MANAGEMENT DISCUSSION AND ANALYSIS

Financial Year 2015 saw signs of revival in the Indian automobile sector following a challenging year with the domestic Passenger Vehicles (PV) segment registering ~4% growth. Sona Koyo Steering Systems Ltd (Sona Koyo) witnessed  growth in line with industry, with net consolidated revenues increasing 4.1% YoY to Rs. 15,530 mn.

Despite this lackluster growth environment, the Company achieved 21% increase in EBITDA. The progress in profitability is the result of continuous cost-optimization efforts made over the past few years, and which hinged on our localization and backward integration initiatives. Both the Pressure Die Casting (PDC) and Sheet Metal units achieved higher operational efficiencies in the year contributing towards sustainable reduction in raw material costs.

Sona Koyo also continues to move forward in our efforts to diversify our revenues through new products developed by our in-house R&D team in the aftermarket and off-highway segments. The indigenously-developed Electric Power Assist Module (EPAM) is a strong driver for export  growth. The Company also sees strong potential for the product in the domestic market.

According to ICRA Research Services, the domestic PV segment is expected to post a marginally higher growth of 5-7% in FY16 fuelled by renewed consumer sentiment, return of first-time buyers and a robust pipeline of new launches. Following the recent optimization efforts and introduction of new products, the Company is well positioned to make the most of the upcoming industry growth.

ECONOMIC SCENARIO

Improving outlook for Global and Indian economy The global economy saw moderate growth of 3.4% in Calendar Year (CY) 2014 and is expected to grow marginally higher at 3.5% and 3.8% in CY15 and CY16, respectively, as per International Monetary Fund (IMF).

The Indian economy is also moving towards gradual recovery with 7.3% GDP growth in FY15, compared to 6.9% growth in FY14, as per government of India estimates. The Index of Industrial Production (IIP) saw a cumulative growth of 2.8% YoY for the period April-March 2015 as reported by the Central Statistics Office. Going forward, the Indian economy is expected to grow at a faster rate in FY16 with a projected GDP growth of 8.1-8.5% as per The Economic Survey for 2014-15. International rating agency Moody's has upgraded India's sovereign ratings outlook to 'Positive' from 'Stable' backed by policy reforms,  pick up in investments and a cheaper oil bill.

MARKET OVERVIEW

Total domestic automotive sales grew by 7.2% in FY15 to reach volumes of 19.8 mn units, against a growth of 3.5% in FY14, according to Society of Indian Automobile Manufacturers (SIAM). The overall PV segment saw a growth of 3.9% during the period. However, the growth was narrow-based as only six out of 18 Original Equipment Manufacturers (OEMs) witnessed growth in volumes in the year, as per ICRA's report on Indian Passenger Vehicle Industry.

Within PVs, domestic car sales posted positive growth of 5.0% in FY15 after declining for two years in a row. Sales volumes were driven by the extension of excise rollback till December 2014, aggressive discount levels, improving consumer sentiments under the new government, decline in oil prices, softening of interest rates and a slew of new launches and variants in the year. In FY15, the car segment saw an increase in car launches to 90 with 27 new models, 26 refreshed models and 37 variants of new models, compared to a total of 70 and 47 in FY14 and FY13, respectively, as per industry reports.

Wheeler segment and Two Wheeler segment registered growth of 10.8% and 8.1%, respectively, in FY15.

The overall automobile exports market fared well, growing at 14.9% in FY15 with 4.4% growth in the PV segment, 11.3% in CV, 15.4% in Three Wheeler and 17.9% in Two Wheeler segments, respectively.

As per SIAM's Automotive Mission Plan 2006-2016, the Indian automobile industry accounted for 7.1% of India's GDP, 27% of India's Industrial GDP and 4.3% of overall exports, second only to textiles and handicrafts in FY14. The industry has provided incremental employment generation in excess of 19 mn since FY06. India, with an annual production of 23.4 mn vehicles in FY15, is the sixth-largest automobile market, behind China, USA, Japan, Brazil and Germany.

The Indian automotive industry was one of the most attractive sectors for Foreign Direct Investment (FDI) during the April-February 2015 period with 89% growth in FDI to reach $2.42 bn, as per the Department of Industrial Policy and Promotion (DIPP). The share of the automotive sector in total FDI increased to 8.4% in the 11 months ending February 2015 from 6.2% in the corresponding period last year.

The government has already announced several initiatives such as building of additional 100,000 km of roads and flagship urbanization schemes like the Smart Cities Mission, Housing For All by 2022 and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) of 500 cities. The government's renewed interest in Public-Private Partnership (PPP) projects resulted in Rs. 135 bn worth of projects in the highways sector being awarded or reaching finalization stages in the first quarter of FY16, compared to only Rs. 63 bn of projects awarded in the entire FY15. These initiatives will give a big boost to infrastructure and economic growth and as a result benefit the automotive sector, which is dependent on the country's overall economic growth for sustained recovery.

The long-term growth drivers of the Indian Auto Components industry, which is dependent on domestic automotive sales, remain intact. According to the Automotive Component Manufacturers Association of India (ACMA), the auto components sector is estimated to grow at 18% FY14-21 CAGR to reach $115 bn by FY21.

Cautious optimism in FY16

As per leading research agency ICRA Research Services, domestic PV volumes will grow marginally higher at 5-7% in FY16 supported by return of first-time buyers, replacement demand due to large base of FY10-11, and a robust pipeline of new launches amidst improving consumer sentiments. Domestic PV sales have already grown positively at 10% in the first two months of the coming year as per SIAM. However, broad-based recovery with all OEMs reporting volume growth along with sustained improvement in economy will be critical to lead the industry into recovery.

OPERATIONS

With the domestic PV market showing signs of revival, Sona Koyo witnessed a year in which it performed at par with industry growth. Consolidated revenues increased 4.1% YoY to reach Rs. 15,530 mn driven primarily by the domestic market, which grew 6% YoY. However, after recording strong growth in FY14, exports business de-grew in FY15 to Rs. 823 mn from Rs. 1,059 mn in FY14. Exports were impacted due to slowdown in the European market, coupled with apbrciation of the Rupee against the Euro making exports less competitive.

Our focus on achieving operational efficiencies has continued to yield benefits in the current financial year. Sona Koyo reported a consolidated EBITDA (excluding other income) of Rs. 2,157 mn in the year, an increase of 21% over the brvious year with margin improving from 12.0% in FY14to 13.9% in FY15. Improvement in operating profit was driven by reduction in material cost due to localization, backward integration, VAA/E (value analysis and value engineering) activities and active involvement with suppliers. Raw material cost as a percentage of sales decreased from 69.2% in FY14 to 67% in FY15 on a consolidated basis. On a standalone basis, the raw material cost as a percentage of sales decreased from 69.7% in FY14 to 67.3% in FY15.

With completion of Phase IV of Electric Power Steering (EPS) localization, imported material cost came down to 15.9% of total material cost (on a standalone basis). Localization has many benefits, chiefly increased profitability, competitive pricing and insulation from foreign currency fluctuations. The chart below shows decrease in raw material costs as a percentage of sales with increasing indigenization of raw materials (i.e. reducing imports as a percentage of total raw materials

The Company's strategic move to diversify from being only PV-centric continued in FY15 with new growth avenues emerging in the off-highway & commercial segments as well as the Aluminum Pressure Die Cast (PDC) & Sheet Metal units. Operations at the PDC went off well with 80% capacity utilization. In FY15, the Company made additional capital investment of Rs. 170 mn to increase production capacity in the Die Casting plant. This included import of an additional 850 Ton machine.

During the year, Sona Koyo's financial position strengthened with debt reducing from Rs. 2,757 mn in FY 14 to Rs. 2,566 mn in FY15 and as a result of which finance charges declined by 21.8%. During FY15, the Company revised the estimation of the useful life of its assets with the adoption of Schedule II of Companies Act 2013, which resulted in additional debrciation charge of Rs. 204.67 mn on standalone basis and Rs. 281.34 mn on consolidated basis. Despite this additional charge, the PBT margin improved from 2.20% in FY14 to 2.22% in FY15 on standalone basis and from 5.1 % in FY14to 5.6% in FY15 on consolidated basis.

The Company's strong fundamentals are reflected in the credit ratings assigned by ICRA. In FY15, ICRA upgraded the long-term credit rating of the Company to ICRA A+ (pronounced ICRA A plus) from ICRA A (pronounced ICRA A). The short-term rating was also reaffirmed at ICRA A1 (pronounced ICRA A one).  Also, in line with the current year's performance, the board has declared a dividend of 65% of the par value of shares

SUBSIDIARIES AND JOINT VENTURES

The Company has two subsidiaries, JTEKT Sona Automotive India Limited (JSAI) and Sona Fuji Kiko Automotive Limited (SFAL).

JTEKT Sona Automotive India Limited (JSAI):

During the year under review, Sona Koyo's key subsidiary, JSAI, saw its revenue growing at 6.6% to reach Rs. 6,447.9 mn. EBITDA and PAT margins also improved to 12.7% and 5.5% in FY15 from 11.0% and 4.7%, respectively, in FY14. Financial highlights of its operations are as follows:

Some key performance highlights of JSAI's operations are as follows:

• Production:

- Accomplished smooth "Start of Production" (launch) of CEPS for Maruti Suzuki's "Ciaz", Honda's "Mobilio" and MS Gear for Toyota "Corolla".

- Successfully reduced Cycle Time of Ring Assembly Line from 28" to 20" seconds.

• Safety: Achieved 1,726 Accident-free days.

• Customer Satisfaction: Achieved 100% Delivery rating from all customers and received Excellence & Supplier Delivery Performance Award for EDI (Electronic Data Information) from "Renault Nissan".

• Environment And Cost: Successfully implemented 50 KW Solar Power Plant.

• Skill Development and Cost: Produced five machines in-house, resulting in cost saving and skill development of employees.

• Quality: Attained second position in Quality circle held in Japan.

• Training & Development: Won the National Award (3rd Prize) from ISTD (Indian Society for Training & Development) for Innovative Training Practices.

• Technology: Successful implementation of in-house developed E-Suggestion Portal resulting in both usage of latest technology and cost saving.

Sona Fuji Kiko Automotive Limited (SFAL): During the year under review, this subsidiary's revenue increased by 9.4% to reach Rs. 611.4 mn. EBITDA and PAT margins decreased due to drop in export volumes as compared with FY14.

Some of the key highlights of SFAL's operations are as follows:

• Production:

- Accomplished smooth "Start of Production" (launch) of Jacket Column Assembly for Maruti Suzuki's Ciaz.

- Achieved start-up of new production line thereby increasing the capacity, keeping in view future requirements.

• Training & Development: Imparted training to employees in Production, Product Design, HR&GA, and Manufacturing Engineering to enhance knowledge and skills.

CORPORATE SOCIAL RESPONSIBILITY & SUSTAIN ABILITY

CSR is engrained in our being and we at Sona Koyo realize the need to give back to the society in which we thrive. Out of all socio-economic interventions, education has always been considered the most powerful tool and Sona Koyo has been actively rendering contributions towards education. It is to further this cause that Sona Skill Development Centre (SSDC) was started in October 2013 with an investment of Rs. 50 mn. The state-of-the-art Centre in the industrial hub of Gurgaon has 2,600+ square meters of total floor area, five classrooms, a well-equipped workshop, a metrology lab and a computer lab. The objective of the Center is to develop people for excellence in manufacturing by upgrading the skill level of employees of the manufacturing industry and to develop suitably skilled people from the bottom of the pyramid.

One of the most satisfying interventions in reciprocating to society has been the program "Praveen" at SSDC, where underprivileged youth undergo vocational training for a period of four months, transforming them into self-reliant, employable youth. This program is registered with Automotive Skills Development Council (ASDC), which is promoted by the automobile industry through Society of Indian Automobile Manufacturers (SIAM), Automotive Component Manufacturers Association (ACMA), and Federation of Automobile Dealers Association (FADA), as well as Government of India rebrsented by Department of Heavy Industry and National Skill Development Corporation (NSDC). After successful completion of the course, the participants undergo test and evaluation by ASDC-approved assessors. Based on this assessment, successful candidates are issued ASDC certificates that enable them to secure jobs in the automotive industry.

We adopt teaching methods that are sensitive to the realities of the industry making the youth well-equipped to perform when he or she enters the workforce. Out of 3,500 training partners for ASDC, Sona Skill Development Centre is ranked among the top 5 - reflecting our commitment to build individual capabilities

During FY15, we trained 46 individuals under the first two batches of Project Praveen. 100% of the students successfully qualified for the ASDC certification. All of these youths have bagged employment through campus interviews arranged by SSDC at salaries that are at par with industry standards. We are currently running a third batch of 28 participants while a fourth batch of 35 students has already been formed. We aim to train 150 underprivileged youths under the Project in the coming year.

In addition, SSDC also runs programs such as Skilling Team Leaders (training supervisors from the industry). Supervisors for Small & Medium Enterprises (SMEs), and Training in various tools and techniques for middle and senior managers in manufacturing. In the coming year, SSDC will be introducing a Campus to Career Program targeted at fresh engineering graduates to make them industry-ready from Day One.

Apart from education, we believe in making our environment clean and healthy. The Sona Group continues to map its carbon and water footprints. Sona Koyo has set targets for reduction in energy consumption, cut in carbon emissions and water consumption using in-house innovative methods for reduction and reuse of resources. The Company has also initiated a tree-plantation drive to offset its carbon footprint.

SUPPLY CHAIN MANAGEMENT

Sona Koyo continuously strives towards better operational management and quality enhancement by focusing on Supply Chain Management (SCM) initiatives. During the year, we continued to focus on the "Milk Run" technique, which was started in FY2013. "Milk Run" is a structured method to collect raw materials from suppliers. We extended this technique to Sanand in FY15 and are working to cover the local suppliers in the coming years.

During the year, we started the Supplier Improvement Team (SIT) within the SCM. The initiative aims at using techniques from Visionary Small & Medium Enterprises (VSME) to improve the quality of products from suppliers. We aim to incorporate new Quality improvement methods and processes to improve the product quality of suppliers, which in turn benefit our production process and quality control. In FY15, the Company started a Quality drive focused on 15 suppliers and achieved significant improvements at their end. The initiative is a win-win proposition for both Sona Koyo and its suppliers. Adoption of this practice improved the Company's delivery performance to its customers. It also reduced supplier rejection by 55% and cut down Line complaints by 25% at Sona Koyo due to child parts. In addition, the Company holds monthly meetings with all key suppliers to improve the reliability of supplies. The SIT team aims to work with 40 suppliers in the next year to further improve the Quality and Delivery performance.

The Company has also appointed technology-wise commodity managers for key technologies. These Techno Commercial Managers will work on aligning the supplier capabilities with regard to future requirements of Sona Koyo.

TRAINING & DEVELOPMENT AND HUMAN RESOURCES

We believe that our employees are integral to our success. Hence, we continue to invest in various HR programs and in training employees to enhance employee morale and engagement, and to raise productivity levels. The Company organizes training for shop floor supervisors at the Sona Skill Development Centre (SSDC) that aims to improve the problem-solving capability of junior managers and make them ready for taking on senior roles in the organization.

During the year, the HR department also organized an assessment program for the top 45 employees in the organization resulting in recasting of a few key roles, aimed at driving growth over the next three to five years. The study involved an external consultant identifying key talent in the organization, their strengths and areas of improvement, and more importantly, allocating the right job to the right person. The Company attaches the greatest importance to feedback from employees and continuously works towards being an 'Employer of Choice' for our people.

Based on the feedback, we undertook a study to rationalize the salary structure in the organization, which maximizes both monthly take home and retirement benefits. The inputs of the study will be deployed in FY16.

INFORMATION TECHNOLOGY

We are focused on adopting technology to make Sona Koyo a more agile business, responsive to the changing external environment. During the year, we focused on data security and established a disaster recovery site in Hyderabad. It is a hybrid disaster recovery site implemented with a data leakage brvention solution. To ensure security of organization data, we have taken various initiatives, such as bespoke solutions for maintenance management, in-transit shipment tracking, manufacturing cost analysis software, and business intelligence for data analysis. In the coming year, we will focus on bringing in digitization in business processes as we believe that digitization will be a key business enabler in the future.

RECOGNITIONS

Recognitions by industry and our customers are testimony to our leadership and commitment to quality. During the year, our leading customer Maruti Suzuki India Ltd (MSIL) lauded us at their supplier meet for superior performance in implementation of Value Analysis and Value

Engineering (VAA/E) as well as localization of Column Assist Electric Power Steering (CEPS) Phase 4.

Achieving indigenization/localization is the need of the hour and customers ask for 100% localization from Day One of new product development. However, due to technical capability constraints certain child parts have to be imported. The customer provides the opportunity to localize these parts since local manufacturing/technical capabilities develop during the product lifecycle. For the year 2014-15, MSIL had set a target of achieving maximum localization in CEPS and MS Gears. The development and implementation of this goal was achieved through teamwork of Team Sona along with MSIL and our suppliers.

Continuous endeavors are being made to achieve more child parts localization in various products like HPS and IMS to get the same recognition from other customers, such as M&M and TKML.

RESEARCH AND DEVELOPMENT

We believe in investing in R&D to achieve sustainable competitive advantage for the future. After successfully deploying the homegrown EPAM technology on customer vehicles, the R&D department is now in the process of upgrading its existing EPAM according to clients' newer requirements. This upgrade of EPAM will facilitate better

communication between the various Engine Control Unit (ECU) ^Vkte and the EPAM unit on a vehicle.

The Company also extended its EPAM ^ technology to the tractor segment by developing TEPAM (Tractor Electric Power Assist Module), especially for Indian Farm Tractors and sports cars. In FY15, we filed an application under the international Patent Cooperation Treaty (PCT) for TEPAM. During the year, we tested TEPAM in the aftermarket and are now set for implementation with domestic OEMs.

Currently, the Company is also working with an international institute as well as Indian partners viz. Council of Scientific and Industrial Research (CSIR) laboratories on development of Advanced Driver Assistance Systems, including autonomous steering.

RISKS AND CONCERNS

The Company is exposed to external and internal risks associated with the business. The operations are directly dependent on the growth of the Indian automotive industry. General economic conditions impact the automotive industry, and in turn, the operations of Sona Koyo as well. To counter these risks, the Company continues to broaden its product portfolio, raise customer profile and expand its geographic reach.

The Company is exposed to strong competitive brssures, both in the domestic and overseas markets. However, our close customer relationships, ability to provide higher quality of engineering, design support and relentless drive for improvement provide us with a competitive Hr edge. The Company is also  rexposed to financial risk from changes in interest rates, foreign exchange rates and commodity prices. The Company additionally faces challenges related to fast-changing technology, reducing life cycle of new vehicles, supply constraints from Tier II suppliers, sustaining cost efficiencies brought into the system and planning capacity expansion in the wake of changing demand patterns.

Risk management is reviewed by the Risk Management Committee. The Committee reviews the Company's management activities on a regular basis in addition to monitoring any new risks that could arise due to changes in the external or business environments. The Risk Committee met twice during FY15. While the possibility of negative impact due to one or more such risks cannot be completely ruled out, the Company proactively takes conscious and reasonable steps, making efforts to mitigate the significant risks that may affect it.

INTERNAL CONTROLS AND ADEQUACY

Sona Koyo has in place systems of internal controls which are commensurate with its size and nature of its operations. These have been designed to provide reasonable assurances 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 with corporate policies. Further, internal audit and management reviews are conducted regularly and reports submitted for review to the Audit Committee of the Board of Directors.

Sona Koyo's Audit Committee reviews all audit reports submitted by Ernst & Young (E&Y), the internal auditors; follows up on the implementation of various recommendations; meets the Company's statutory auditors to ascertain their views on the adequacy of internal control systems; and keeps the Company's Board of Directors informed of major observations from time to time. The Audit Committee met six times during FY15

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