MANAGEMENT DISCUSSION AND ANALYSIS

(Within the limits set by the Company's competitive position)

Your Company is India's largest tyre manufacturer and ranked amongst the Top 20 Global Manufacturers. With 9 state-of-the-art factories across India, it is also India's largest Original Equipment Manufacturer [OEM] tyre supplier with an expansive tyre range from two-wheelers to fighter aircraft. Recent years have seen it augment capacities significantly to meet growi ng demand whi le also i nvesting in building a superlative sales, service and distribution network across the country. The MRF brand is the undisputed leader in the replacement market for tyres in the country and its recent partnership with the ICC for World Cup Cricket fixtures between 2015-2019, has given it a credible platform to take its brand imprint worldwide. Despite less than ideal conditions in the economy and in the tyre market in the last 18 months, your Company's strategy, focus and resilience have seen it maintain its leadership in the Indian tyre market for a record 29 years in a row.

The discussion below summarises the key issues and challenges that faced your Company in the 1 8 months period ended 31 st March,201 6.

Market & Industry Overview

The Indian economy, after a somewhat uncertain start, saw an increasing 7.6% growth rate in the final quarter of 2015-2016 as compared to a 7.3% during 201 4-201 5. The Index of Industrial Productivity (IIP) though showed a negative growth in December and January, is expected to see core sectors showing growth in the period ahead. The lagged impact of interest rate reductions, pay commission recommendations and easier monetary conditions is also expected to support demand and boost industrial capacity utilization, though the entire process may be volatile. According to CRISIL, GDP is expected to rise to 7.9% in fiscal 201 6-201 7 from 7.6% in fiscal 201 5-201 6, driven by manufacturing and construction activity. Manufacturing has been the star performer with growth rising to 9.6% i n fiscal 201 6, driven by efficiency gains and with lower commodity prices, pushing down input costs. Investment demand remained weak at an expected growth rate of 5.3% in 2015-16 as compared to 4.9% in the brvious year. Private consumption was mostly supported by urban demand in view of a rural slump due to two successive poor monsoons. On the other hand, inflation seems well under control and it is expected that despite increasing investment in infrastructure, the government will be able to mai ntain fiscal discipline and contain the deficit at the targeted levels, though concerns about employment growth still abound. The Indian tyre industry is estimated to be around Rs. 50,000 crore in 2015-16 and is dominated largely by the commercial vehicle segment consisting of heavy, light and smal I commercial vehicles. The next largest segment is passenger vehicles constituted by cars, SUV's, motorcycles and scooters. The Farm & Off The Road (OTR) segments consisting of the Tractor Front and Rear tyres, Tractor trailers and large tyres for earth moving and other construction and mining related equipment (OTR) are the other important segments in the market.

Traditionally tyres are classified as cross-ply (bias) and radial based on the technology deployed in their manufacture. In India, the commercial tyre segment continues to be dominated by cross-ply tyres due to road conditions, loading patterns and the high initial cost of radials. There is however a steady growth in radialisation across segments in recent years with the highest in passenger cars at almost 100% followed by heavy commercial vehicles at 33% and light commercial vehicles at 30% in 201 5.

The tyre industry, which is a derived demand business, is also directly affected by the performance of the vehicle manufacturing sector which in turn is dependent on the overall economic growth. The tyre industry consists of three distinct markets namely Replacement, Institutional/Original Equipment Manufacturer [OEM] and Exports. By value, replacement market accounts for approximately 60% of the Industry with Institutional / OEM and Exports making up to 22% and 1 8% respectively. While in the Commercial and Farm segments, replacement sales forms a major chunk, in the passenger segment, both Institutional and OEM and replacement sales play an almost equal role. Of the total tyres produced in India, the top eleven tyre companies' account for more than 90% of the volume. The tyre industry provides direct and indirect employment to more than a million people, comprising of dealers, re-treaders and truck operators. The truck business is controlled by nearly 2.6 million small operators.

The key factors which enabled growth of the automobile manufacturers by 3.5% in 2015-16 included a marginal rise in OEM and replacement demand from the medium & heavy commercial vehicle and cars & utility vehicles segments, backed by new models launch activity and improved vehicles sales. Passenger vehicles sales grew by 6.9% which was mainly led by the 1 2.1 % rise in sale of utility vehicles. Commercial vehicles grew by 12.2% while medium and heavy commercial vehicles had a healthy growth of 28.2%. The deficient monsoon though drove down demand for vehicles such as LCVs with a very modest 2.6% growth and two wheelers by 2.7%, especially in the rural areas. This was largely led by scooter tyres which significantly out performed the tepid growth in motorcycle tyres.

The domestic tyre demand grew by 11% to 12% during 2014-15 supported by 7% to 7.5% growth in the OEM segment and 12% to1 5% growth in the replacement segment. Natural rubber and crude prices continued to favour the domestic tyre industry during201 5-1 6 with profit margins remaining high. This also saw many of the players diversify and make continuous and major investments of nearly Rs. 36,000 crore in recently completed green field and major expansion projects across the country. The cause for concern is the less than robust demand from the two wheeler and tractor segments due to the agrarian distress seen in the country. While a good monsoon may alleviate this next year, it appears that the era of soft commodity prices is already bottoming out and a slow but steady uptick in commodity prices may be expected in fiscal 201 7.

Opportunities and Threats

The last two years have seen the global economy recover rather slowly, but with reference to the tyre industry, the recovery has been somewhat positive in select sectors with the exception of the two wheeler and tractor segments. While the Indian tyre market has seen a growth of 10% to 12% during 2014-201 5 on the back of a 7% to 7.5% growth in OEM demand and 12% to 15% growth in replacement demand, it is felt that these growth rates will most likely range between 4% to 8% over the next 3 years with the likely exception of two wheeler and farm segments. Even within the two wheeler segment, there seems to be a silver lining with the scooters showing an increasing growth rate.

Exports could see a strain especially with a decrease in the demand for cross-ply tyres in the commercial sector. The massive investments made in capacity by various players epitomize the confidence in the Indian market by the Industry even during this uncertain scenario. It will also intensify competition greatly as is being seen already with some of the Companies (both domestic and international) entering new segments and significantly increasing outlays on brand and consumer promotion. An unfortunate scenario of glut could also develop if cheap Chinese imports continue to flood the market and undercut establ ished Indian Companies, as is being increasingly seen in the last couple of years. The long pending issue of inverted tax is yet to be resolved despite the numerous rebrsentations made to the Government. The natural rubber import is required to maintain competitiveness in the International market as the gap between natural rubber production and consumption is quiet substantial and hence duty concessions should be extended for import of natural rubber and other raw materials. A permanent solution to this has been sought, as it will be very important for the Indian tyre Industry in the long run, though in the current commodity scenario, due to the lower prices of raw materials like rubber and crude oil, this may not have been of immediate critical concern.

Segment wise and Product wise Performance

The operations of the Company brdominantly relate to manufacture of rubber products such as tyres, tubes, flaps, tread rubber and conveyor belt and this constitutes one single business segment.

Across the board, there was an overall increase in all product segments adding up to a 9% increase in total tyre production. In the heavy commercial vehicle segment, the increase was 11% over the brvious year while light commercial vehicle tyres increased by 1 7% in this period which also saw a new sub-category viz., 'Pick-Up' vehicles become a strong growth sector. The small commercial vehicle tyres increased by 7%. In the motorcycle and scooter segments the increase was 8% and 1 3% respectively. The passenger car and SUV / MUV tyres recorded a 8% growth. The farm sector showed commendable performance in a very tough market with the introduction of new products.

Exports

The Company's exports stood at Rs. 1,856 crore for the 18 months period ended 31st March, 2016 as against Rs. 1,332 crore for the 12 months period ended 30th September, 2014. The International Business Division [IBD] of your Company, during the period under review, has put in place various measures such as identifying and developing new sizes and patterns in truck & bus radial tyres required for key export markets, expandingthe portfolio of products with new product launches in international markets, identifying suitable channel partners to expand the existing distribution channel and providing faster technical support to our international customers. This has resulted in increased revenue, better product support and facilitated faster launch of new products in the international markets.

Motorsports tyres have been identified as a new vertical for IBD and the MRF Motorsport Tyres were formally launched at the Autosport International Exhibition in Birmingham, UK, in January 2016. This is also expected to increase MRF's brand profile in advanced markets such as Europe & Australia as a brcursor to launching our passenger brands in these markets.

Brand Bui Idi ng activities have been carried out by your Company through its international distributors by participating in regional exhibitions/ trade shows in countries like Indonesia, UAE, Kenya etc., and also by conducting several road shows/ customer contact programs in various markets to increase brand awareness and visibility.

Discussion on Financial Performance with respect to Operational Performance

The revenue from operations (gross) of the Company during the 1 8 months period ended 31 st March, 201 6 stood at Rs. 22,521 crore as againstRs. 1 4,649 crore in the 12 months period ended 30th September, 2014.During the 1 8 months period, the earnings before interest and debrciation (EBIDTA) amounted to Rs. 4,485 crore as against Rs. 1,988 crore in the brvious 12 months. After providing for debrciation and interest, the profit before tax for the period is Rs. 3,410 crore as compared to Rs. 1,339 crore in the brvious 12 months period. After making provision for income tax, the net profit for the 18 months period ended 31st March,201 6, is Rs. 2,328 crore as compared to Rs. 898 crore in the brvious 12 months. The prices of natural rubber and crude linked derivatives witnessed a steady fall duringthe period under review, resulting in lower raw material cost. Reduction in raw material cost has been passed on to customers by way of selling price reduction. This has finally resulted in lower top line growth, duringthe period under review.

Outlook

Two successive monsoon failures has hit the automobile industry quite hard in 2015-16, but Indian industry's tenacity has seen off this sluggish phase with optimism and a modest level of success despite the agrarian distress that characterized the period. Further hopes of recovery in the tyre industry are tied to a resurgence of growth in the overall economy. The positive sentiment shown by the manufacturing sector in recent months will definitely have an impact on the demand i n the tyre industry, both for the OE and the Replacement markets.

The increased capacity built up by the various industry players will see heated competition with severe price discounting being the norm and it is critical to protect your Company's turf in the commercial tyres and the 2 wheeler segments which will be under severe brssure. A normal monsoon is brdicted for the new season and it is believed this will help the farm sector to show stronger performance in the coming year, with an attendant spike in rural demand that will, hopefully, help drive an all-round recovery in the next fiscal.

Internal Control Systems and their Adequacy

The Company has adequate internal control systems in place commensurate with its size and nature of business. The internal control systems provide for well documented policies/guidelines and authorization and approval procedures. Company through its own Internal Audit Department carries out periodical Audits at all locations and functions based on the Plan as approved by the Audit Committee. Some of the salient features of the Internal control systems in vogue are:

(i) A robust ERP system connecting all plants, sales offices and Head Office to enable seamless data inflow. This is constantly reviewed from Internal Control stand point.

(ii) Preparation of annual budget for operations and services and monitoring the same against the actuals at periodic intervals .

(ii i) All assets are properly recorded and system put i n place to safeguard against any losses or unauthorized use or disposal.

(iv) Periodic physical verification of fixed assets and all Inventories.

(v) Observations arising out of the Internal Audit are periodically reviewed at the Audit Committee meeting and follow up action taken.

(vi) Periodic Presentations made to the Audit Committee on various operations and financial risks faced by the Company and action proposed to mitigate such risks.

Risks and Concerns

During the current fiscal iev 2016-17, there is likely to be a period of global uncertainty in view of Brexit. This could lead to a potential currency volatility. An increase in demand for the auto sector can only be triggered by adequate investments in infrastructure and attending to the rural sector which is going through certain amount of distress.

Tyre imports into India, mainly in Truck and Bus Radial(TBR) tyres have grown by over 250% during the last 2 years. China's share in the TBR imports is about 90%.This sharp rise in the Imports, if continued, will lead to under-utilisation of TBR and also Truck and Bus Bias(TBB) capacities.

Human Resources

Your Company believes that Human Resources are the driver to its continued success by helping to meet the challenges of providing quality products to the customers across the length and breadth of the country and penetrating key markets abroad.

In order to strengthen its human capital base, your Company conti nues to invest in human resources by retaining and developing its existing talent and also attracting competent and talented manpower across functions.

Your Company has a robust talent acquisition process which has helped us attract some bright youngsters from the renowned engineering and management institutions and also other professional Institutes like the Chartered Accountants Institute. Your Company continue to invest significantly in developing the research and development and sales & marketing talent pool which drives its products and market leadership.

The Talent Management strategy tocusses intensively on developing internal resources for critical positions with need based recruitment for specific lateral positions.

The development philosophy tocusses on driving technology leadership and manufacturing excellence through the competency enhancement programmes. Regular skill enhancement programmes continue to be part of our employee development strategy. Training effectiveness measurement is an integral part of our learni ng and development strategy.

An intensive training program on team building and collaboration using outward bound training methodology, to enhance the team cohesiveness and collaboration mind set among workmen was implemented during the 1 8 months period ended 31 st March, 201 6. Leadership traini ng for union leaders and opinion makers continued throughout the above period, thereby keepi ng with our commitment of shaping the future of our plants. A new initiative for leadership capability enhancement for manufacturing units leadership team was also rolled out.

Your Company has been able to keep the employees motivated and dedicated through our policies, HR initiatives and various welfare measures.

The total employee strength as on 31 st March, 201 6 was 1 5,553.

Your Company maintained cordial and harmonious Industrial relations in all our manufacturing units. Several HR and industrial relations initiatives implemented by the Company have significantly helped in improving the work culture, enhancing productivity and enriching the quality of life of the workforce. All the above initiatives have contributed significantly to achieving and maintaining the market leadership, your Company enjoy today.

Corporate Social Responsibility

Your Company conti nues to contribute to the development of our society through various social welfare initiatives apart from complying with the provisions of Section 135 of the Companies Act, 2013 on Corporate Social Responsibility.

Education:

Your Company continue to extend support in the education of underprivileged children in backward areas close to our manufacturing units. We make our brsence felt in the villages through our focus on educating the young and rendering assistance in developing the capabilities of children and inculcating in them values which will help them become a responsible member of society.

Your Company conducted many social events to enable children in the villages to display their talents, to make them confident and to brpare them to meet the challenges of today's society. We also have organised events to recognise students who have done well in their academics.

Health & Rural Infrastructure:

During the 18 months period ended 31st March, 2016, your Company conducted numerous medical camps and health awareness programmes in the rural areas in and around our manufacturing units. We also joined our hands with the government officials when they conducted community/health programmes in these villages.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Company's objectives, expectations or forecast may be forward looking within the meaning of applicable laws and regulations. Actual results may differ materially from those exbrssed in the statement. Important factors that could influence the Company's operations include global and domestic supply and demand conditions affecting selling prices of finished goods, input availability and prices, changes in government regulations, tax laws, economic developments within the country and other factors such as litigation and industrial relations.