MANAGEMENT DISCUSSION AND ANALYSIS 2015

1.1 The Indian auto industry is showing signs of improvement in performance. The reason for the same is an amalgamation of multiple factors, namely, early signs of economic recovery, and improved consumer sentiment, clubbed with government initiatives to bring in more foreign direct investment into the country, leading to job creation. Also, the Government policy initiatives in terms of project implementation, infrastructure development, and revival in mining activity would impact growth pace to get back to a fast track growth path.

1.2 With a stable Government at Centre after long time, Indian economy has shown a moderate growth of approximately 7% in 2014-15. The projected GDP growth for 2015-16 is estimated at 7%- 8%. This will surely impact on Auto Sector positively.

1.3 As per the trend over the past few years, the Indian auto industry has shown slower growth as compared to economic growth. In 2014-15, the passenger car (PC) segment has grown by 4% and commercial vehicle (CV) segment has de grown by 1%.

1.4 The 2015-16 outlook for the Indian auto industry is positive, as we expect a growth of 6%- 8%. In 2015-16, the CV segment is likely to register overall volume growth of 2%-3%. These will largely be driven by the sales of light commercial vehicles (LCVs). This high volume will come as CVs are dependent on consumer activities and not industrial activity.

1.5 While the industry struggles to realize its growth potential, auto ancillaries struggle to meet their profitability targets. The input cost brssures and underutilization of capacities continue to persist. This puts immense brssure to drive cost down projects, and improve internal efficiencies through manufacturing excellence.

2 Financial & Operational Performance

2.1 In 2014- 15, the company's Gross Sales have increased to Rs.1,333 Crores, an increase of 1.44% in sale over the brvious year's Rs.1,314 Crores. The operational profit (EBIDTA) has improved due to operational efficiencies and material cost down realisation. In 2015-16, the management continues to focus on improvement of operation levels and material cost control to further increase operational profit.

2.2 In view of fluctuating foreign exchange scenario, the Company continued its efforts to improve the level of localization of various imported parts. Various VA/ VE activities were initiated along with active participation of suppliers. During the current year, the company localized Piston and Swash for combrssor parts for long term cost competitiveness, further local RS Evaporator are now being sold to Denso Subsidiaries in India to improve capacity utlization. Few other localization projects are in implementation stage.

2.3 The company values contribution and its relationship with its vendor partners to achieve operational excellence. Supply Chain is given due focus to work closely with vendor partners for long-term strategic direction of the business and up gradation thru cluster programs. Company conduct Annual Vendor Meet to recognize and reward vendor performance and also to share long term plans for coordinated planning efforts.

2.4 During the Year, the company has moved its Tool Engineering Centre to its New and Independent location at Noida. Subros Tool Engineering Centre (STEC) has a strong Tool Design office. STEC set up is to take care of Subros captive Tools and Moulds requirement. The company's focus is to meet their customer's specialty tools requirements for import substitution and exports. STEC will specialize in very niche and high technology tooling for Plastics Injection moulding, non-ferrous Vacuum and squeeze Die Casting dies and Precision Sheet Metal Dies.

3. Information Technology

3.1 Information Technology(IT) based business solutions are the key enablers for Business strategy realisation at Subros system. SAP is strongly supporting important business processes of production, logistics, upstream, and downstream supply chain operations, as well as finance and accounts system of the company. The company continues to improve these implementation practices for better effectiveness.

3.2 The company has strong IT deployment for information support such as Lotus Notes, Project Management System & Vendor Extranet etc. It has helped generate process efficiencies and lean operations. It also helps manage complexity and scale in -house, and with vendors.

3.3 The company has strong IT deployment in Engineering and design areas with tools like Team Centre (TLM), CAD, CAE and CAM this has helped in improved product development cycle.

3.4 The company's Vendor Management System using IT tools enhanced its coverage across the network of vendors throughout the country. The system enables the company and its vendors to have real time access to information on vendor operations, vendor information, and feedback.

4. Internal Controls and their Adequacy

4.1 The company has strong & integrated systems of internal control in place, which is commensurate with its size and nature of operations. These systems have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization, and ensuring compliance of corporate policies. Further, internal audit and management reviews are conducted regularly and the reports are regularly submitted for review to the Audit Committee of the Board of Directors.

4.2 Company's Audit Committee reviews audit reports and findings submitted by the Internal Auditors; follows up on the implementation of various recommendations. They also met Company's statutory auditors to ascertain their views on the adequacy of internal control systems; and keeps the Company's Board of Directors informed on its operations from time to time.

5. Risks and concerns

5.1 The company is exposed to external and internal risks associated with the business. The operations of the company are directly dependent on the growth of Indian automotive industry. General economic conditions impact the automotive industry, and, in turn, the operations of the company. To counter these risks, the company continues to broaden its product portfolio, increase customer profile, and geographic reach. In line with these plans, the company has created expansion plans in commercial vehicle segment to de-risk its dependency on the passenger car segment.

5.2 The company is expected to face strong competitive brssures from domestic and overseas suppliers. The company is also exposed to financial risk from changes in interest rates, foreign exchange rates and commodity prices. The company also faces challenges with regard to fast changing technology, reducing life cycle of new vehicles, supply constrains from Tier II suppliers, sustaining cost efficiencies brought into the system, and planning capacity expansion in the wake of changing patterns.

5.3 On a regular basis, the company reviews its risk management. In addition, monitoring for any new risks that may arise due to changes in the external or business environment is also conducted. While the possibility of negative impact due to one or more such risks cannot be totally negated, the company proactively makes reasonable efforts to mitigate the significant risks that may affect it.

5.4 The company is evolving new Risk Management framework (ERM), which will further improve risk identification and mitigation process. This is being rolled out across organization including all plants and functions.

Intensity of competition has increased in almost all the segments of the Indian automotive market due to entry of new players and expansion plans of existing competitors. The company is aware and is taking measures to sustain its market leadership.

5.5 The research and development (R&D) Centre at Noida & Pune contribute to product development for new model launches. The new Technology development and new product development initiatives are well supported by our collaborator Denso Corporation-Japan. The joint venture company, Denso Subros Thermal Engineering Services (DSEC), is taking care of application design and allied services for new models to be launched by our OEM's. This is bringing expertise and experience of Denso engineers to work with Indian talent to develop high technology solution at low cost with short lead time for the Indian market. Further, the Engineering Application Centre at Chennai is focusing on product development related to the CV segment to meet the customer demand.

5.6 The company is undertakings various new projects ranging from development of new models as well as new segments. These projects are at various stages of planning and execution. Though the company employs sophisticated techniques and processes to forecast the demand of new products, yet the same is subject to margin of error. Timely introduction of new products, their acceptability in the market place, and managing complexity of operations across various manufacturing locations would be the key to sustain competitiveness.

6. Future Plan

6.1 Global economic indicators are expected to improve, led by positive prospects in advanced economies. Though the global economic climate continues to be volatile, uncertain and prone to geo-political risks. In view of the growth opportunities in domestic market and proactively observing the cost brssure of the market, your company has made extensive Localisation plans and VA/ VE plans for the key components. The objective is to develop capabilities to provide latest technology product to the customer with low cost. Further, this will help the company to sustain growth profitably and minimize the impact of fluctuation in economic indicators.

6.2 The company is adequately equipped with the capacity to meet the demand of customers and will increase the capacity to meet future demand of the industry if required. The company is also in the process of radiator manufacturing facility to meet their customers requirement. This will add to the revenue growth of the company.

6.3 The company has also expanded its facilities of Tool Engineering Centre and focusing on in house development of all Molds/ Dies that are required for new product development. This will help the company shorten the lead-time of product development and save cost.

7. Human Resources

7.1 The company's Human Resource (HR) agenda for the year was focused on strengthening individual and organizational capabilities for future readiness. Progressive people practices at the shop floor were conducted to drive greater employee engagement and strengthen employee relations.

7.2 The company's Human Resource (HR) agenda for the year was focused on strengthening individual and organizational capabilities for future readiness. Progressive people practices at the shop floor were conducted to drive greater employee engagement and strengthen employee relations.

7.3 The company is widely acclaimed for its people development practices and has reinforced its position in this area. This, coupled with the ability to attract best talent, provides a competitive edge to the organization. Employee training activities are also well emphasised in the company, and are in line with competency matrix and training needs identified through performance reviews of each employee. This will give focus approach for individual skill enhancement.

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 down trend in the automobile sector, significant changes in the political and economic environment in India, exchange rate fluctuations, tax laws, litigation, labour relations and interest cost.