WABCO India Ltd Management Discussions.

I. Industry Structure and Development: i. GDP growth and Indian economic outlook:

The International Monetary Fund (IMF) is projecting acceleration for the Indian economy, with the GDP growth of 6.7% in 2017-18 scaling up to 7.4% in 2018-19 and projected to reach 7.8% in 2018-19. India has once again regained its tag as the fastest growing economy in the world. The disruptive impacts of demonetization in November 2016 and the implementation of the Goods

& Services Taxhampered the growth in 2017-18. The effects from these structural reforms largely waned, the Indian economy is expected to grow on a higher trajectory during 2018-19 and beyond. Inflows of Foreign direct investments attracted by improvement in ease of doing business through liberalized regulations will bolster this growth. However rising global oil prices, risk of an earlier than anticipated rate from the Reserve Bank of India and the potential negative impact of the banking sector frauds and rising non-performing assets are some of the possible headwinds for the projected GDP growth in 2018-19.

INFLATION: Consumer price index (CPI) inflation for 2018-19 is projected to be at 3.9% which is slightly below the Reserve Bank of Indias long-term target of 4% INTEREST RATES: Repo rates may be restructured to accommodate global crude oil price increase. Increase in the range of 25 basis points is projected.

GDP GROWTH:

2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
GDP 6.6 7.2 7.6 7.1 6.6 7.4

ii. Indian Commercial Vehicle Industry:

When the commercial vehicle industry does well, it spells good times for a countrys economy. That is exactly what is happening in India with most Commercial Vehicle OEMs which are working hard to address the growing demand posting handsome growth and accelerating into the growth lane. The commercial vehicle Industry, which is the barometer of the countrys economy, is expected to witness good growth due to various legislations and fuel efficiency norms expected during 2018-19. The Indian commercial vehicle industry has turned around quickly post strong headwinds from the effects of demonitisation and Implementation of Goods & Services Tax. After the initial hiccups in the beginning of 2017-18 when the CV market was transitioning to BSIV emission norms and saw customers delaying buying, the market has picked up with OEMs de-bottlenecking their supply constraints.

The CV industry is projected to register a good growth during 2018-19 after a strong performance in Q4 of 2017-18. Not only is the return of replacement demand helping OEMs, but government initiatives like stricter enforcement of overloading has resulted in fleet operators preferring rated loads is pushing demand for higher-tonnage trucks. The demand is pushing the segment from lower tonnage vehicles to higher tonnage vehicles. With the introduction of GST in 2017 and removal of state tariff barriers, check posts, introduction of e-way bills etc., truck productivity and haulage efficiency has risen sharply.

Along with the overloading regulation, Indias drive towards increasing the steel production is in line with the ministry of Road transport and highways vehicle scrap policy. The policy aiming at scrappage of vehicles more than 20 years old will also significantly boost demand. The Indian e-commerce industry is now expected to grow in terms of investments, diversity and opportunities. This will result in a higher demand for the light commercial vehicles (LCV) and the intermediate Light commercial vehicle (ILCV). With the effect of GST and demonetization diluted, OEMs have reported record numbers in sales and production for Q4 of 2017-18. With the trend expected to last for the entire year, there will be a bullwhip effect on the entire Commercial vehicle supply chain. With India already gearing up for BSVI norms and the governments push for fuel efficiency norms coupled with budget allocation for infrastructure development will help the growth trend. With these factors playing a crucial role, the commercial vehicle industry will see a 10-12% growth in 2018-19 The Medium & Heavy Commercial vehicle Industry is expected to grow by 9-11% during 2018-19 compared to 11% in 2017-18.

The below table shows vehicle production along with growth: Figures in units

Category 2016-17 2017-18 Growth
M & HCV Production 3,42,761 3,43,951 0.35%
M & HCV Sales 3,46,286 3,84,408 11.00%

 

Source: SIAM

II. Opportunities & Threats

The Company provides safety and vehicle control solutions to the commercial vehicle segment of the automotive industry. In addition to the Anti-Lock Brake Systems (ABS) legislation for M3 and N3 vehicles got implemented from the third quarter of 2015-16 that resulted in increased business, other safety related features legislation are under discussion. Local market growth opportunities were through increase in content per vehicle in the form of introducing new systems / technologies like Fleet Management Solutions, Electronic Stability Control and increase in Share of market from Automatic Slack Adjuster. The Company has also expanded into new segments like off- highway, defense, luxury bus, car and trailers and looks forward to the following strategic opportunities in the following years.

• Partner with Trailer customers for implementing 100% TABS

• Technical / Homologation Support for complete technology products

• Leverage Site plants to stay close to customers

• Capture 100% entitlement by excellence in execution

• Penetration roadmap for newer technologies like ADAS, Door System, Smart Suspension

In the Aftermarket side, further potential in retro fitment of advanced products like Air Disc Brakes, Electronically Controlled Air Suspension is being explored. Our focused efforts in retro fitment of Trailer Anti-Lock Brake Systems TABS and Trailer Electronic Brake Systems TEBS in Trailer segment have boosted the sales growth. Focused initiatives are also being taken to venture into the space of telematics through the indigenously developed DCS (digital customer services) products.

Distributors are continuing to increase their presence in B & C towns and that is resulting in availability of genuine parts in remote locations. Our authorized service center network is expanding and currently we have 280 service centers with Pan India presence to cater to the customer requirements. To improve the customer reach mobile smart catalogue application has been launched and so far 8000 customer got connected. These initiatives would result in improved service practices, availability of genuine parts and generate additional revenue for the Company.

Given the growth opportunities that are available in the commercial vehicle industry we expect the activity levels of the competitors to be on the rise.

III. Risks and Concerns

The cyclical nature of the Indian commercial vehicle industry presents its own risk to the business. The operating expenses are likely to rise with the expected increase in prices of key raw materials.

STEEL

Steel prices have increased steadily starting from June 2017 and reached all-time high in April 2018. The available indications suggest a gradual downward trend in global prices of iron ore, coking coal and scrap from the current levels. This is a positive indication for the steel industry which foresees uplift in demand. Short term outlook of World Steel Association forecasts 1.8% growth in global steel consumption in 2018, led by India (5.5%), the US (2.7%), the EU (2.5%), Turkey (5%), Russia (2.1%) and South Korea (1%). For China the steel consumption is likely to be flat.

Meanwhile, the World Economic Outlook recently brought out by the International Monetary Fund has predicted a reasonably good growth in global GDP of 3.9% which would be fueled by the GDP growth in major economies. Higher global economic growth would require higher investments which are expected to generate substantial steel demand in varying proportions in different countries.

This positive outlook, however depends crucially on China which controls nearly 50% of global steel production. China a major exporter of steel, dominates the iron ore prices and has a major influence on global coking coal and coke prices.

Excess production of steel in China beyond normal global demand hugely impacted the interests of the global steel producers during the years from 2014 to 2017, which forced global producers to operate at lower price levels. After 2017, China operated at normal capacity levels, which resulted in increased demand for local steel manufacturers. Further, China, having nearly 50% of the estimated global steel capacity, has committed to bring down the carbon footprint entailing elimination of some of the polluting units in steel, coal and cement industries. It had set a target of closing down 150 MT of steel capacity by 2020. The prediction follows a 30.5% reduction in Chinese steel exports during last year.

In a nutshell increase in domestic demand coupled with reduction in global steel capacity had resulted in unprecedented steel price increase during the year 2017-18. Continued demand from the infrastructure and auto industry is likely to result in the steel prices remaining at relatively higher levels during 2018-19.

ALUMINIUM

The year 2017-18 witnessed Aluminium prices rocketing from the lows of $1,700 to five-year highs, before settling around the $2,100 mark. In 2017, the performance of global aluminium market was determined predominately by China cutting down on the Smelters capacity which has overshadowed the global market. Chinas action was due to initiatives such as culling of illegal aluminium capacity and avoiding production in fog season in an effort to decrease pollution levels.

The production trend is following a downward trajectory and it is estimated to drop further. Though global aluminium prices have risen, rise in the input costs were higher resulting in depleting profitability for Chinas aluminium producers stamping out the supply growth. In addition to the tightening of existing capacity, Chinese smelters have seen a reduction in new capacity as well due to stringent government requirements. Reduction of capacity in China coupled with growth in global aluminium demand is likely to increase the prices.

Risk Management:

The Company has laid down procedures for risk assessment and mitigation actions. These procedures are periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. Risks identified and mitigation measures are periodically communicated to the board of directors.

IV. Internal control system and their adequacy

The Company has proper and adequate systems of internal control to ensure that all assets are safeguarded and protected against loss from unauthorized use or disposition thereof. All transactions are authorized, recorded and reported correctly. The internal controls are checked by internal auditors. The observations made by them, management action and time frame are reviewed by the audit committee of the Board of Directors. Concerns if any are reported to the Board.

V. Operations review

A. Manufacturing

During 2017-18, company has expanded its plant at Jamshedpur to support the volume growth. Various capacity augmentations were also made across locations to meet the increased volume requirements post BS-IV. To increase proximity of operations to customers manufacturing locations, improve supply chain responsiveness and increase competitiveness, certain manufacturing lines were transferred among locations wherever necessary with lean asset business models to achieve optimal cost advantage and results.Expansion of the Mahindra World Facility Plant located in the Special Economic Zone was initiated to cater to the increasing requirements of the Global market. Focused efforts were made to enhance productivity and quality through lean tools and facility upgradation programs. During the year, the company has received special recognition award in National Safety Practice Competition hosted by CII.

The Companys manufacturing facilities, building on its strong fundamentals of Total Quality Management (TQM), Total Productive Maintenance (TPM) and Lean Manufacturing has best-in-class practices for safety, work environment, water and energy conservation. These initiatives are deployed companywide to achieve significant improvement in productivity and reduction in manufacturing cost.

Continuous focus to improve quality and productivity were undertaken at all the manufacturing locations, challenging the site layouts to be more compact &to be efficient in floor space utilization. A facility upgradation program is underway to set new benchmarks including adoption of Smart Manufacturing practices like Low Cost Automation, IIoT, Traceability Systems, Machine/Computer Vision etc.Working on its inherent strengths in frugal engineering and quality with optimal cost the Company has demonstrated various "Lean Equipment Development" projects for its group entities in Brazil, Charleston through design and development of manufacturing lines.

"WIN 2.0" was a transformation initiative intended towards changing the mindset of employees at all levels, all functions and across locations to achieve global standards of performance. This initiative which was widely imbibed in employees has already started yielding visible results in all areas of operations. This transformation has been acknowledged by key customers with awards.The Company had bagged prestigious supplier awards from the top OEM Customers which are "Best Supply Chain Transformation" award from Cummins India, "Outstanding contribution to Technology Innovation" award from Volvo Eicher, "Cost reduction" award from Swaraj Mazda Isuzu etc. Further, the Company received "Supply Chain and Logistics Excellence" award from CII and Institute of Logistics for the second consecutive time for its approach on inventory optimization techniques.

The Mahindra World City Plant received the prestigious Export Excellence Award from Ministry of Commerce & Industry, Government of India in recognition of contribution to Net Foreign Exchange Earnings. It has also received the "Future Ready Factory Award - Auto Ancillary Sector, Large Business" at India Manufacturing Excellence Awards 2017.

B. Quality

The quality systems in the Company aim at achieving total customer satisfaction through its focus on improving product quality to world standards. This is achieved through total employee involvement and continuous improvement culture.

The year 2017-18 was a year of mixed status with customers in India. The Company is at 18 PPM. Customers continue to raise their expectations. TATA Motors expects to achieve <50 PPM for 0Km and no failures in 3 MIS from the field. Volvo Eicher expects Zero line interruptions in their plant due to supplier part quality. Ashok Leyland measures the pain points and rates suppliers based on the same.

To meet the above customer requirement it is necessary to standardize the processes, operate with right competency/ skills of the workforce to consistently supply right quality of products. Six sigma projects started for each customer to meet each customer requirements and to standardize all critical production lines.

The First pass yield [FPY] is measured in India in PPM and we have brought it down ~60% in 2017. Deploying "VDA6.3" , "VDA6.5", Product safety standards, helped the Company reduce the defects significantly. 96 assembly lines were upgraded in line with VDA6.3 for making them robust enough to prevent defects.

Product quality along with PE Quality achieved 100% customer PPAP "First Time Right". However, the Company needs to mature to take care of manufacturability, serviceability, reliability and hand over projects in time. Significant efforts were put in to improve Supplier Quality, which resulted in a 50% reduction in Supplier PPM. 40% of the suppliers have been upgraded as "Zi ZF" (Zero Inspection and Zero Follow-up) Suppliers. All the plants have been transformed from TS16949 to latest improved IATF 16949 Quality systems. The joint efforts of all functions enabled the Company to get certified in January 2018. TQM is a way of life at the Company. 100% participation in employee involvement has been successful for the past 19 consecutive years. Employees have completed 268 Quality Control Circle projects and 89 Supervisory Improvement Team and Cross Functional team projects by applying statistical tools, Six Sigma (DMAIC and DMADV) and Quick Response Six Sigma (QR6S) methodology during 2017-18. Over 84,000 suggestions have been implemented by all employees of all the plants, including trainees. Employees from all the plants participate in Quality Control Circle, Supervisory Improvement Team and Cross Functional Team projects and present their completed projects in monthly presentations. Employee suggestion scheme is in force at all plants and employees implement suggestions under productivity, quality, cost, delivery, safety and morale categories. In order to foster employee engagement across all plants, interplant quality circle and six sigma competitions were conducted and best teams were recognized.

Quality Control circle, Cross functional teams of employees participated in external competitions conducted by industry bodies, Automotive Component Manufacturers Association (ACMA), Confederation of Indian Industry (CII), National Institution for Quality and Reliability (NIQR), Indian Machine Tool Manufacturers Association (IMTMA), Quality Circle Forum of India (QCFI), Indian National Suggestions Schemes Association (INSSAN) and had won various prizes. Significant among them are winning first prize in 10th CII National Competitiveness & Cluster Summit -2017, winning first prize in CII Supply Chain and Logistics Excellence competition, winning first prize in CII Southern region kaizen competition 2017, 12th Edition for operators and supervisors, winning first prize in ACMA Northern region zonal quality circle competition, winning first and second prizes in ACMA Southern region business quiz competition, winning first and second prizes in ACMA Southern region kaizen competition, first prize in FICCI competition on role of corporates on road safety 2017, winning second prize in IMTMA National productivity summit, winning platinum award in QCFI Six Sigma competition, Gold and Silver awards in NIQR Six Sigma competition. One quality circle team participated in International quality circle competition held at Philippines and secured Gold Award in demonstrating their passion and innovation in various areas of excellence in manufacturing.

C. Cost management

The Company has continuesly upgrading the robustness in cost control capabilities, especially in procurement. The Company realizes that better cost management is a key differentiating factor in this competitive environment, the prime strategies are value creation through design Improvement, localisation of inputs and products and conversion cost productivity.

Cross functional teams are formed with members from various functions like Product Engg, Manufacturing & sourcing to focus on identified cost reduction projects. The Company continues to find best cost supplier across continents leveraging its global platform in its endeavor to become best cost supplier to the customers. Key focus area is process improvement by collaborating technology partnership with leading suppliers to continuously keep the costs at optimal levels.

D. Information Technology

The Company uses an ERP system that integrates all business processes across the Company as well as customers and suppliers. During the year, the company focused on 100% availability of the ERP applications which is now hosted in global HP Data center at Germany with enhanced security features and back to back disaster recovery methodology.

Focus was given towards paperless office wherein additional projects have been implemented towards automation of the repetitive activities in order to eliminate non-value added activities. With the vision to build a digitally optimized workplace to engage and develop talents by efficient collaboration, the company migrated to a cloud based Email system with access of data on any device anytime. To ensure security at all WABCO locations, a Central Command Center has been setup to monitor all CCTV cameras at the corporate office which is manned round the clock.

VI. Human Resource Development

The Company focuses on attracting and retaining the best talent and enjoys a good brand image across leading educational institutions and talent pool. The current average recruitment lead time of the lateral talent is around 50 days. We have inducted 267 new talents in 2017-18, majority of them in Product Engineering. The Company blends successfully mid-career recruitment with internally grown talent through a robust globally managed talent management process. Rewards and recognition system is in place to retain and provide fast track growth for high potential employees. Internal Talent mobility rate which is at 59%, is one of the key engagement driver ensuring employees move and grow within WABCO from one position to another -either cross functional, across businesses and across geographies. Our Voluntary attrition rate is at 4.7%, while similar Industry attrition rates are at an average of 9.9%.

"The PACEmakers" program inspired by our differentiation formula: D=P[A+C+E] = Passion [Anticipation + Creativity + Execution] was launched to develop a new culture together and to act as an enabler for our success and reinforce our differentiation. PACE5 behaviours will be integrated into our performance management process and employees will be encouraged to self-assess themselves against the following five behaviours - 1) Be Authentic, 2) Foster Engagement, 3) Leverage Difference, 4) Culitivate Collaboration & 5) Is Accountable. Pacemakers workshops are conducted for the employees to understand the behaviors, live them to the best of their abilities. "Talk 2 Me", "Womens Forum" and "Blue Collar Contact Program" initiatives help to build a strong bottom up communication and ensure healthy Industrial Relations climate across all locations resulting in zero man hour loss.

As of 31st March 2018, the Company had 1673 employees on its rolls.

VII. Environment & Safety

The first three months of the year were taken as safety months which wereused to enhance safety systems and in create safety awareness among the employees. The Director of Industrial Safety and health from the Government of Tamilnadu was gracious enough to visit the plant during the culmination of the safety months program and share his experience and also motivated the employees. All 5 plants and test track have sucessfully completed the second Surveillance audit of ISO 14001 & OHSAS 18001.

The Company has taken many initiatives on improving ergonomics in the shop floor. Medium fatigue stations were identified and the ergonomics were improved with achievement of low risk job stations of 97%, thereby improving productivity and operator morale. Ergo Stretch programme was initiated in Ambattur plant for shop floor employees which helped them feel refreshed and reduce fatigue.

As a part of Environmental protection, the installed sewage treatment plant treats and reuses water which is used for gardening and toilet flushing thereby reducing the water consumption by 25%.

During the year Ambattur plant won "SPECIAL AWARD"for the best safety practices from the Confederation of Indian Industries and Dr. C K Ramachandran award from Indian Association of Occupational Health for maintaining the Best Occupational Health centre.

VIII. Community development and social responsibility

As a responsible corporate citizen, the Company engages in social responsibility and community development activities. This year the activities were conducted through internal engagement of employees and resources, driving activities which would help the needy sections of the society as specified in Schedule VII of the Companies Act, 2013 and the Companys CSR policy with specific focus towards areas surrounding the companys plant locations.

The Company is also in the process of identifying suitable projects and scaling up the existing projects and hence could not spent 2% of the average net profits of last three years. The Company has established a trust in the name of WABCO Foundation for carrying out CSR programs, which identifies appropriate CSR projects in line with the Companys CSR policy and implements them.

The CSR Activities ofthe Company for the FY 2017-18 are mentioned in the Annexure - 2 to the directors report

IX. Financial statement

Year ended 31st March 2018 Year ended 31st March 2017
Particulars $ in lakhs % $ in lakhs %
Sales 2,60,941.67 98.08 2,26,057.16 98.43
Other Operating Income 5,095.92 1.92 3,615.07 1.57
Total Income 2,66,037.59 100 2,29,672.23 100
Raw Materials Consumed 1,57,741.41 59.29 1,27,566.80 55.54
Changes in inventories of Finished goods & WIP 2,448.43 0.92 (3,759.05) (1.64)
Staff cost 22,909.87 8.61 19,111.43 8.32
Stores & tools consumed 6,281.26 2.36 5,425.80 2.36
Power & fuel 2,073.33 0.78 1,973.48 0.86
Repairs & maintenance 1,308.20 0.49 1,072.21 0.47
Other expenses 24,709.66 9.29 22,494.51 9.79
Finance costs 161.74 0.06 46.44 0.02
Excise duty on sale of goods 4,051.58 1.52 19,308.39 8.41
Depreciation 6,173.69 2.32 6,162.93 2.68
Total Expenditure 2,27,859.17 85.65 1,99,627.08 86.92
Profit Before Tax 38,178.42 14.35 30,045.15 13.06
Provision for taxation 10,895.79 4.10 8,697.38 3.79
Profit after Tax 27,282.63 10.26 21,347.77 9.29
Other Comprehensive Income / (Loss) for the year net of tax (73.52) (0.03) (352.93) (0.15)
Total Comprehensive Income / (Loss) for the year net of tax 27,209.11 10.23 20,994.84 9.14

X. Cautionary statement

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