Management Disussion And Analysis Economy The global economy managed to stay on an even keel even as challenges emerged from several quarters, traditional and new. The new geo political realities, changes in the established patterns of growth, a definitive global agreement for a sustainable growth, turmoil in commodity markets and an increasing push for "localisation" in several economies coupled with a global slowdown determined a broad spectrum of challenges that demanded a differentiated response from Society, Governments and Business. India's economy is at the cusp of what most of the globe expects to be an era of golden growth. The expectations of the global community from India's economy to deliver on its potential have never been as high as they are now. A new government, a promise of reforms, favourable demographic distribution, changing world economic order, a growing middle class and an underwhelming infrastructure to name a few have all fuelled the expectations of growth from the Indian economy. As a developing economy with deep rooted democratic values; several challenges in near term have to be overcome to realise this potential. Management of fiscal challenges, reforming the rules of the game while simultaneously creating a market (read raising per capita income), creating a fair and competitive environment for business and attracting capital are some of the near term challenges to be addressed by the government. The Government's focus on reforms across different sectors of the economy, focus on imparting skills to youth, favourable eco system for start-ups, increased focus on manufacturing sector, increased spending on basic infrastructure of rail and road and the high priority "Make in India" program promises to provide the much needed thrust to the economy in the near future. India's economy grew at decent pace and continues to be a bright spot in the global economy. The growth in GDP was registered in the face of a lacklustre performance of manufacturing sector which continued to battle with a slow market demand. A weak monsoon for a second consecutive year dented the rural economy and major drivers for growth continued to be the public investment and urban consumption. Private sector investment was markedly absent from the market and will be a critical dimension to create sustainable long term growth. To kick start the economic activity in the near term, a normal monsoon and focused infrastructure development spend by government, coupled with continued and accelerated reforms will shape the curve of economic growth. The government's push towards macro level programs such as "Make in India", "Skill India", "Start-up India" are all well intended and a successful execution of the intent will go a long way in building and sustaining the growth momentum. The industry too will do well to move from a highly defensive posture to a constructive aggressive posture and play its role in driving the economy. Industry Structure The Indian bearings market did not witness any major structural changes and is estimated at about INR 90 billion. The market is served through domestic production and imports. Organised sector companies including global bearing majors meet the needs of the Indian market through a mix of domestic manufacturing and imports. The market is driven by two key user segments - the automotive and industrial sectors. The business is further divided into OEMs and end user markets. OEM and companies across the industrial and automotive sectors were affected by the brvailing economic headwinds, and hence this was a challenging year for the Indian bearings industry. Your Company, with its reputation for high quality, wide product portfolio and lasting customer relationships, used its extensive and high quality product offerings to deliver performance and sustainable results. Opportunities Most of the experts believe that India's economy is poised to enter an era of sustained growth. The expectations of the global community from India's economy to deliver on its potential have never been as high they are now. Continued reforms in policy regime, a focus on building a world class infrastructure (Railways, ports, roads etc) hold the promise of a bright era for India's manufacturing sector. The "Make in India" initiative is a pathbreaker that can revolutionise the country's economy. This initiative will create job opportunities for the demographic dividend to be delivered. It is only when the people earn that they will have the power to spend in turn driving demand and economy. Regulatory policies have been relaxed to facilitate investments and improve ease of doing business. This initiative is a strong signal of the government's commitment to enhance manufacturing in the country. Spending on capital expenditure for large projects in manufacturing and infrastructure will lead to a demand led recovery and spur economic growth in the years ahead. This initiative with policy reforms has opened up key sectors of Railways, Defence, Space, Insurance and Aviation - to meaningfully higher levels of Foreign Direct Investment. Another area that will have a multiplier effect on growth is the government's continuing emphasis on infrastructure development. Better road infrastructure, smart cities, improved connectivity of industrial clusters with modern ports, development of sustainable energy infrastructure, a continued development of field to market sustainable food chain, tougher safety and emission norms for automotive industry will enhance our competitiveness as a nation while creating a completely new market opportunity. Improving the competitiveness for an enterprise will be a key driving force for shaping the offerings in the market. Organisations will embrace higher level of technology and integrate knowledge of stake holders both to comply with changing regulatory regime as also to differentiate themselves with an ultimate aim to win in ever more competitive arena. The winners in the competitive arena will be organisations that focus on improving the ultimate competitiveness proposition for their customers and your Company is well positioned to serve this opportunity. Our parental heritage and technology prowess with deep rooted customer relationships at both local and global level will help us to further consolidate our position as leaders in the business. Automotive Sector Automotive sector has served as a proxy indicator for economic growth of the country. India's per capita vehicle ownership across the segments continues to be very low when compared to developed or several large developing economies. This industry is also critical to the growth of manufacturing sector as large auto components and ancillary business eco system forms the backbone of the automotive world. India has already developed a very successful and strong auto sector. In the recent slowdown in economic activity, deicient monsoons and decreased discretionary spending had slowed down the vehicle sales in general with speciic impact on commercial and personal vehicles. As we await a normal monsoon, recent trends have turned encouraging for passenger and commercial vehicle sales. This is very encouraging and is an early indicator of possible economic growth. Ease of mobility is a very important factor for increased economic activity. India offers a large potential market, on account of the size of the country, the geographical sbrad and the young workforce. Changing sensitivity to pollution, increasing awareness of safety and the continued demand from Indian customers on improved "mileage" will shape the demand for improved technology from automotive companies and in turn from component makers. Emergence of e-commerce coupled with revival in core economic activity and ensuing demand for logistics will drive commercial vehicle demand positively. Continued emphasis for energy eficient and green vehicles has OEMs focusing on reducing vehicle weight and opting for low friction technologies. Regulatory demands on emission levels, and passenger insistence on safer, more reliable vehicles offers an opportunity to automobile manufacturers to incorporate cleaner and more eficient technologies. This will limit the life of old technology on roads further driving the demand. India's driving conditions, including ownership and maintenance practices are uniquely different from the developed world practices. The expectation from leaders in the ield is to develop solutions that are tailor made to suit these. A very strong parental technology base, high capabilities in new product development and a strong manufacturing base enables us to offer innovative world class leading solutions. Industrial Sector In a country as diverse as India, economic revival is often dependent upon the progress of Industrial sector. The Government's focus on reforms across different sectors of the economy, attracting investments in manufacturing sector, increased spending on basic infrastructure of rail and road and the high priority "Make in India" program promises to provide the much needed thrust to the economy. The "Make in India" initiative offers the policy, direction and changes at ground level to enhance India's attractiveness as a brferred location for manufacturing and services. The current slowdown in world economy, existing unfulilled global capacity, and ease of doing business are some of the reality parameters, we as nation need to work on. While new investments are certainly a key driver for the economy, it is the existing players who carry a larger responsibility as their commitment is already on the ground. Businesses that are already operating are key decision influencers for attracting new investment both from existing and new players. The government has announced a major thrust on Infrastructure development and has begun to implement its plans to link industrial corridors and create smart cities. The Indian Railways has started a modernisation drive with focus on enhanced safety and productivity and the DFC (Dedicated Freight Corridor) will transform the movement of goods across the country while expanding serviceable markets by connecting production centres with markets and ports. These steps are expected to add to our country's competitive edge in a significant manner. The "Make in India" program has defined a priority list of industries where India can emerge as a globally brferred manufacturer. Automobile Components, Electronics, Biotechnology, Aviation, Construction and Defence manufacturing - are some of the areas that have been defined as sectors with high growth and investment potential. As the leader in the bearings industry we are uniquely positioned to participate in this program. Power generation continues to face a large deficit. In a positively developing economy focus on renewable energy and energy efficiency is of prime importance not only to strike a balance with ecology but also to build a competitive industry and energy infrastructure. All organisations are pushed to find ne frontiers on staying competitive. Amongst the play for technology and innovation, a need for cost competitiveness has acquired centre stage. Higher levels of utilisation and productivity are key to achieving significantly higher levels of competitiveness. This need is giving rise to a demand for a collaborative approach amongst the end users, OEMs and technology suppliers. The "Smart" has acquired a completely new meaning in managing asset performance. Your Company's broad range of expertise and experience across product and service platforms equips us to play a larger role as a brferred partner and offer these 'Smart" customer centric solutions. Threats Underutilised global manufacturing capacities, and a continuing global slowdown can lead to increased competition in the domestic market. The short term protective measures (enhanced duties and minimum support price mechanism) for steel industry if continued will harm the domestic manufacturing companies in medium term and weaken their competitive position globally as also in home market. Across industries, despite the demographic dividend, companies are facing a shortfall of the right skilled talent. Companies are putting in place customised training programs to impart the skills that they need. Limited job opportunities and the lack of right skills could delay the country's growth trajectory and damage the social fabric. Counterfeit products are a threat to industry and the economy. Your Company focuses on anti-counterfeit measures to protect brand equity with customers, safety hazards and likely inancial damage. Your Company addresses this issue by working with stakeholders to create awareness about the need for genuine, high quality products. Your Company also works with law and order agencies to detect and brvent counterfeit products. We believe that in every threat also lies an opportunity and we will leverage our global expertise to strengthen our leadership position. Outlook While global growth outlook remains subdued, India is one of the few economies expected to deliver growth. Recent initiatives such as the "Make in India" program, plans for significant private and public investments in infrastructure development projects, and policy initiatives such as GST, opening up of to the private sector of areas such as defence and space and ease of doing business will provide a very good positive boost to the economy. These programs have the potential to spur economic development in India and place the country on a significantly higher growth trajectory. Your Company's key strengths lie in continuously delivering high performance engineered solutions through customer centric innovation that create a competitive advantage in the market. We expect to continue building on these strengths as we make the most of business opportunities offered by the rapidly evolving business environment. Risks And Concerns Your Company has a well-defined and continually updated risk management plan as an integral part of its business strategy. Risk is identified across all units and functional levels - strategic, operational and financial and business risk. Your Company's risk management policy includes strategy, action and risk mitigation guidelines across each function. Policies and directions, where applicable, are based on internationally accepted standards or best practices. These policies are evaluated periodically and updated as required. For all identified material risk, mitigation action is clearly listed and followed. These policies minimise risk and enable us to apply an active risk management system. A senior manager who reports directly to the Managing Director is responsible for identifying, defining risk and listing mitigation actions. This risk manager works closely with business unit heads across locations and identifies risks. For each major risk area, a Risk Manager is appointed, with responsibility for monitoring and controlling the risk. He reports to the country Risk Manager and the management team. Your Company has the advantage of a multinational parentage and adheres to stringent norms and policies of the international group. SICS (SKF Internal Control Standard) is an extensive risk monitoring, controlling and assessment policy that your Company strictly follows. Independent processes such as internal audits, quality audits, environmental compliance also assist in identifying and mitigating risks. We regularly study these risks and upgrade our risk management plant and policy in line with changing developments and global best practices. Your Company has also implemented a code of conduct and a well-deined whistle blower policy. The code of conduct formally informs employees of their responsibility. The whistle blower policy offers a serious platform for employees to raise concerns and report misconduct. Your Company takes all complaints and inding seriously, and uses external investigators where required. Internal Control Systems and Their Adequacy Your Company has a robust Internal Control and Internal Audit system in place. Your Company views internal audit as a vital part of management control systems that keeps management informed about the control systems and processes in the organization. Additionally systems are in place to evaluate and refine control practices, evaluate the adequacy of risk management processes. As a multinational, your Company adheres to SICS (SKF Internal Control Standards), which is a customised control system adhered to across the globe by all SKF companies. The standards specified by SICS are an integral part of standard operating procedures for all business functions. These SICS controls are regularly tested by the Internal audit function. Your Company also works with an independent external firm to test the adequacy of controls and highlight changes if any. A detailed Operational Risk Assessment exercise first identifies all major auditable areas. These form the basis of an Internal Audit Plan with a 4 years' time horizon. This four year plan is prioritized and further divided into Annual Internal Audit Plans. Your Company uses the information from the annual reviews as well as specific feedback received during the year from the units/ functions and the Statutory Auditors, to refine and revise the internal audit plan. This plan is then approved by the Audit Committee at the beginning of the year. This internal audit plan is executed by the internal audit team, comprising of external and internal audit professionals. The internal audit function independently tests the design, adequacy and operating effectiveness of the internal control system and this provides a credible assurance to the Audit Committee regarding the adequacy and effectiveness of the internal control system. The plan and the internal audit reports are shared with the Statutory Auditors. The Audit Committee then reviews the Internal Audit reports, the SICS testing results and the status of implementation of the agreed action plans arising out of the indings of the internal audits. Financial and Segment Performance The Net Sales for the 15 month period ended 31st March, 2016 amounted to Rs. 29,555.6 million as compared to Rs. 23,726.4 million in the brvious year. The Proit after tax for the period amounted to Rs. 2571.5 million compared to Rs. 2027.7 million during the brvious year. During the year the Company has changed its accounting year from calendar year to iscal year April to March. The current accounting period of the Company covered 15 months starting from 1st January, 2015 to 31st March, 2016 and therefore brvious year igures are not directly comparable. Your Company produces bearings and related component segments, which are used in an extensive range of industries. The slowdown in the Indian manufacturing sector, subsequent to the global commodity slowdown, affected both the automotive and industrial sectors. Despite these challenges, your Company continued to focus on innovation, productivity improvements, delivered quality and developed products and services that offered competitive advantages for customers. Your Company's ability to provide advanced integrated solutions that were customized to specific needs, helped your Company further strengthen its leadership position. Your Company's emphasis on productivity and customer focus helped us maintain a healthy profitability despite the business environment challenges. Your Company is enthusiastic about the growth opportunities ahead as the several government initiatives to spur manufacturing begin to deliver, and result in growth in the economy. Human Resources Your Company has a vision of creating "A world of reliable rotation" and a mission of becoming "The undisputed leader in the bearing business". Both of these goals are powered by its people. Your Company has driven and sustained various growth and transformation initiatives to attract, retain and develop a capable and committed workforce. The people development programs were aligned to enable achievement of Business goals set for the year. One of the key Business goals was to capture the Customer and Grow Ahead of the Market. From a Talent perspective this meant strengthening the Front line Sales Capability through a structured program. The Sales Academy was launched to address this need. A framework for building Sales Competency was created, competence gap assessment completed and programs rolled out to address these gaps. Having a strong Leadership Pipeline is another important focus area. To keep pace with the changing business context and therefore the changing talent needs, your Company launched a structured Succession planning process. This enabled identiication of critical positions and critical talent for future business success. To build an empowered and capable pipeline a special program "Leadership for Growth" was launched in 2014. In 2015, this program culminated with a formal talent review and development discussions with each participant to accelerate the development of potential future leaders. In order to ensure leadership development across levels, your Company designed and launched a host of specialized programs. The Leadership Foundation Program was developed and rolled out for first time managers, and external coaches were assigned to new leaders (needing a sounding board) having recently transitioned into larger roles. Your Company's management believes that such programs will ensure readiness of leadership capability for the future and enable your Company to Stay Ahead of the curve by building a strong leadership pipeline. Your Company also initiated structured programs including collaboration workshops between the union and management with a view to drive harmonious relationships and therefore World Class Manufacturing. Additionally, Personal Leadership Development programs, multi-skilling and front-line leadership and associate development programs were also launched. Your Company is committed to provide a healthy and safe work environment free from accidents, injuries and occupational health hazards. A number of campaigns were run through the year on creating health awareness, periodical medical check-ups for employees, and sessions to increase awareness on safety at workplace. Your company believes in creating an inclusive environment. This is driven through employee friendly policies and programs. A day care facilities for employees children has been provided by the company to all its employees to enable a healthy work life balance. Your Company firmly believes that Human Resource Development strategies and practices will continue to provide sustained competitive advantage. The management of your Company deeply apbrciates the spirit and commitment of our dedicated 2,222 employees. Cautionary Statement Statements in this report on Management's Discussion and Analysis describing the Company's objectives, projections, estimates, expectations or brdictions may be "forward looking statements" within the meaning of applicable laws and regulations. These statements are based on certain assumptions and expectations of future events. Actual results could differ materially from those exbrssed or implied since the company's operations are influenced by many external and internal factors beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events. Readers are cautioned that the risks outlined here are not exhaustive. Readers are requested to exercise their own judgment in assessing the risks associated with the Company. For and on behalf of the Board SKF India Limited Rakesh Makhija Chairman Bengaluru 10th May, 2016 |