR practice this year. Employees safety continues to be an important focus area. Continuous communication with employees on available safety measures to increase awareness is undertaken throughout the year. To ensure that employees are at their productive best, the Company continued to work on simplifying internal processes through a collaborative effort with various teams.

To foster a positive workplace environment, free from harassment of any nature, the Company has institutionalized an Internal Complaints Committee (ICC) in all locations across India to consider and address sexual harassment complaints in accordance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

There were no incidents of sexual harassment reported during the year under review, in terms of the provisions of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

The Company continues to maintain its record of good industrial relations without any interruption in work and have carried out restructuring process at different plants under the challenging business conditions to ensure the operating flexibility and competitiveness among the workforce to deliver 100% productivity at all plants.

11. Health, Safety and Environment

The Company has taken various precautionary measures to tackle COVID-19 keeping in mind the safety of its employees and customers. Social Distancing and sanitization norms were continuously practiced and awareness of good hygiene practices was emphasized. Vaccination awareness programs and drives were conducted at plant locations encouraging employees and their family members to get vaccinated. The Company attaches great importance to the health and safety of its employees and towards this end, strict safety and health measures are enforced across the organization at all locations at all times. All manufacturing operations and plants adhere to all pollution norms by continually improving environmental and occupational health and safety management systems. Water conservation, reduction in use of hazardous chemicals, waste management and adopting renewable energy continue to be given emphasis.

12. Internal Control System

The Company has an efficient internal control system commensurate with its size and nature of business to safeguard the assets of the Company and to ensure effective utilisation of resources. These controls ensure that transactions are completed on time and in an accurate manner and by following proper procedures and systems. The Company has external teams carrying out audit to strengthen the internal audit and risk management functions. The internal auditors cover a wide area of operations and this is being continuously reviewed by the Audit Committee. Internal audit is conducted on a quarterly basis by a team of internal auditors and the reports together with the action taken reports are reviewed by the Audit Committee periodically. The Board and Audit Committee ensure that the internal financial control system operates effectively and they regularly review the effectiveness of internal control system in order to ensure due and proper implementation and due compliance with applicable laws, accounting standards and regulatory norms. A system of management controls is also in place to ensure higher levels of efficiency and to keep the organisation competitive. All the critical functions of the Company i.e., Sourcing and Procurement, Manufacturing, Costing, Finance, Dispatch and Sales are handled through Oracle fusion system which is well-integrated. Checks and controls have been built into the system to handle the transactions. Existing internal controls provide adequate assurance to the management for all the transactions covering operations, inventory, fixed assets, financial records and compliance to statutory requirements. The systems and controls are reviewed periodically to ensure their effectiveness.

13. Outlook

In line with its target of accelerating growth and expanding its global footprint, the Company has drawn a strategic roadmap for financial year 2022-23. Leveraging on its strength as a market leader and manufacturer of repute in a wide range of automotive components, the Company will explore opportunities in new markets and emerging segments in a dynamically evolving automotive landscape.

Your Company achieved the highest sales during the year despite the pandemic disruptions, sectoral de-growth and a surge in raw material and fuel costs. While the signs of growth revival for 2022-23 are positive, much depends on the stabilization of the geo-political environment, the cessation of the war between Russia and Ukraine, the containment of the pandemic that has resurfaced in a third wave and supportive Government measures to promote business growth.

The Companys multi-plant operations, engineering expertise and strong sectoral credentials serve as a buffer against regional disruptions and business vulnerabilities and provide the headroom to achieve its chartered growth plan.

14. Cautionary Statement

Certain Statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and others may constitute ‘forward looking statements within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections and so on whether express or implied. Several factors could make a significant difference to the Companys operations. These include climatic conditions and macro economic conditions affecting demand and supply, government regulations and taxation, natural calamities and so on, over which the Company does not have any direct control.