Varroc Engineering Ltd Management Discussions.

ECONOMIC REVIEW

Global Economic Overview

Following a broad-based upswing in cyclical growth that lasted nearly two years, the global economic expansion decelerated in the second half of 2018. Activities softened amid an increase in trade tensions and tariff hikes between United States and China, a decline in business confidence, a tightening of financial conditions and policy uncertainty across many economies.

The Euro area economy lost more momentum than expected as consumer and business confidence weakened and car production in European countries like Germany was disrupted by the introduction of new emission standards. Trade tensions contributed to the worsening of financial market sentiments with conditions tightening for emerging economies in the spring of 2018 and for developed economies later in the year, weighing on global demand. Conditions have relatively eased in 2019 as US Federal Reserve signaled a more accommodative monetary policy stance and the markets become more optimistic about a US-China trade deal.

As a result of these developments, global economic growth is now projected to slow from 3.6% in 2018 to 3.3% in 2019, before returning to 3.6% in 2020. The projected pickup in the second half of 2019 is predicted on an ongoing buildup of policy stimulus in China, recent improvements in global financial market sentiments and the waning of some temporary drags on growth in the Euro area.

Improved momentum for emerging market and developing economies is projected to continue in 2020, primarily reflecting recovery from the economic distress. By contrast, activity in advanced economies is projected to continue to slow gradually as the impact of US fiscal stimulus fades and growth tends towards modest potential.

Indian economy overview

In India growth is projected to pick up to 7.0% in FY2020, supported by the continued recovery of investments and robust consumption amid a more expansionary stance of monetary policy and some expected impetus from fiscal policy. This stabilization will also be due to continued implementation of structural reforms and easing of infrastructure bottlenecks.

While growth will remain consumption driven, investment will improve gradually, aided by bank recapitalization and improved capacity utilization. Export growth, at 8%, increased at the highest pace in the past five years during FY19. However, imports too grew at a even higher pace expanding the trade deficite to USD 176 billion. Consumer Price Index (CPI)-linked inflation is expected to soften to around 3% in first six months of FY20 due to lower food and fuel prices.

Upside risks to inflation, however, arise from three factors:(i) fiscal actions (such as higher minimum support price (MSP) and higher pension out going to the Seventh Pay Commission) that will exert higher influence on inflation;(ii) firmer global oil and metal prices that will compel manufacturers to raise prices given improving domestic demand conditions; and (iii) higher MSPs for farmers and higher import duties. Current account deficit (CAD) is expanded from in fiscal 2019, owing to import growth exceeding export growth. Higher CAD will exert pressure on the Rupee as well. Capital inflows face risks from tightening of global liquidity and adverse global financial developments.

BUSINESS SCENARIO AND INDUSTRY OUTLOOK & OPPORTUNITIES

Our business is directly related to our customers vehicle sales and production levels across various segments. Automotive sales and production are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences, as well as changes in interest rate levels, consumer confidence and fuel costs.

We have two primary business lines, namely (i) the design, manufacture and supply of exterior lighting systems to passenger cars OEMs worldwide (our "Global Lighting Business" for VLS), which we undertake through our subsidiaries forming part of the VLS group and (ii) the design, manufacture and supply of a wide range of auto components in India (our "India Business"), primarily to two-wheeler and three-wheeler OEMs, including exports.

Our India Business offers a diversified set of products across three product lines, namely Polymers/Plastics, Electrical/Electronics and Metallic components. In addition, we have other smaller businesses, which include the design, manufacture and supply of two-wheeler lighting to global OEMs, and under carriage forged machine components for OHVs and drill bits for the oil and gas sector.

i) Global lighting business

In 2018, worldwide sales of passenger cars and light commercial vehicles decreased for the first time since 2009, as carmakers sold 0.5% fewer vehicles, according to JATO Dynamics figures, based on their data of 54 top markets.

Passenger car and pick-up sales were down 0.6% to 81.8 million and LCV sales were up 2.5% to 4.2 million vehicles. Of the major markets, double digit growth was recorded by Thailand (+20%), Brazil (+14%) and Russia (+13%), while sales declined by double digits in Turkey (-35%) and Argentina (-10%) as these two countries battled economic downturns. But small declines in Europe, United States, and most significantly China had a great impact on global car sales. India, on the other hand, set a fourth consecutive annual sales record and finally surpassed Germany to become the worlds fourth largest car market. The fastest growing segment worldwide was that of EVs, which increased by more than 73% to over 1.2 million sales.

Regarding future trends, Yole expects global PC and LCV sales to reach 99 million units in 2021 at a CAGR2016-2021 of 2.0%. Yole notes that growth will be driven by emerging markets where GDP growth per capita will enable more households to purchase their first car.

Factors which will revolutionize the automotive industry in the upcoming years are:

• Electrification,

• Stricter emission regulations,

• Autonomous driving

• Shared mobility

Review and outlook on the global automotive exterior lighting market

The increasing demand for superior systems that enhance users driving experience and convenience is propelling the growth of the global automotive exterior lighting system market. The increasing initiatives by government agencies to promote road safety campaigns is leading to innovations and the introduction of advanced automotive lighting systems in the market. The development and adoption of ADAS technology will augment the demand for laser headlamps and OLED lights in the global market.

The introduction of electric and hybrid vehicles and the establishment of safety and emission regulations will create lucrative opportunities for key players operating the global market. Innovations in the electrification of engine mechanism and propulsion technologies will drive the global automotive exterior lighting system market

The geographical segment in the global automotive exterior lighting system market is divided into APAC, Europe, North America, Latin America, and MEA. APAC occupied the largest market share in 2017. The increasing production across China, Japan, India, and South Korea will boost the development of the APAC region in the global market. The growing sales of SUVs in China and other countries in APAC will increase the performance of the automotive market in this region. The presence of large manufacturers such as Toyota, Honda, Suzuki, and Nissan will contribute to the revenues in the global automotive exterior lighting system market.

The beginning of the favourable economic environment, availability of financing options, and established presence of global OEMs will contribute to increased sales and help companies in APAC to gain a larger market share. The digital revolutions and supportive trade reforms will increase revenues in the APAC market.

ii) India business

Indian Two-Wheeler Sector

According to CRISIL Research, India is one of the largest two-wheeler manufacturer in the world.

Two-wheeler sales in the domestic market in the 2018-19 financial year saw a 4.7% increase in volumes. According to SIAM, the domestic two-wheeler sales stood at 2,11,81,390 units in FY2018-19, as against 2,02,00,117 units sold in 2017-18. However, this growth numbers were lesser than estimated, especially after registering double digit growth for the past year post a five-year hiatus. Factors including a weak customer sentiment, increase in fuel prices and overall increase in insurance for vehicles contributed to slow buying period, especially in the second half of the financial year.

Domestic sales for scooters during FY2018-19 stood at 67,01,469 units, dropping by 0.27% over 67,19,909 units sold in 2017-18. Motorcycle sales, on the other hand, continued to bring in the larger chunk of volumes as sales increased by 7.8% to 1,35,99,678 units in 2018-19, as against 1,26,20,690 units sold during the previous fiscal. Moped sales also increased by 2.41 per cent to 8,80,243 units from 8,59,518 units in 2017-18.

Two-wheeler exports witnessed a strong growth for the 2018-19 fiscal with 32,80,841 units shipped, a growth of 16.6% over the 28,15,303 units sold in FY2017-18. Scooter exports grew by 26.74 per cent with 3,98,316 units shipped while motorcycle exports increased at a relatively lesser pace by 15.4% with 28,65,851 units.

The biggest challenge for the industry would be to make the transition to the new norms related to safety and emission over the next 12 months. New regulation like ABS to the 100 and 125 CC vehicles would increase price to end users effective April 2020. BS VI implementation is also expected to result an increase in price of the vehicles and hence impact demand in the near term.

Indian Three-Wheeler Sector:

India is one of the largest exporters of three-wheelers, and major players are continuously expanding their distribution reach in other countries to boost exports growth. Exporting countries include emerging markets like Africa, South East Asia and Latin America.

Issuance of fresh permits, availability of funding, replacement demand, favorable CNG economics and demand from cab aggregators for three wheelers are driving the domestic growth for the three wheelers.

The three-wheeler segment has reported a robust 24% growth in overall production volume (sales) in the financial year 2019, producing 12.68 lakh units vis-a-vis 10.22 lakh units in FY 18

While the domestic sales during the fiscal under review saw a 10% growth to 701,011 units as compared to 635,698 units in FY18, exports supported domestic sales heavily with 49% growth to 567,689 units in FY19, against 381,002 in the year-ago period. SIAM attributes this growth possibly to enormous demand for the Indian three-wheelers in Asian and African regions.

According to CARE Ratings, carmakers are also setting up units for manufacturing electric vehicles and many launches, both in two- and three-wheelers categories, are planned in the coming months during FY20.

We at Varroc have developed products to cater to these changing emission norms and expect to benefit from the trend. We have already secured orders for products like Electronic Fuel Injection (EFI) and Catalytic Convertor (Cat Con) to meet the BS VI emission norms.

Apart from these products, Varroc is well positioned to capture the growth emanating from trends like Electrical Vehicle penetration. We have successfully developed prototypes for products like traction motor for EVs. This is being highlighted in detail in the outlook and opportunity section below.

(Source: SIAM, CRISIL Research, CARE).

OUTLOOK AND OPPORTUNITY

The increases the lighting value and lighting content per car as a result of technological improvement and upgradation presents a big opportunity for our lighting business. Going forward we will continue to focus on high growth markets and customers where we can increase customer revenue and on improving operational efficiency across our businesses. We will continue to invest in our R&D, design, engineering and software capabilities in order to capitalize on future trends.

The Indian two and three-wheeler industry is expected to grow at a promising rate in the medium term supported by a buoyant economy with rising rural income. In addition, there are significant opportunities created by the future safety and emission norms for our Electrical and Lighting divisions. All of these factors are likely to support our growth going forward.

Our Strategies

Focus on high growth markets for our Global Lighting Business

The global exterior automotive lighting market is expected to grow at a CAGR of 4.3% between 2016 and 2021 (Source: Yole). Such growth is driven by the trend towards autonomous driving and connectivity between cars, with lighting becoming an increasingly prominent design and aesthetic feature, as well as playing a critical role in safety requirements and lighting technologies playing a greater role in energy efficiency and design flexibility. As such, we are looking to expand our market share in the global exterior automotive lighting market, including projection systems, signalling functions and electronics.

We have expanded our customer base to include new OEMs such as the VW Group, Renault-Nissan-Mitsubishi, TVS Motors and Volvo Truck. With our cost efficient and global manufacturing footprint, we are well-positioned to continue to serve our customers needs across different car models and geographies.

Focus on increasing customer revenue for our India Business

The primary demand drivers for the Indian domestic two-wheeler industry are improving affordability and lower cost of ownership, whilst the key growth drivers for two-wheeler industry exports are rising crude oil prices and a focus on other markets. Given the high exposure of two-wheelers in rural areas, they depend, in turn, on trends in rural incomes and infrastructure

In addition to benefiting from the overall growth in the Indian two-wheeler and three-wheeler markets, we also intend to increase our revenue with our existing customers by expanding the array of our existing products that we supply to them and by continuing to develop technology solutions aligned with their needs. Our pan-India manufacturing footprint provides us with the ability to be close to our customers across key automotive manufacturing hubs in India, and we seek to foster customer loyalty by being closely attuned to each of their needs.

In particular, our growing business with Hero and Honda, Indias two largest two-wheeler OEMs, provides us with significant opportunities to capitalize on the growing market for scooters and motorcycles in India. In addition, we have added TVS as a customer during the year, which should provide additional avenues to increase our scale in India.

We also have grown revenue in the passenger vehicle and commercial vehicle segments in India for both our lighting and polymer businesses. Since 2012, we have seen a growth in revenue from our business relationships with Mahindra, Volvo Truck, VECV and Renault-Nissan-Mitsubishi. We have also won orders from customers like VW in the previous year.

Continue to invest in our R&D, design, engineering and software capabilities in order to capitalize on future trends

We plan to continue expanding our R&D, engineering and software development capabilities in order to capture future growth trends. We seek to expand our capabilities in a cost efficient manner, by focusing on low-cost geographies nearby major automotive markets, in order to expand our capabilities in a cost-efficient manner. For example, in India we established a R&D facility specifically catering to VLS, which provides support to our core R&D facility in the Czech Republic. Moreover, we established a new R&D facility in Poland which started operations in 2018.

Pursue strategic joint ventures and inorganic growth opportunities

We intend to actively pursue acquisitive opportunities and strategic alliances with targets that are complementary to our business. We are mainly focused on growing existing product lines, such as automotive lighting and electronics for the global exterior automotive lighting market, in key markets including North America. While we will continue to focus on the polymer, electrical and metallic businesses within India, we will also continue to be disciplined in evaluating complementary businesses in India to increase our focus on other segments if necessary. In particular, we will seek to make acquisitions that provide us with access to new technologies, or new customers, or new geographies.

Focus on operational efficiency

We also focus on operational efficiency in order to improve returns in a rapidly changing technological environment. Within each production facility in India and internationally, we have sought to improve efficiencies, streamline our capacity and asset utilisation and manage our capital expenditure. We have implemented various initiatives to lower costs, improve man & equipment productivity and improve customer delivery. Few such examples are: purchasing raw materials in bulk to take advantage of promotions and economies of scale, shop automation to improve output and quality, Industry 4.0 implementation for faster response with accurate data, Implementation of Lean tools and practices.

We apply a lean manufacturing standard in the Global Lighting Business, which we refer to as the Varroc Excellence System ("VES"). VES is structured to boost industrial efficiencies and increase profits and operating cash flows by reducing costs and eliminating waste in excessive stocks, workforce and processes. Through the VES, VLS aims to achieve operational excellence by meeting our key goals of "Superior Quality", "Lowest Cost", "Timely Delivery" and "Highest Motivation", which we pursue through the three pillars of flow management, people development and quality enhancement. By focusing on these elements, we seek to achieve: (i) zero defects, by implementing scheduled maintenance and monitoring in order to detect and remove the causes of such defects; (ii) zero waste, by reviewing manufacturing methods to manage and minimize excess produce; (iii) zero lead time, by managing product processes and delivery times; and (iv) zero accidents, by focusing on training and safety.

VLSs global industrialisation team is directly responsible for the global result of the VES strategy and agrees targets and goals with the Board of Directors of VLS for each fiscal year. Plant managers are responsible for aligning their respective facilities to the global vision across daily Key Performance Indicators ("KPIs"), which are standardized across the Global Lighting Business.

For our India Business, we have implemented total preventive maintenance ("TPM") in order to help ensure high quality, low costs and on-time delivery for our customers. This program has now been rolled into Varroc Manufacturing Excellence System (MES). This new program exerts more

rigor on improving the efficiency of production and support functions by identifying and eliminating losses. For example, on the shop floor, we conduct activities to eliminate major losses that affect equipment and achieve higher OEE, production per hour, production per headcount and lower costs. We have also received TPM Awards for our 12 plants from our largest customer, Bajaj, during 2008-2014. The practices which we have put in place at our manufacturing plants, Business Units and at group level are, among others, (i) the development of the periodic TPM audit system in 2011 to ensure the effective implementation and improvement of the TPM system, (ii) the development of TPM knowledge through the preparation of a methodology manual and (iii) the TPM pillars awareness book in 2014. Each Business Unit Head and Business Unit management team is directly responsible for business results and, together with the Board of Directors, define the goals for each fiscal year. Each Plant Head is responsible for aligning the respective facilities to the groups vision, mission, business plans, KPIs and project themes, which are standardized across the units and plants of our India Business.

OPERATIONAL REVIEW

Financial Review

Analysis of profit and loss account and balance sheet including the key ratios based on consolidated results is mentioned is as follows:

Profit and loss account

Revenue from operations

Our consolidated revenue from operations increased by 16.0% to Rs. 120,364.6 million in FY2019 from Rs. 103,784.6 million in FY2018, primarily as a result of an increase in sales across all businesses.

Other Income

Other income increased to Rs. 907.9 million in FY2019 from Rs. 386.1 million in FY2018. The other income increased as a result of benefit of change in surrender value of keyman insurance policy, increase in government grants and increase in miscellaneous income as compared to FY2018.

Expenses

Raw Materials Costs

Raw materials costs increased by 18.2% to Rs. 75,457.9 million in FY2019 from Rs. 63,826.9 million in FY2018, which was mostly in line with the increase in our revenue.

Excise Duty

Excise duty of Rs. 996.3 million in FY2018 was not applicable in FY2019 on account of the introduction of the Goods and Service Tax, which took effect from July 1, 2017.

Employee Benefits Expense

Employee benefits expense increased by 14.3% to Rs. 15,014.9 million in FY2019 from Rs. 13,135.2 million in FY2018, primarily due to increase in volume of operations and the impact of annual salary increments.

Operating Profit and Margin (%)

The operating profit as measured by EBITDA for the year increased to Rs. 11,539.3 million in FY2019 from Rs. 9,179.0 million in FY2018, i.e. as increase of 25.7%, positively impacted by implementation of Ind AS 115 and strong improvement in profitability of India business.

Depreciation and Amortisation Expense

Depreciation and amortisation expense increased by 46.4% to Rs. 5,656.4 million in FY2019 from Rs. 3,864.7 million in FY2018, primarily as a result of implementation of Ind AS 115 Accounting Standard in our VLS business and incremental depreciation on capital expenditure incurred in last two years across our manufacturing facilities located in our VLS business and in India.

Finance cost

Finance costs increased by 12.4% to Rs. 968.5 million in FY2019 from Rs. 861.7 million in FY2018, primarily as a result of increased finance costs attributable to capital expenditures and increased working capital in our VLS business.

Interest Coverage Ratio for FY2019 was at 6.7x as against 6.9x in FY2018. The ratio declined as interest expenses increased during the year.

Other Expenses

Other expenses increased by 11.7% to Rs. 19,002.7 million in FY2019 from Rs. 17,018.0 million in FY2018, which was less than our increased sales of + 16.0%. This was achieved as a result of operational cost efficiencies in the second half of FY2019 in our VLS business and in our India business.

Tax Expense

Total tax expenses increased by 52.0% to Rs. 988.9 million in FY2019 from Rs. 650.6 million in FY2018. Our total tax expenses increased mainly on account of an increase in profit before tax and lower tax benefit in our VLS business as compared to FY2018.

Profit for the Year

Primarily for the reasons stated above, our profit for the year was at Rs. 4,497.8 million in FY2019 as compared to Rs. 4507.8 million in FY2018. The profit was at almost similar level to FY2018 in a challenging situation across our global operations throughout the year and in the fourth quarter in our Indian operations.

Net Profit Margin (%) for the year was at 3.7% as compared to 4.3% in the previous year. The margin was negatively impacted by higher depreciation and amortisation expenses and higher taxes.

Balance Sheet

Net worth

Net worth increased to Rs. 31,112.3 million in FY2019 from Rs. 28,487.7 million in FY2018.

Return on Net Worth

Return on Net Worth declined to 15.1% as compared to 18% in the previous year mainly due to increase in net borrowings over FY2018.

Net asset per value

The net asset value per share has increased to Rs. 230.8 per share at the end of FY2019 from Rs. 209.8 per share at the end of FY2018 (including the impact of additional shares)

Gross Borrowings

Gross borrowings increased to Rs. 24,393.0 millions from Rs. 11,990.2 million at the end of FY2018. The debt increased as a result of increase in working capital and higher capital expenditure to meet future growth requirements at our VLS business and acquisition in Turkey for Rs. 3,453 million.

Debt-to-equity ratio

Net debt to equity ratio for the company is at 0.7x as at the end of FY2019. The ratio increased from 0.3x in FY2018. The ratio increased as borrowings increased due to increase in working capital, higher capital expenditure during the year and acquisition of Sa-Ba business in Turkey.

Debtors Turnover

Debtors turnover ratio measured in the number of days sales outstanding for the company for the years decreased to 41 days as at the end of FY2019 from 50 days as at the end of FY2018. Debtors considered for calucating this ratio are year end.

Inventory Turnover

Inventory turnover ratio measured in the number of days sales outstanding for the company for the years decreased to 28 days as at the end of FY2019 from days from 31 days as at the end of FY2018. Inventory considered for calculating this ratio are year end

Current Ratio

Current ratio for the company is at 0.7x as at the end of FY2019 as against 1.0x as at the end of FY2018 due to increase in current liabilities as shortterm borrowings and current maturities were substantially higher than those in FY2018.

RISK MANAGEMENT

The current economic environment, in combination with significant growth ambitions of the Company, carried with it an evolving set of risks. It counters the impact of unfavourable internal and external events and attempts to ensure business continuity across different stages of the economic cycle. The Companys risk management processes ensure that the Company accepts risks as per the boundary conditions based on its risk appetite. The Company is primarily engaged in the business of manufacturing auto components relating to automobiles sector which is a cyclical industry where global liquidity, government policies, government spending, competition and corporate sentiments have a huge bearing on the industrys prospects, and the long-term success of the Company depends mainly on the existence of a robust risk identification and mitigation process. The Company recognises that these risks need to be managed to protect its customers, employees, shareholders and stakeholders, to achieve its business objectives and enable sustainable growth. Our risk management framework reduces the volatility due to unfavorable internal and external events, facilitates risk assessment and mitigation procedures, lays down reporting procedures and enables timely reviews by the management. The Audit Committee of the Board oversees implementation and effectiveness of the risk management processes. Business level risks and their mitigation plans for each business unit are reviewed periodically by the risk management committee. This section provides an overview of the key risks and control framework and its approach to risk management.

The following section discusses some of these risks :

Risk type Description and mitigation
Pricing pressure from customers Pricing pressure from customers may adversely affect our gross margin, profitability and ability to increase our prices, which in turn may materially adversely affect our business, results of operations and financial condition. Our customers generally negotiate for larger discounts in price as the volume of their orders increase. In addition, substantially all our products are customised to specific customer requirements, which requires us to incur significant costs in setting up our capabilities to manufacture these products. We believe that we have high pricing power given the following factors: a concentrated market with few number of players, low lighting cost (as a percentage of car cost) and the importance of technology and design which prevents entry of new players. Additionally, we are continuously working towards achieving sufficient production cost savings to offset price reductions by the customers. These reductions are through improved operating efficiencies, new manufacturing processes, sourcing alternatives and other cost reduction initiatives etc.
Market Risk Market risk is the risk of loss related to adverse changes in market prices, including commodity risk and interest rate risk. We are exposed to interest rate risk, commodity risk, foreign exchange risk and inflation risk in the normal course of our business.
We follow established risk management policies to mitigate these risks.
We are exposed to risks in respect of price and availability of certain commodities that we use in the process of manufacturing our products. This risk is mitigated to some extend as we primarily purchase raw materials back-to-back and in line with the terms and prices that are agreed with our customers for our India business. For our international business, we typically agree a fixed per-unit price for raw materials for each purchase order, and thus bear the raw material price risk for such purchase order.
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to the fluctuation of the prevailing market interest rates relating to our long-term debt obligations with floating rates. We continuously monitor our borrowing levels and the cost of funding these loans. We have also been able to lower our borrowing costs for a variety of reasons, including, in particular, the improvement of our credit rating in India as our financial strength has improved, which has allowed us to access cheaper sources of credit, commercial paper in particular. Additionally, decreasing interest rates have allowed us to refinance loans as they come due with cheaper sources of funding.
Changes in currency exchange rates influence our results of operations. We have designated certain derivative instruments as cash flow hedges to mitigate the foreign exchange exposure of forecasted highly probable cash flows. For our Indian operations, we enter into forward contracts, in order to cover our foreign currency exposure, especially in the case of exports.
Credit Risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. We are exposed to credit risk from our operating activities, primarily from trade receivables. We typically have credit terms of 45 to 60 days with customers of our Global Lighting Business and of 15 to 60 days with customers of our India Business, save that our exports from India typically give customers 90 to 170 days credit terms. Most of our largest customers have high credit ratings, which helps to mitigate credit risk.
Customer credit risk is also managed by the groups established policies, procedures and control relating to customer credit risk management. Further, our customers include marquee OEMs and tier one companies, which have long standing relationship with us. Outstanding customer receivables are regularly monitored and reconciled.
Loss of major customers Our business is dependent on certain major customers, with whom we do not have firm commitment agreements. Significant reduction in purchases by any of our major customers, or a lack of commercial success of a particular vehicle model or lack of commercial success of such model, of which we are a significant supplier could adversely affect our business, results of operations and financial condition.
At Varroc, we strive to meet our customer requirements with our QCD program. We always strive to remain competitive through our R&D efforts and with respect to technology, design and quality. In addition, our success in expanding our business also depend on significant investments in our R&D capabilities, in order to support our growth and business strategy. We have been continuously investing in our R&D capabilities.
Safety Risk/ Cyber Risk The Company is committed to conduct all its activities in such a manner so as to avoid harm to employees and the community.
At Varroc, the use of information and telecommunication technologies are increasing, resulting in greater security threats to its digital infrastructure. These impacts may include the loss of sensitive data or information, legal and regulatory breaches and reputational damage.
The Company continues to strengthen its cyber security policies, standards, technical safeguard, ongoing monitoring of new and existing threats and IT security awareness initiatives which include IT disaster recovery, emergency response and business continuity management capabilities to enable reduction of impact of any cyber-security event.
Regulatory Compliance The Company recognises that timely compliance with the ongoing frequently changing regulatory requirements can at times be challenging, and therefore will:
Risk • Strive to understand the changing regulatory standards, so as to strengthen its decision-making processes and integrate these in the business strategy of each of the segments in which it operates
• Drive business performance through the convergence of risk, compliance processes and control mechanisms to ensure continued operational efficiency and effectiveness
Political Risk Social / Civil unrest, act of terrorism within India or internationally can have an impact on the Companys operations. Political and civil unrest and tensions globally may have an impact on the safe and timely execution of projects, which may have financial implications.
We review the our risk management practices and activities on a quarterly basis. This included a review of risks to the achievement of key business objectives covering growth, profitability, talent aspects, operational excellence and actions taken to address these risks.

INTERNAL CONTROLS

The Company has an adequate system of internal controls implemented by the management towards achieving efficiency in operation, optimum utilisation of the Companys resources and effective monitoring thereof and compliance with applicable laws and regulations.

Controls deployed are appropriately designed to manage the key business risks and is operating effectively. Audit plans, internal auditors observations and recommendations, significant risk areas assessments and adequacy of internal controls are also periodically reviewed by the Audit Committee. The Company has an ERP system - SAP, to have better internal control systems and flow of information. Further, the Company adheres to rules and regulations of ISO.

The Companys internal audit department conducts regular audits to ensure adequacy of internal control systems, adherence to management instructions and compliance with laws and regulations of the country, as well as to suggest improvements. The Internal Audit Function provides assurance to the Board and Senior Management in the various Businesses and Functions that the system of internal

ENVIRONMENT, HEALTH AND SAFETY

Health, employee safety and the environment is among our top priorities and is seen as both a right and a responsibility for all our employees. We take initiatives to reduce the risk of accidents and prevent environmental pollution through implementing a five-pronged environment, occupational health and safety ("EOHS") plan which is based on the requirements of ISO 14001 on OHSAS 18000. First, we seek to eliminate exposure to serious accidents by identifying hazards and reducing the total number of accidents. Second, we work towards preserving our industrial assets by achieving compliance with all applicable legal norms. Third, through a systematic approach towards training and development, we hope to enhance our managers skills such that these concerns will be efficiently managed. Fourth, we remain conscious of the impact our industrial activities have on our environment, and actively monitor and minimize the environmental impact of our operations. Fifth, we seek to prevent occupational disease and maintain employee health and safety by maintaining industrial hygiene at work places. We also maintain public liability act insurance for some of our plants and also have a commercial general liability policy for all our locations in India. The EOHS plan is implemented on a group level and we are committed to measuring, evaluating and continually improving our EOHS performance by establishing goals and objectives through regular periodic management reviews and guidance. EOHS performance is reviewed periodically in order to monitor the EOHS performance of our plants and EOHS strategies are developed to achieve our EOHS objectives, which include:

• reduce the dependability of conventional energy sources through the use of renewable energy sources;

• having all our plants in India certified for environmental management systems, in accordance with the requirements of ISO 14001 and OHSAS 18001;

• proactively enriching the EOHS culture within key parts of our organisation;

• having a strong focus on the sustainability of our EOHS system and compliance with the system;

• developing EOHS competency in our organisation;

• having a proactive focus on upcoming legal requirements and internal mechanism of audits; and

• driving sustainability through various initiatives.

Varrocs EHS core values

To ensure compliance with occupational regulations and controlling occupational hazards that put risk to employees life, property and the environment by investing in safe and eco-friendly technologies.

Implementation of Varrocs EHS Core Values through:

• Communication - Actively informing stakeholders about EHS guidelines

• Collaboration - Working as a team (CFT) to provide and implement EHS practices

• Commitment - Dedicated to promote a proactive EHS culture

EHS is an integrated part of our core values. Our goal is to be injury-free, while being eco-friendly. Our employees are expected to follow these values with team work and integrity. Employees who passionately improve the EHS plan have been duly rewarded.

Health and employee safety

We are committed to maintaining high standards of workplace health and safety and we regard the safeguarding of such interests as one of our most fundamental responsibilities as an employer. We see safety as both a right and a responsibility for all employees and we aim to become a zero- accident organisation. Any mishaps or accidents at our facilities or any emission or leakage from our factory could lead to personal injury, property damage, production loss, adverse publicity and legal claims. It is therefore important that we maintain the Occupational Health and Safety certification in relation to our management of the safety of our people and property.

As of March 31,2019, 17 of our plants in India have been certified for environmental management systems, in accordance with the requirements of ISO 14001 and OHSAS 18001.

Environment

In addition to creating initiatives to improve workplace employee safety, we also implement initiatives to reduce the environmental impact of our operations.

As at March 31, 2019, we have obtained, or are in the process of renewing, all material environmental consents and licenses from the relevant governmental agencies that are necessary for us to carry on our business. Our activities are subject to environmental laws and regulations, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites and natural resource damages. We have an automated internal system to track laws applicable to us. For further details on approvals relating to our business and operations, please see "Government and Other Approvals" on page 559 of this Prospectus.

As part of our commitment to the environment, we have set up three wind power plants, totaling 12 windmills with an aggregate power generation capacity of 8.35 MW. These windmills are located at three different locations, with four windmills at Supa, Maharashtra with power generation capacity of 1 MW each, six windmills at Satara, Maharashtra with power generation capacity of 0.35 MW each and two windmills at Jaisalmer, Rajasthan with power generation capacities of 1 MW and 1.25 MW each. The power generated at Supa and Satara is consumed by our plants located at Waluj and Aurangabad and the power generated at Jaisalmer is sold to Rajasthan Vidyut Board as per the Power Purchase Agreement executed with the Rajasthan and Jodhpur Vidyut Nigam.

We have also set up a solar plant at Shiwaji Nagar Sakri Dist Dhule, which has a power generation capacity of 5 MW. The power generated by the solar plant is used by our forging plant in Aurangabad.

Further, we have setup solar panels at eight of our plants that have sufficient roof space for the installations, with total power generation capacity of 4.2 MW.

HUMAN RESOURCES

We have seen significant enhancement in employee engagement driven by a focused agenda, rewards and recognitions. Our policies and benefits continue to help us in attracting and retaining best resources.

As of March 31, 2019 we employed approximately 13,800 full-time employees across the globe (excluding those employed at our China JV).

As at March 31, 2019, many of our employees are members of labour unions. We have in the past entered into labour union agreements, for the mutual benefit of our employees and our business, as we recognise that employee satisfaction impacts upon productivity, quality of product, employee engagement and employee discipline. Such agreements have involved, inter alia, agreeing revised wage structures, ex-gratia payments, interest free loans, attendance bonuses and the provision of or enhancement of insurance policies as a quid pro quo for employee agreement to adhere to specified disciplinary rules, codes of conduct, rules on absenteeism, productivity and quality standards and other miscellaneous terms and conditions.

In addition to our full-time employees, we frequently hire workers on a contractual basis through registered contractors for some of our ancillary activities. Such activities include packing, material handling, housekeeping, cleaning, gardening, driving, security and canteen services.

CORPORATE SOCIAL RESPONSIBILITY

The Company has engaged in CSR activities for more than two decades and has contributed in the areas like healthcare, education, safe drinking water, food distribution, women empowerment. etc. We were always been at the forefront of voluntary CSR. Details regarding CSR initiatives taken by the Company during the year under review is available on page no. 52 of this report.

CAUTIONARY STATEMENT

This report comprises the facts and figures along with assumptions, strategy, goal and intentions of the Company which may be "forward-looking". The Companys actual results, performance may differ considerably from those presented herein. The Companys performance is dependent upon global and national economic conditions, price of commodities, business risk, change of governments rules and regulations, etc