MANAGEMENT DISCUSSIONS AND ANALYSIS REPORT Economy Overview In the wake of a new Central Government, higher spending on gross capital formation, falling inflation, lowering interest rates and crude oil price compared to the brvious fiscal year, some sectors of the economy have started showing signs of revival and higher growth. Both fiscal and current account deficits remained relatively stable, which contributed to growth. As adjusted for a methodological revision in India's GDP calculation, GDP for fiscal 2014 increased by 6.9% (compared to a brvious estimate of 4.7%) and GDP for fiscal 2015 increased by 7.3% (compared to a brvious estimate of 5.5%). Industry Review The Indian automobile industry is finally seeing an uptick in sales. Fiscal 2015 numbers reveal all vehicle categories other than commercial vehicles are in positive territory and passenger car sales have returned to the black after three years. Riding on the back of a gradual uplift in market sentiments, excise duty cuts and the opening up of the mining and infrastructure sectors, the Indian automotive industry posted an overall growth of 8.68% in fiscal 2015, marking an improved performance over the fiscal 2014. The industry produced a total of 23 million vehicles including passenger vehicles, commercial vehicles, three wheelers and two wheelers in fiscal 2015 as against 21 million in fiscal 2014, registering a growth of 8.68% over the same period last year. The sales of passenger vehicles grew by 3.90% in fiscal 2015 compared to the brvious year. Within the passenger vehicles segment, passenger cars and utility vehicles grew by 4.99% and 5.30% respectively. [Source: Society of Indian Automobile Manufactures ("SIAM")]. With the Government's 'Make in India' initiative boosting manufacturing and moderate growth in GDP, spurring industry, commodity prices under control and growth in industrial activity visible, all being indicators of a positive outlook, the Indian auto sector is set for a better ride this fiscal. Business Overview PPAP Automotive Limited ("PPAP") is the principal manufacturer of Automotive Sealing Systems, Interior and Exterior Injection Molded Products. The Automotive Sealing system product range includes Outer Belt Moulding (Black type / Bright type), Inner Belt Moulding, Windshield Moulding, Roof Moulding, Quarter Window Moulding, Air spoiler, A-Pillar Garnish, B-Pillar Garnish, Body Side Protector and Skirt Air Damper etc. The Company introduced new technologies viz. Bright Stainless Steel type Outer Belt Moulding and Slide Rail Component to meet the demands of its customers for the passenger car segments. The Company also manufactures Injection molded products like Door Trims, Interior Pillars, Rear Parcel Shelf, Trunk Linings and Fender Inner etc. During the year under review, the Company successfully commenced commercial production at the new plant established in Pathredi region in Rajasthan. PPAP is a key supplier to major automotive manufacturers in India. Some of the brstigious manufacturers like Maruti Suzuki India Limited, Honda Cars India Limited, General Motors India Private Limited, Toyota Kirloskar Motor Private Limited, Renault Nissan Automotive India Private Limited, Tata Motors Limited, Ford India Private Limited and Mahindra and Mahindra Limited along with the OEMs. The Company also caters the requirements of their respective Tier 1 suppliers. The Company has technical collaboration with Tokai Kogyo Co. Limited, Japan, for Automotive Sealing System and Nissen Chemitec Corporation, Japan, for Injection Molded Products. The Company also has a Joint Venture with Tokai Kogyo Co. Limited, Japan for manufacturing EPDM Rubber based Sealing System with products like Opening Trims, Hood Seals, Door Weatherstrip and TPV Glass Run Channels. Outlook With economic recovery expected in 2015, demand for automobiles across the various categories is likely to receive required impetus. While sales growth in commercial vehicles and passenger vehicles are expected to enter the positive trajectory, growth would accelerate in the two-wheeler and three-wheeler segments, driven by expected moderation in interest rate, fall in ownership cost and improvement in economic activity and consumer sentiments. The Indian component industry has an opportunity for significant growth in this decade as the projected high vehicle production levels, across segments, will generate growth in demand for components.The passenger vehicle production is estimated to grow at 14% till 2020. This growth largely be driven by the small car segment as India is expected to become a global hub for producing small cars. Awards & Recognition PPAP is a key supplier to major automotive manufacturers in India. The Company continued its track record of superior performance with its customers. The efforts were recognized by its esteemed customers. The Company received the following awards from its customers: > "Certificate of apbrciation for Superior Performance in the field of special support" by India's largest car manufacturer Maruti Suzuki India Limited. > "Silver award for Delivery" by Honda Cars India Limited. > Certificate in apbrciation of "Best Eco Kaizen" and "Our commitment to work together in brserving our environment" by Toyota Kirloskar Motor Private Limited. Opportunities and Threats Opportunities Over the next decade the global demand for vehicles and components will be driven by the emerging markets accounting for over 50% of global light vehicle production. Key markets driving this growth would include the BRIC countries Brazil, Russia, India and China along with other emerging markets such as Thailand and Mexico. Lack of strong demand and underutilization of capacities in the mature Triad markets will result in continual pricing brssures for the OEMs and the component manufactures. India is expected to witness strong growth in vehicle production till 2020 across all segments. The domestic automotive industry has been growing at imbrssive rates and is expected to witness strong growth in vehicle production till 2020 across all segments. Achievement of these production volumes will position India as one of the top 5 vehicle producing countries in the world. The vision of AMP 2006-2016 sees India, "to emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion; accounting for more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016." The Indian passenger vehicle market is expected to produce four million vehicles annually by the year 2020. Threats Domestic Indian companies have developed strong manufacturing capabilities that have helped them in keeping costs low and quality under control. As volumes increase, Indian component manufactures will have to scale up their operations and further improve quality, cost and delivery performance to global standards demanded by customers. Till now, Indian entrebrneurs have successfully managed the evolution of the Indian component industry. Larger scale will require major changes in organizational structure and levels of decentralization. Robust internal controls and scalable business processes need to be put in place. These new capabilities should be implemented such that the organization retains its entrebrneurial culture while being able to manage large scale operations. Many organizations need new talent to set up professional management teams. A number of areas would need to be addressed, some immediately by the Indian Components players as they need to: • Raise capital - balance sheets have to be strengthened and investment strategies need to be defined; • Scale capacities - manage cost and flexibility of new assets; • Build Research & Development competence, build / enhance product development, design and engineering capabilities, incorporating frugal engineering elements; • Develop organizations to manage sufficiently increased complexity and risk; and • Attract talent - both management and skilled labour. On this part the Indian government needs to provide long-term stable policies to create a conducive ecosystem in which the large numbers of small and medium companies that make up this industry are able to scale up at the rapid pace. Additionally the government needs to continue its efforts to improve the infrastructure. Outlook The Government of India encourages foreign investment in the automobile sector and allows 100% FDI under the automatic route. Excise duty on small cars, scooters, motorcycles and commercial vehicles was reduced in February last year to 8% from 12% to boost the 'Make in India' initiative of the Indian Government. Some of the major initiatives taken by the Government of India are: • The Government plans to promote eco-friendly cars in the country i.e. CNG based vehicle, hybrid vehicle and electric vehicle and also made mandatory of 5% ethanol blending in petrol. • The Government has formulated a scheme for Faster Adoption and Manufacturing of Electric and Hybrid Vehicles in India, under the National Electric Mobility Mission 2020 to encourage the progressive induction of reliable, affordable and efficient electric and hybrid vehicles in the country. • The Automobile Mission Plan for the period 2006-2016, designed by the Government is aimed at accelerating and sustaining growth in this sector. Also, the well-established regulatory framework under the Ministry of Shipping, Road Transport and Highways, plays a part in providing a boost to this sector. Risk and Concerns The Company is operating in the business of automotive components and the performance of auto component industry is largely dependent on the performance of automobile industry. Safety standards norm continue to put brssure on improving the technology level requiring enhanced investment with attendant increase in product cost. The Company is also exposed to various internal and external risk like financial risk, operational risk, technological risk, marketing risk, quality risk, economic risk, forex risk etc. The Company is also continually developing and launching new and improved products to stay ahead of competition. The Board has established a Risk Management Policy which formalizes to ensure that risks are identified, analyzed and managed effectively. This Policy facilitates management of risks associated with the Company's activities and minimizes the impact due to undesired and unexpected events. At the same time, it ensures that the cost of managing risks, balances with the anticipated benefits. All the Functional Heads under the guidance of the Executive Directors to oversee the Risk Management process including risk identification, impact assessment, effective implementation of the mitigation plans and risk reporting and are accountable for strategic risk management within the areas under their control including the devolution of the risk management process to the operational managers. Growth The domestic automotive industry has been growing at imbrssive rates and is expected to witness strong growth in vehicle production till 2020 across all segments. Achievement of these production volumes will position India as one of the top 5 vehicles producing countries in the world. The Indian Component industry has an opportunity for significant growth in this decade as the projected high vehicle production levels, across segments, will generate growth in demand for components.The passenger vehicle production is estimated to grow at 14% CAGR till 2020. This growth would largely be driven by the small car segment as India is expected to become a global hub for producing small cars. Financial Performance i. Total Revenue The Company's total revenue has increased from Rs. 255.11 crores in fiscal 2014 to Rs. 322.64 crores in fiscal 2015 registering a growth of 26%, outpacing the Industry growth of 3.9% (Passenger vehicles only). The Company has been growing at a CAGR of 13.57% for the past 5 years.The Company continues to secure the orders for new models being developed by its customers. The Company also continues to focus on enhancing its product portfolio for each passenger vehicle. The Company is also focusing on increasing its brsence across all passenger vehicle manufacturers. ii. Profit and EBIDTA margin The Company's Profit before Debrciation, Interest and Tax (PBDIT) increased from Rs. 36.27 crores in fiscal 2014 to Rs. 44.50 crores in Fiscal 2015, registering a growth of 23%. Although the EBIDTA margin for the fiscal 2015 reduced by 0.7% (13.97% in fiscal 2015 from 14.70% in fiscal 2014), the profit after tax (PAT) increased by 120% to Rs. 12.02 crores in fiscal 2015 (from Rs. 5.45 crores in fiscal 2014). The Company's management continues to focus on improving the overall efficiencies of each operation of the Company. iii. Earning Per Share (EPS) The Company recorded an EPS of Rs. 8.59 per equity share of Rs. 10 each on 14,000,000 Equity Shares, an increase of 120.25% compared to brvious year. Internal Control System and their adequacy Your Company has adequate systems and processes of internal controls which are commensurate with its size and nature of operations. They have been designed to provide reasonable assurance with regard to recording and providing reliable financial information, complying with applicable statutes, safeguarding of assets, authorization of transactions and adherence to the Company's policies and practices. The internal controls and governance process are duly reviewed for their adequacy and effectiveness through periodic audits by independent internal audit function. The summary of the Internal Audit observations and status of implementation are submitted to the Audit Committee. The status of implementation of the recommendations are reviewed by the Audit Committee on a regular basis and concerns, if any, are reported to the Board. Respective functions have also been trained and equipped to enable continuous monitoring of exceptions by themselves to reduce surprises and enable corrective action on timely and regular basis. Human Resources Your Company believes that its People are its most valuable assets. To keep them motivated, your Company provides a challenging and remunerative work environment that encourages high performance, ownership and team work. Your Company believes that a winning culture is essential to its success. This begins with the way employees are treated, protecting their health and safety, rewarding their performance, developing their potential, seeking their counsel and promoting diversity and inclusiveness. To support this, the Company has established the principles of good labor standards, equal opportunity for employment, ethical work environment, respect and health, regard for diversity and believes in following a code of conduct in order to further cultivate a culture of social responsibility at all levels. As on 31st March, 2015, the Company had 911 employees on its rolls. Due to the continuous focus on development of people's knowledge, attitude, skills and habits, the Company's attrition rate of 4% is well below the industry average of 15%. Cautionary Statement Certain statements in 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 and actions might differ materially from those either exbrssed or implied. |