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The Hi-Tech Gears Ltd.


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Series: EQ | ISIN: INE127B01011 | SECTOR: Auto Ancillaries

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Annual Report

For Year :
2018 2016 2015 2014 2013 2012 2011 2010 2009

Chairman's Speech

Dear Shareholders,

As I write my message to you this year, the economic environment seems to be changing almost on a daily basis and the emerging markets are affected most of the volatility. The FY 2018 was eventful and challenging in terms of both the global and domestic scenarios.

I have the pleasure to inform you that your Company has done exceedingly well in many spheres in the previous year, despite a very challenging environment. Firstly, it has both increased and diversified its production capacity through significant capital expenditure in both core and strategic areas to prepare for the future. Secondly, it has proved its excellence in cutting edge innovation and technology to cater to both its domestic and international clients. Thirdly, we successfully reached North America by crossing the geographic barriers through successful acquisition of some entities in Canada and the US.

Global and Domestic Economic Affairs

The World Economy has experienced significant volatility in the past few years and the period under review continued to be very challenging due to numerous such macro-economic factors, some of which are briefly discussed below.

World economic growth strengthened in 2017 to 3.2%, with a notable rebound in global trade. It was driven by an investment recovery in advanced economies, continued strong growth in emerging Asia, a notable upswing in emerging Europe, and signs of recovery in several commodity export countries. The upsurge was more pronounced in emerging market and developing economies (with trade growth rising to 6.4% in 2017), reflecting improved investment growth rates in formerly stressed commodity exporters as well as the recovery.

Global growth is expected to tick the same growth this year and next, supported by similar momentum, market sentiment, accommodative financial conditions, and the domestic and international repercussions of expansionary fiscal policy in the United States.

According to data from the IMF, the United States has the largest economy in the world at $20.4 trillion. China follows, with $14 trillion and Japan is in third place with an economy of $5.1 trillion.

Two European countries take up the next places on the list: Germany is fourth, with a $4.2 trillion economy, the United Kingdom is fifth with $2.94 trillion. It is heartening to note that India has recently surpassed France and has become the sixth largest economy with around a strength of $2.90 trillion.

The US Economy constitutes & occupies the first slot in world business and dominates the growth of the world economy. I will give my take on the US Economy and other economies in the below paragraphs.

The US Economy has continued to grow steadily, perhaps not as fast as some would prefer but swiftly enough to continue to create jobs at a significant rate. Business investment is slowly picking up, and financial conditions appear good, with market volatility measures unusually low. It grew 2.4% in 2017, mostly because of the major tax reforms announced by the Trump Government. The Economy will enjoy a mild cyclical rebound in 2018, & then return to a marginally average growth but jobs are increasing at a moderately good pace, with unemployment below record at 4%. The strongest part of the US GDP reports has been consumer spending, up 3.8 % over the past 12 months, resulting in a minuscule drop in the savings rate. Consumer attitudes are stable at a good level, a bit above the long-run average.

On the other side, the exceptional domestic momentum has so far been unmarred by signs of moderate growth in key trading partners. Although recent tariff measures will likely have minimal impact, the increasingly likely escalation of the dispute with China into a trade war is a major downside risk, which could weigh on business sentiment and investment. Faster monetary policy tightening, and high fiscal deficits may further dampen growth in the medium-term.

Emerging Asia, which is forecast to continue growing at about 6% in 2018, remains the most important engine of global growth. In China, growth is projected to soften slightly from 6.8 % in 2017 to 6.6 % in 2018 and 6.4 % in 2019. Over the medium term, the economy is projected to continue rebalancing away from investment toward private consumption and from industry to services. Today the Chinese economy is the second largest in the world and it experienced massive growth in the last many years. To avoid overheating the economy, authorities are conducting a managed slowdown, which has seen growth gradually slow down year after year since 2014.

At the domestic front, growth in India is projected to increase from 6.6 % in FY 2018 to 7.4 % in FY 2019 and 7.8 % in FY 2020, lifted by strong private consumption as well as fading transitory effects of the currency exchange initiative and implementation of the national goods and services tax. Over the medium term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivize private investment.

From 2003 to 2007, India experienced high growth rates of around 9% annually before moderating in 2008 as a result of the global financial crisis. In the following years, India began to see slow growth due to international slowdown, a plunging rupee, a persistently high current account balance and slow industry growth. However, the economy has since bounced back as the stock market has boomed and the current account deficit (CAD) has decreased.

With the same growth expected, India is projected to overtake the UK economy in 2019 to become the fifth largest economy in the world with a nominal GDP of around USD 3 trillion.

India’s per capita income grew at a marginal pace of 8.6% to Rs 1,12,835 during the current fiscal compared to Rs 1,03,870 in FY 2017. Foreign exchange reserves also touched the highest ever level of about US $ 426.08 billion and the total FDI Investments India received in FY 2017-18 was US $ 61.96 billion compared to US $ 60.1 billion in the previous year indicating a nominal increase of 3%. This also indicates that the government’s effort to improve ease of doing business and relaxation in FDI norms is yielding results.

However, since the previous year, the price of Indian basket of crude surged from around US$ 60 a barrel to US$ 78. This, along with an increase in other global commodity prices and recent global financial market developments, has resulted in a firming up of input cost pressures. On the other hand, food inflation has remained muted over the past few months and the usual seasonal pickup delayed, softening the projections in the short run.

To add more woes, India’s crude oil production has fallen continuously for at least six years in a row. The crude oil production, which was 38.1 million metric tons in FY 2012, slumped to 35.7 million metric tons provisionally in FY 2018, hence we have to spare more funds to buy oil from overseas. Besides adversely impacting the economic growth and inflation, persistent high oil prices remain a key risk to the CAD.

China and the US are spiraling into an ever-worsening conflict over trade, as each side threatens to slap retaliatory tariffs on hundreds of billions of dollars worth of goods. The US has announced tariffs on Chinese products from steel to electronics, and China has hit back with tariffs on American products from cars to seafood. President Trump argues that the tariffs are a necessary response to unfair Chinese trade practices, including the theft of intellectual property from American firms. China denies the accusations. A full-blown trade war would damage both economies and could spill over to other countries & regions, including India, South Korea, Japan and Europe.

The tariff war led by the US has also given rise to concerns of safe haven fears. This has led to outflow from emerging markets (Ems), including India. So far this year, around $7 billion of funds have flowed out of India.

The rupee has hit historic lows against the dollar in recent weeks, leading to widespread expressions of concern about what that means for the Indian balance of payments and the economy more generally. In my view, some of these concerns are exaggerated, and there is no need to panic. India’s external accounts look far more secure than it used to be. The current account deficit, too, remains manageable. While so far the merchandise trade deficit has been adequately financed in part by payments for service remittances as well as strong capital inflows. Further, it is worth noting, thus, that the Indian rupee’s depreciation is not out of line with what can be observed to be happening with many emerging market currencies.

Yet the consequences of rupee depreciation need to be thought through carefully. This might hamper the growth recovery in short run and worry about the trade deficit and widening CAD.

Indian Automotive Sector and our Future Outlook

The Indian automobile industry is closely linked to the country’s Gross Domestic Product (GDP) growth and accounts for 7.1% of the GDP. It also contributes to nearly 22% of the country’s manufacturing GDP. The industry is one of the largest in the world with an annual sales of 29.01 million vehicles in FY18, registering a growth of 14.48% over the last year. The automobile sales in India have grown at a compounded annual growth rate of around 14.22%, average 25 million vehicles in a year, over the period of FY11-FY18 and has become the fourth largest in the world. India is currently the sixth largest market in the world for cars and is expected to become the world’s third-biggest car market by the year 2020. Other facts about the Indian automobile market achievements are that this is the largest tractor manufacturer. It occupies the position of the 2nd largest two wheeler (2W) and bus manufacturer.

The automobile industry is supported by various factors such as availability of skilled labour at low cost, robust R&D centres and low cost steel production. The industry also provides great opportunities for investment and direct and indirect employment to skilled and unskilled labour. At the same time, in order to keep up with the growing demand, several auto makers have started investing heavily in various segments of the industry during the last few months. The industry has attracted Foreign Direct Investment (FDI) worth US$ 209 billion in the last few years.

The Two Wheeler segment dominates the market in terms of volume owing to a growing middle class and a young population. Another important milestone is that the premium motorbike sales in India crossed one million units in FY18. Moreover, the growing interest of companies in exploring the rural markets further aided the growth of this sector.

India is also a prominent auto exporter and has strong export growth expectations for the near future. Overall automobile exports from India grew at 6.86 per cent CAGR between FY13-18. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the two wheeler and four wheeler segment in the world by 2020.

The auto industry is set to witness major changes in the form of electric vehicles (EVs), shared mobility, Bharat Stage-VI emission and safety norms.

Just few days ago, a news item appeared in a leading newspaper, which demonstrated that not only the Automobile manufacturers, but the component suppliers are also flourishing because of the booming automobile growth. Traditionally, promoters of original equipment manufacturing companies (vehicle makers) have figured in the list of automobile billionaires. However, growth of this industry is now bringing newer faces from the auto component sector. Based on the value of shareholding of promoters in these companies they are now worth over $1 billion.

A lower base in the previous year’s quarter and likely good results select companies in sectors such as automobiles, capital goods, FMCG, IT and metals should help the Nifty 50 companies to report a double-digit growth in aggregate sales and profits in 2018-19.

Company Performance and Strategy

After the successful acquisition of some entities in Canada and the US, your Company is no longer confined only to its domestic manufacturing facilities, but has made its presence felt globally. Your Company is confident that exposure to a global environment will lead to strong growth opportunities. In the years to come your Company plans to further expand its Global presence in new areas, always keeping the customer requirement at the centre of its growth plans.

All possible steps are also being taken within the organization to maintain and further improve operating standards and achieve excellence at every step. As part of our strategy, the company continues to give special attention to maintain a strong Balance Sheet and healthy financial ratios, as you will see in the attached audited statements.

Your Company has made its mark as a leader of sustainable manufacturing. Our state-of-the-art Plants are operating to their capacity now while minimizing wastes and pollutants. This phenomenon has attracted several recognitions from the top assessing agencies, which are enumerated elsewhere in this Annual Report. Therefore, your Company is today a respected name in the industry for its competitive and cutting-edge products, which is a result of its farsighted vision and policies. To summarise the financial results for the year FY 2018,

I must mention that there was significant growth in all the key areas; resulting the robust growth was demonstrated. The total turnover of the Company grew by 17.62 % and touched Rs. 55157.06 lakhs. As a result of this and our enhanced operating efficiencies, the profit before tax grew even higher to Rs 4838.74 lakhs and the profit after tax stood at Rs. 3191.24 lakhs. While consolidating the financials of the Company with the subsidiary Companies in the US and Canada, the consolidated total turnover stood at Rs. 77949.10 lakhs .The Company has shared the gains among the shareholders by declaring an interim dividend of 15%. Your Board of Directors have further reviewed the cash position of the Company and have recommended a final dividend of 20% for your approval, thus taking the total to 35% of share capital with a payout of Rs. 656.88 lakhs.

The vedic philosophy of “Sarva loka Hitam” i.e. “the well being of all”, has regained importance in the current business environment. CSR is one of the noble practice of doing “Hitam”. We have been taking up deep impacting initiatives in line with, what is required to be done as a responsible citizen of the Society. To exhibit the commitment your Company has contributed Rs. 62.47 lakhs in the betterment of the society during the FY 2018 which is in line with the CSR Regulations. Similarly, to show our commitment towards a Clean Environment and green manufacturing, our ECOFAC Plants have been awarded the Platinum level of certification by the Green Building Council.

Before concluding, I would like to place on record my sincere gratitude to the entire Hi-Tech family for their dedicated and relentless hard work in the year that has gone by to enable the Company to achieve the success that it has despite all odds. My sincere thanks to all our customers, our supply chain partners, our bankers, and my Board colleagues for their wise guidance from time to time. I am confident that this journey will continue to be equally exciting and rewarding as we move ahead.

Deep Kapuria