MANAGEMENT DISCUSSION AND ANALYSIS - 2015-16 Business Overview Indian gross domestic product registered a moderate growth. Index of Industrial Production relating to the manufacturing sector showed a reasonable growth when compared with advanced western nations. Volatility in foreign exchange rates due to erratic US economic data and Euro zone crisis, persisting current account deficits, inflation rates, slump in crude oil prices, high interest rates and low consumption growth marked yet another difficult year. US economy showed reasonable growth while European economies in general showed a negative growth. The stress in Euro zone economies caused by the financial crisis continued to simmer and full scale recovery is still nowhere in sight. Emerging and developing economies other than India also slowed down considerably. During 2015-16, the automotive sector in India showed a decent growth with some important segments posting a negative growth. The following table shows the production trend of the industry: The domestic market continued to be affected by macro economic problems, high inflation, high petroleum product prices, high interest rates and poor consumer sentiment. There was an improvement in the sales of passenger cars during 2015 in the US. In the overseas markets, the CV industry has continued to struggle, with sales recorded at much lower than peak levels. Growth level in sales of passenger cars is expected to improve further during 2016 due to reduction in gasoline prices. Domestic Sales Domestic sales increased by 16% to Rs. 1650 crores from Rs. 1427 crores in the light of increase in sales of heavy and medium commercial vehicles, passenger vehicles and two / three wheelers. There was a steep drop in production of tractors. There has been a sharp increase in aftermarket sales due to specific initiatives undertaken by the Company. Exports The US market recovered modestly though not uniformly across all customers of the Company. Sales to a large US customer plunged on account of slow-down in their Sales. European markets continued to be hit by recession and negative sentiments. Exports were at Rs. 908 crores as against Rs. 899 crores in the brvious year. Export sales remained around 35% of the overall sales revenues as against 38% in the brvious year. The Company's investments for manufacture of new products are expected to result in further improvement in exports in the near future. Financial Performance Automotive component industry leans very heavily on commercial vehicle segment for high volume sales and profits. Increase in production of heavy and medium commercial vehicles and passenger vehicles resulted in improved domestic sales. Raw material prices were steady during the year. Other input costs rose across the board. Man power costs increased due to general hike in a competitive environment besides increase in dearness allowance in line with the cost of living index linked to inflation. The operating margin continued to be under brssure due to rising manufacturing costs. Power availability was better throughout the year and costs remained within control throughout the year, thanks to measures taken by the Company over the years. During the year, PBIDT (Profit before interest, foreign exchange fluctuation, debrciation, exceptional income and tax) was at Rs. 419.50 crores as against Rs. 356.79 crores in the brvious year. The Company made sizable investments in creation of capacities for new products and additional capacities for manufacture of existing products to meet projected demand from domestic and international customers. Financing costs, including brmiums on forward cover and adverse foreign exchange variations of Rs. 39.75 crores (Rs. 60.10 crores) on foreign currency borrowings, were at Rs. 59.97 crores as against Rs. 81.39 crores in the brvious year. The Company has been able to limit increase in interest costs through reduction in working capital requirements across its major divisions. In line with the Accounting Standard AS-11 (dealing with the effects of change in foreign exchange rates) and to ensure the principles of consistency, the Company recognises the exchange differences arising out of foreign currency denominated items as expense or income in the profit and loss statements. Debrciation was higher at Rs. 91.80 crores (Rs. 88.32 crores). Profit before tax after providing for exceptional items of Rs. 45.59 crores was higher at Rs. 222.12 crores (Rs. 177.08 crores). Investment Allowance admissible under Sec. 32AC of the Income Tax Act and reduced taxation on profits from Export oriented units resulted in lower net tax rate. Profit after tax after providing for deferred tax of Rs. 2.31 crores (Rs. 0.15 crore) increased to Rs. 211.16 crores (Rs. 135.32 crores). The company achieved the highest ever profits despite debit of net exceptional expenditure arising out of loss on sale of German subsidiaries and associate. Restructuring of International Operations The Company has restructured its international operations in order to maximise the revenue potential and shareholders' value. As part of the restructuring, Sundram Fasteners has found it prudent to divest itself of the German subsidiary Peiner Umformtechnik and its affiliates. During the year under review, the Company disposed of a part of its holding in its Associate viz., Windbolt GmbH reducing its holding from 24.99% to 9.99%. Windbolt GmbH has filed for insolvency under German laws. The Company has created a new subsidiary called Sundram International Limited, based in the United Kingdom. The Company has transferred its shareholding in Sundram Fasteners (Zhejiang) Limited (SFZL) and Cramlington Precision Forge Limited (CPFL) to Sundram International Limited, UK (SIL-UK) after obtaining shareholders' approval through Postal Ballot at fair value as stipulated in the regulations under Foreign Exchange Management Act, 1999. Consequently, SFZL and CPFL have become subsidiaries of SIL-UK. There is a net exceptional loss of Rs 45.59 crores as a result of the restructuring. Capacities and Capital Expenditure During the year, the Company has incurred Rs. 156.35 crores towards capital expenditure on existing and new projects. Capital investments were incurred to dovetail production plans to those of key customers. The total capital expenditure commitments during 2016-17 are likely to be around Rs. 150 crores, subject to market conditions and internal accruals. Research and Development The Company continues to focus on development of new products for existing customers and new customers. R&D efforts also relate to new processes in line with technological advancements. Projects involving regulatory compliances, cost reduction, import substitution, safety in manufacture and use of products and new technologies are accorded high priority. The Company's R&D facilities at Padi and Velappanchavadi, Chennai, Bonthapally Village, Medak District and at Hosur have been granted recognition by the Department of Scientific and Industrial Research (DSIR), making the Company eligible for weighted deduction under Section 35 (2AB) of the Income Tax Act. The Company incurred capital expenditure of Rs. 390.58 lakhs besides incurring revenue expenditure of Rs. 996.84 lakhs during the financial year. Quality Systems, TPM, TQM and Cost reduction All the major factories of the Company have obtained / retained certification according to the latest ISO/TS 169492009 and ISO 14001:2004 standards. The Company has adopted Total Productivity Maintenance (TPM) techniques for over twenty years and has become a way of life in all the factories. This has helped the employees to continuously improve production, reduce costs, improve quality, reduce wastage, reduce fatigue and improve employee morale. Low cost automation and installation of visual control systems have lead to improved productivity / safety. Best practices and systems developed by the teams are horizontally deployed, wherever feasible, across the Company. During the year under review, the company strengthened the TQM activities in all the Plants. New measures such as Policy Deployment and Daily Work Management activities were started in all divisions and plants. TQM was also extended to non-manufacturing areas like marketing, design and development, human resources and finance. As knowledge sharing and knowledge management initiative, the new steps adopted, experiences and results were shared between the divisions and plants to facilitate horizontal deployment. To continue supplying high quality products to customer and to eliminate customer complaints, new measures such as critical quantitative quality characteristics were introduced. Further, productivity improvement projects were also initiated in all plants in addition to quality improvement projects, which could result in improvement in productivity of the plants. The Company considers its sub-contractors as business partners and hence necessary support was extended to them to implement TQM measures. TQM and TPM activities are subject to review and audit periodically at the highest level. Human Resources and Industrial Relations Human resources have played a pivotal role in the Company's growth ever since inception. With the number of people employed being 3258 as at the year end, the Company recognises that their contribution is critical to the organisation's success. The Company attaches significant emphasis on the talent management and training of employees to ensure that their over-all development, meets the organisational needs. The Company considers learning and development as a critical aspect in the development of its employees. The Company has a combrhensive learning and development architecture aimed to provide well-rounded programmes to employees, which integrates with the Annual Performance Appraisal. Besides focussing on the core functional skills, training programmes are attentively structured to develop their behavioural attributes. Significant areas in which training is imparted to employees include leadership skills, strategic thinking, and negotiation skills. Such focussed programmes act as a motivational tool resulting in enhanced contribution and productivity. The Company had very consciously sown the seeds of mentoring during the year 2008. Over the years, the deployment of well-calibrated mentoring programme has ensured that the mentees (especially new joiners, millennial work force) have embraced it with enthusiasm, as such an avenue provides them the necessary support to make themselves grounded and facilitates their contribution to the organisational needs in a short span. The Mentors have also been actively contributing to the developmental needs of the mentees. Communication being the vital link connecting the employees, especially for our company, which has manufacturing plants in multiple locations, the Company's in house journal "Sundara Inaipu" besides being an avenue for management to engage with its employees and their family members, also extends as a platform for knowledge sharing on the learnings across multiple plants. Such engagement and knowledge sharing mechanisms creates an atmosphere of bonhomie among employees themselves and also with the management. Among the other welfare measures extended by the company to its employees, the Company also imparts free practical training in computers and soft skills to the children of employees. With an objective to support their higher education, the Company also offers substantial scholarship grants. Such initiatives and support has enabled the employees' children to launch themselves on a better career path. The Company has maintained its excellent industrial relations record of not losing even a single day due to industrial action since its inception in 1966. Health, Safety and Environment The Company attaches considerable importance to the health and safety of the employees. Products are manufactured by adhering to zero pollution norms and by eliminating accidents by continually improving environmental and occupational health and safety management systems. All factories are provided with green cover of trees and shrubs to enhance aesthetics. The Company's factories at Krishnapuram, Gummidipoondi and Velappanchavadi are accredited with OHSAS 18001:2007 certification. All the major factories of the Company have obtained certification for conformance to ISO 14001 standards. Internal Control Systems The transactions of the company covering all major processes i.e. purchase, manufacturing, marketing and finance are handled through the ERP system which is integrated to track the transactions end to end. Adequate controls have been built into the ERP system which are reviewed periodically to assess robustness and also bring out improvements where necessary. The systems and controls are benchmarked with the industry norms and improved by adopting the best practices. The control systems of the company are periodically evaluated by internal audit, reviewed by the management and the Audit Committee. Thus the internal audit plays a vital role in successfully sustaining and improving internal controls. The existing controls provide a continuous and consistent assurance of a high degree to the management covering operations, inventory, fixed assets, financial records and compliance of statutory requirements. Subsidiaries / Joint Ventures Details of investments and operating performance of subsidiaries / joint venture are given in this report and also in the Directors' Report. Prospects, Risks and concerns Weak growth in industrial production, power shortages and volatile currency movements are causes for concern in the short run. There has been an improvement in the business sentiment based on optimism arising out of policy statements from a stable government. According to IMF estimates, India is poised to grow faster than most economies. Reduction in inflation spurred by downward trend in crude oil prices has kindled hopes for reduction in interest rates leading to higher consumer demand and investment. Barring a poor monsoon, the pace of growth in domestic market is expected to improve during 2016 - 17, as the government addresses various problems faced by the economy and more particularly, the automotive sector. Cautionary Statement Statements in this management discussion and analysis describing the Company's objectives, projections, estimates and expectations may be 'forward looking statements' within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those exbrssed or implied. Important developments that could affect the Company's operations include a downtrend in the automobile industry - global or domestic or both, significant changes in political and economic environment in India or key markets abroad, tax laws, litigation, labour relations, foreign currency fluctuations and interest costs. |