MANAGEMENT DISCUSSION AND ANALYSIS Industry Structure and Development and outlook The Company is in the ball and roller bearing business for the requirements of the mobility industry which has Original Equipment Manufacturers (OEMs) accounting for 60% -65 % of the demand while the rest is supplied to the Afftermarket (15% -20%) and Exports (20% - 25%). OEMs comprise domestic and global vehicle manufacturers in the following broad segments: - 2/3 wheelers comprising motor cycles, scooters, mopeds, auto rickshaws (passenger & goods) and industrial 4 stroke engines - passenger cars from small car hatchbacks to luxury models and utility vehicles - commercial vehicles from LCVs,MCV/HCV to buses - farm equipment and off highway vehicles including forklift trucks and construction equipment - railway locomotives. - defence vehicles including gun carriers and tanks As a young nation, India needs multi nodal mobility solutions: personal mobility, urban mobility, inter- urban mobility- new vehicle models are being constantly introduced, there is expansion of the public transport systems, dedicated freight corridors for movement of farm produce and goods from and to the rural areas. The annual production of the domestic organized sector (as rebrsented under Ball & Roller Bearing Manufacturers Association-BRBMA) has grown by 14% at Rs. 5150 crores for the year 2014-15. Your Company's market share in the domestic organized sector is 13% approximately, Market growth in the Indian mobility industry for both people and goods has a very large potential given the geographical sbrad and size of population- personal mobility is spurred by the increasing disposable incomes and higher rural incomes of an aspirational young population, given the relatively low current penetration while growth in the goods mobility segment is being driven by the need to establish strong supply chains between producers and markets. During fiscal 2014-15, manufacturing and industrial activity remained sluggish for the major part of the year as demand did not take off with business confidence remaining low reflecting in low investments and low capacity utilization. With the election of a new government at the Centre, optimism continues even as the overall economy has improved only marginally. Positive actions on reforms, infrastructure and inclusive growth by the government, focused spending on future growth projects is likely to pave the way for a sustainable demand led recovery. The commercial vehicles segment is dependent on activities in mining, infrastructure and logistics. Increased investment and activities in mining coupled with higher logistical requirements from E-commerce sectors augur well for the segment. Railways, one of the lifelines of the Indian economy, now has a clear roadmap of growth - the government's push for dedicated freight corridors, high speed network for both freight and passenger routes, improved safety is expected to increase the spending. With a gradually recovering world economy, government initiatives like 'Make in India', inviting private sector players in defence production, re-opening of mines, coupled with the new governance regime is expected to boost confidence of global investors and act as a catalyst for overall growth in industry. While the long term outlook of the Indian economy remains positive there are some challenges in the immediate short term - falling rural incomes if impacted by a below normal monsoon, high interest rate regime prompted by continuing inflation could dampen demand for 2/3 wheelers and farm equipment, volatility in currency adversely impacting steel prices- could dampen the hopes of a smooth demand-led recovery. Creation of right investment sentiment is key to India's long term sustainable growth with speedy clearances to ensure that industrial growth is fast tracked again. With abilities to consistently deliver quality and reliability at an unbeatable cost position, India has the potential to become highly export competitive country for several goods and services and the Indian bearings industry can be part of this elite group of manufacturers. To meet growing customer expectations, your Company has regularly invested in modern manufacturing technology and has taken a number of initiatives to strengthen its competitive advantage- partnering with customers with a focus on application engineering and R&D to develop advanced products for their new generation vehicles, building processes to ensure high brcision is embedded in all products and quality improvements are a continuing process and exploring ways to minimise waste, reduce costs and increase productivity. During 2014-15, the farm equipment (tractors) and light commercial vehicles witnessed de-growth with demand being subdued. The two wheeler/three wheeler and multi utility vehicles demand saw reasonable growth; while demand for heavy vehicles improved over the brvious year, it continued to be significantly below the levels achieved in earlier years. Tabled below are growth estimates for 2015-16 projected by the Company, after assessing demand forecasts with all major OEMs: Financials Revenue from operations, net of excise duty has increased by 10.28% to Rs.65559 lacs from Rs.59449 lacs in 2013-14. Domestic sales increased by 9.3% to Rs.48773 lacs from Rs.44634 lacs while exports increased by 14% to Rs.15484 lacs from Rs.13585 lacs in 2013-14. Economic Value Addition EVA is residual income after charging the Company for the cost of capital provided by the lenders and shareholders. It rebrsents the value added to the shareholder by generating operating profits in excess of the cost of capital employed in the business Notes: Tax calculation excludes deferred tax and is adjusted for tax shield on interest. Cost of equity is based on cost of risk free return equivalent to yield on long term government bonds @ 7.8% p.a. plus equity brmium adjusted for Company's beta variant. The equity brmium is assumed @ 9% while the beta is considered at 0.5. The Company's EVA, which is a real measure of shareholders' value creation, has improved during the year. Capital employed in the business has gone up with additional borrowings at lower cost mainly by way of foreign currency borrowings, and with yields on long term government bonds having gone down, the weighted average cost of capital has reduced and operating profits having grown with increased volumes. As a result, the EVA has shown improvement. Segment wise Performance Your Company has a single reportable segment of ball and roller bearings as the primary business segment for the purpose of AS17. The assets and liabilities of the Company are all expended towards this business segment. Opportunities and Threats Opportunities - The Automotive Mission Plan I (AMP-I) (2006-16) had envisaged India to become an international hub for designing and manufacturing of automobiles and auto components with output reaching USD 145 billion and accounting for more than 10% of the country's(GDP) and providing employment to 25 million people by 2016.The Indian automotive industry currently accounts for around 7 % of the GDP and employs about 19 million people both directly and indirectly. It is estimated to become the third largest auto market in the world by 2016, accounting for more than 5 per cent of global vehicle sales. Growing to 6 million units annually by 2020 India is poised to become a global production hub. - The Automotive Mission Plan (AMP)II for the period 2016-26 will be finalised by mid 2015 and is expected to lay down an ambitious road map for the industry's growth. Factors like emergence of large automotive clusters in the country, Delhi-Gurgaon-Faridabad in the north, Chennai- Bengaluru-Hosur in south, Pune-Aurangabad in the west and Jamshedpur-Kolkata in east would help fuel growth.Besides, a growing working population and an expanding middle class are expected to remain key demand drivers. - India currently is the second largest two-wheeler manufacturer, the largest motorcycle producer and the fifth largest commercial vehicle manufacturer in the world. India will have to gear itself to changes including electric and hybrid cars, climate change, green consciousness and carbon emissions. - Road infrastructure development has been lagging. Under the 12th Five Year Plan, the Government has reaffirmed its commitment to develop dedicated freight corridors which will give impetus to people movement and to movement of goods by reducing per tonne-km transportation costs.With the consequential linkage to our industry, it should be a big demand booster. - India's arable land is next only to the US' and with productivity levels getting a shot in the arm with technology , micro-irrigation, superior raw materials, cheaper and readily available financing, a boost for farm equipment requirements is imminent - Most of the worlds large vehicle manufacturers have set up base in India and are expanding capacities with a thrust on localisation to improve competitiveness. Your Company has the largest product range in the domestic market and has been investing in technology development and building competencies for skilled based manufacturing. Having won customers' confidence by leveraging innovative ideas, creative engineering and combrhensive manufacturing expertise we are well positioned to take advantage of the revival in demand. Threats - Spurious/ counterfeit product supplies of inferior quality and which are unsafe and unreliable in use, pose a risk to people, to industry and to the economy by way of unexpected downtime, safety hazards and financial losses. These probably account for a fourth of the bearings sold in the replacement market and the problem continues owing to the slow legal process, in spite of industry-wide efforts to thwart the unscrupulous suppliers. In addition to educating users and increasing awareness about the need to use safe sources like the authorized distribution channel, the Company is also working actively to deter the culprits and mitigate its risk by partnering with competent agencies and BRBMA. - Regulatory demands on emission levels and improved safety norms is driving Indian industry to shift their focus on reducing vehicle weight and opt for lower friction technologies. Customers are demanding higher fuel efficiency, improved manoeuvrability, lighter weight, intelligent vehicle control and of course low noise and improved reliability from their vehicles - hence there is need to evaluate alternative propulsion options like the hybrid and plug-in electric cars. Company will need regular investments in R & D, new technology and even new production facilities to meet these requirements. Indian industry will need to capitalize on its competitive advantages of an economical and large skilled workforce for establishing R & D capabilities to leap frog into the future by getting into such hi-tech businesses. - Following the slowing demand in the developed markets of the US and Europe, cheap imports from China and other South-East Asian countries, have put brssure on Indian suppliers to price their products lower and are proving to be a big threat for the domestic bearings industry, as many customers are opting for cheaper imported options. Supply chain readiness and a stronger focus on reducing costs, minimising waste and increasing efficiency of operations are the main challenges to counter the same. Your Company is working continuously to mitigate these threats - leveraging its wide range of products and its Engineering capabilities and priming its sourcing and purchasing capabilities. The Company remains committed towards implementing TPM and investing in sophisticated technology to offer enduring and efficient solutions. Risks and concerns Risk management practices seek to sustain and enhance long term competitive advantage of the Company. The Board of Directors looks at risks which are mainly reputational and where the risk grid shows criticality. For the risk grid, the risks have been listed, then prioritised and ranked in terms of probability and impact- high/moderate/low. Wherever possible, triggers are being identified, even multiple triggers, which would help decide when a risk has become critical - eg. Euro Dollar rate changing to 1.00 or USD INR rate exceeding a specified risk point. The Board also approves the risk policies and associated practices of the Company, reviews and approves risk related disclosures. Otherwise in a normal situation, the operating team would be responsible for all operational risks. At the operating level the core group of the Executive Management team comprising the Managing Director, the Executive Director and Company Secretary, CFO, Heads of Manufacturing, HR and Sales and Marketing, review enterprise risks from time to time, initiate mitigation actions and identify owners for the action to be taken. The following broad categories of risks have been considered : • Strategy : Choices and decisions we make to enhance long term competitive advantage of the Company and value to the stakeholders eg. the Company's shift from bearing related products to becoming a friction solutions provider. • Industry : Relates to the inherent characteristics of our industry including competitive structure, nature of market and regulatory environment. Eg. adding to existing segments, the emerging segments of defence and railways and improving its brsence in the ASEAN region, thus sbrading the risk in terms of geographies. • Counterparty : Risks arising from our association with entities for conducting business. These include customers, vendors and their respective industries. • Resources : Risks arising from sub-optimal utilization of key organization resources such as capital and infrastructure. Eg. risks further broken up into equipment risk and people risk. With insurance covers in place for the equipment, the management of people risks by way of a cordial relationship with the employees and keeping motivation in the plants at a high level. • Operations : Risks inherent to our business operations includes service & delivery to customers, business support activities like NPD, TPM, Quality management, rr,Legal,Taxation eg.plants having detailed plant maintenance and tool manufacturing programs, dedicated teams for managing risks relating to information security (data leakage) and technology disruption risks and constantly researching how new technologies are changing the applications and products . • Regulations and compliance : Risks due to inadequate compliance to regulations and contractual obligations violations leading to litigation and loss of reputation. The business environment changed significantly during the year, with the slowdown in economic growth leading to moderation in demand as the automotive industry, the largest consumer of bearings, has strong linkages with the economy. Also the slowdown in the EU markets have impacted the demand for the companies products in overseas markets. Management of financial risks such as interest rates risk, currency risk and liquidity risk, have come in for increased focus. Various measures were deployed to continuously monitor risks and take appropriate actions to mitigate the same. Internal Control Systems and Adequacy Based on the nature of the business and size of operations the Company has in place adequate systems of internal control and documented procedures covering all financial and operating functions. These controls have been designed to provide for - Accurate recording of transactions with internal checks and prompt reporting - Safeguarding assets from unauthorized use or losses - Compliance with applicable statutes, and adherence to management instructions & policies - Effective management of working capital - Monitoring economy and efficiency of operations Processes are also in place for formulating and reviewing annual and long term business plans and for brparation and monitoring of annual budgets for all operating plants and the service functions. A reputed external audit firm carries out periodical audits at all plants and of all functions and brings out deviations from laid down procedures. The audit firm independently tests the design, adequacy and operating effectiveness of the internal control system to provide a credible assurance to the Audit Committee. The observations arising out of audit are reviewed, in the first instance by the respective HODs and plant/functional heads and compliance is ensured. Further corrective action plans are drawn up to build business processes which will eliminate repetition of deviations. Business risks are managed through cross functional involvement, facilitated by internal audit and the results of the assessment are brsented to senior management. The Audit Committee reviews the recommendations for improvement of the business processes and the status of implementation of the agreed action plan. Human Resource and Industrial Relations Overall relations with the workmen at all plants have been cordial during the year and the Company has contained its employee costs, benefiting from the wage settlements which have linked incentive payments to increase in overall production volumes ( net of rework) and reduction in rejection rates. The primary focus of IR during the current year will continue to be on the engaging, motivating and improving the productivity of blue collar employees. To achieve our stated objective to cross sales revenues of Rs 1000 crores by end 2017, we at NRB continue with our people approach to harness employee potential and encourage team work. We have multi phased training programs imparting understanding of bearing and engineering principles, diverse bearing applications, modern manufacturing practices, lean management and quality management and in behavioural aspects and providing an understanding of the Company's customers and markets. Besides developing knowhow, they also serve as a platform to interact with peers from diverse backgrounds and sbrad the values of togetherness, positive thinking and mutual respect. We continuously aim to provide career development and growth opportunities to our people through our Talent Management Process. It provides dual opportunities for people to grow in the managerial and technical capabilities aligned with their career aspirations. We continuously encourage our people to broaden their horizons and fulfill their potential via a wide and varied range of learning and development opportunities be it class room, on the job or experiential. SPEED : System of Performance Evaluation and Employee Development, the framework for Individual Development Planning, Career and Succession Planning maps employee competence with current and future needs of the organization and forms the basis for developmental interventions. This is being continuously improved upon to enable building a bench strength of talented future leaders of tomorrow. Permanent employees directly employed by the Company currently total 1622 nos. Cautionary Statement Statements in this Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may constitute 'forward looking statements' within the meaning of applicable laws and regulations. Actual results may differ materially from those either exbrssed or implied. |