Risk Management

Managing threats with utmost prudence

We have an all-pervading risk management system (RMS) to ensure timely identification of risks, analysing the mitigation plan in existence to overcome the risks and identifying potential areas of improvement to combat any adverse impact on the Company’s business continuity and value creation. Risks are inevitable, as we operate in a dynamic environment. However, by implementing RMS we safeguard and protect our earnings and assets.

Organisation and assessment

RMS is driven by our Board of Directors, ably supported by the Risk Management Committee (RMC), constituted as per the provisions of the Companies Act. Details of RMS are set out in a risk management policy, which is made available to the employees responsible for the risk management function and is binding. It contains a description of the process, the allocation of responsibilities, and the structure of the risk assessment and reporting thereof.

Under RMC’s guidance, Risk Management Working Group (hereinafter ‘RMWG’) operates. It is an interface between various functions/divisions of SIL and RMC of SIL’s Board. While on one hand it monitors, reviews and guides productive implementation of risk management at SIL, on the other hand it provides valuable feedback to RMC.

Risk assessment is carried out in a hierarchical format, with a bottom-up approach. The process owner of each risk area assesses the risk, evaluates its impact on our earnings and assets and describes the mitigation plan in existence to offset adverse impact thereof. If such a mitigation plan is inadequate, future measures are identified for implementation. RMWG analyses the risk assessment so done and provides its inputs for further safeguarding of the assets.

The value-added report is presented by RMWG to RMC for review. The RMC annually reports to the Board of Directors, which ensures they are continually updated on the current risk situation of the Company.

Structure of risk management system

Risk assessment matrix

We have an all-pervading risk management policy and adopt both top-down and bottom-up approach. Risk assessment is done with a two-dimensional approach - amount of damage each risk can have on an annual basis and its probability of occurrence. Based on the damage each risk is classified as very low, low, medium and high. Probability of occurrence is assessed using percentages and is classified as improbable, possible, probable and highly probable. The combination of estimated amount of damage and probability of occurrence determines the risk class, which can be low, medium or high based on its impact on net assets, financial position, and earnings.

Each risk is evaluated at two stages – before and after putting risk mitigation measures, referred to as gross and net valuation, respectively. Risks, based on net valuation, are assigned to various risk classes using the risk matrix.

Classification of risks

Risks are divided into strategic, operating, legal and financial risks and are described in decreasing order of the magnitude of their impact on the next assets, financial position and earnings of the Company.

Risk Key risk Risk description Mitigation measures Risk class Capitals impacted

Strategic risks        
  Geographic Changes in the social, political, legal or economic stability within or outside the country could hamper our regular operations or planned future expansion. Changes in the political and regulatory environment of markets, in which the Company operates, could have an impact on its net assets, financial position, and earnings. During the year 2021, we were partially affected by the second wave of COVID-19. However, during the latter part of the year, it recovered well to reach higher milestones. The socio – economic – political risks are mitigated with continuous observations of the developments in the relevant business environment and taking appropriate actions in terms of changes in strategies to protect the interest of the Company. Several cost containment measures were identified and implemented in material, employees and process expenditure to overcome the loss arising out of pandemic.

  Strategic market and technology There are transformative changes forecasted in the marketplace like reducing diesel penetration, stricter emission norms, potential electrification of vehicle powertrain and so on. Customers are increasingly looking for bundled offering of products and services. On the manufacturing side, we currently rely on a certain degree of vertical integration and comprehensive production expertise that facilitate improvements in the production process and ultimately safeguard our ability to maintain its competitive position in the market. The evolution of our business from being component-driven to more systems-based could reduce the proportion of value added by our organisation. We are taking a variety of measures to address these trends. We are focusing on development of new evolving technologies and offerings. It is strategically enhancing its production system to be more modular and aiming towards ‘Factory for Tomorrow’. An e-mobility division is dedicated to work on e-mobility solutions for motor and various control modules. We are constantly improving efficiency to safeguard and further expand our market position.

Operational risks        
  Market developments As the Company is a supplier in the automotive and industrial sector, demand for its products is, to a large extent, driven by macro-economic conditions. Besidesthese, in the Automotive OEM division, demand is also affected by changes in consumption patterns, fuel/commodity prices, availability of key components, interest rate levels and so on. Cumulatively put together these factors lead to significant volatility in automobile production, which makes exact sales forecasting more difficult. Sales in industrial division is spread across diversified business fields and no significant risks are identified in these markets. A change in forecasted market trends could have an impact on the net assets, financial position, and the earnings of both Automotive and Industrial markets. Markets are analysed on an ongoing basis to detect changes in market structure or regulations early on. We use managed cost efficiency programmes to reduce the amount of damage, flexibly and dynamically from unexpected market slowdowns. Should prices increase unexpectedly, the amount of damage arising from the risk is reduced by re-negotiating with customers as much as possible.
  Delivery performance The ability to deliver represent a key competitive factor for a long-term relationship of trust with customers; this competitive factor is being constantly enhanced by systematic improvements in production and delivery logistics. Inability to meet contractual delivery dates could have an impact on the financial position and earnings of our Company We have built high-performance distribution centres aimed at improving market supply and delivery performance with strategic logistics locations. Component sourcing options and capacity of critical production lines are being enhanced. Alternate material/source is identified for cost optimisation and uninterrupted supplies.

  Procurement Procurement risks arise mainly due to raw materials price fluctuations, ability of suppliers to deliver quality products in time. Adverse fluctuations in market prices and/or supplier’s financial distress could have an impact on the Company’s financial position and earnings. There is constant threat emanating from global supply chain disruptions and import restrictions due to government policies. We ensure optimal supply of goods and services, focusing on quality, cost and delivery performance. Multiple product sourcing and localisation options are continuously explored. By negotiating prices and utilising economic synergies, we are largely able to obtain competitive prices. We keep a close watch on the operations of its suppliers, by deploying dedicated personnel performing quality checks, for early signs of distress so that interventions can be made to secure its interests. Representations are made to government to ensure timely clearance of import consignments.

  Information Technology (IT) The importance of the IT systems utilised across various functions in the Company is growing. The operability of business processes and, therefore, the continuity of operations depend on the availability of IT systems. Three protection targets – confidentiality, integrity and availability – steer the Company’s IT security management and protection of data and IT systems. Unauthorised access to IT systems, modification and misappropriation of sensitive business data could have an impact on the Company’s net assets, financial position, and earnings. We have the highest standards of IT security systems and are constantly upgrading our IT security infrastructure. It educates/ trains its employees on IT security and what precautions the users should take, to ensure that the IT infrastructure and business data are adequately protected against any possible IT risks.

  Information or cyber security The prevalent threat of cyber-attacks remains an area of concern in an increasingly digital space. Cyber security risk is an important and continuous focus for us. We devote significant attention and resources to protect and improve the security of our computer systems, software, networks and other technology assets. Nonetheless, cyber-attacks/ breaches pose a significant threat to the protection of our intellectual property, and that of our business partners, from theft, loss, unauthorised disclosure, and illegal access or misuse.
Given the increase in both the frequency and sophistication of such attacks, the possibility of cyber attacks/breaches cannot be entirely ruled out and could have an impact on our net assets, financial position, and earnings.
Cyber security initiatives have been implemented to mitigate potential incremental security threats from possible security risk exposures. We reinforced and scaled up the internal environment to ensure the network is secure and healthy. To mitigate cyber security risk, we put in place a robust information security policy based on the ISO/IEC 27001 standard and taking into account sector-specific regulations. Procedures and other IT security specifications supplement our information security regulations. Several technical measures have been established for any illegal intrusions and to mitigate the risk of cyber-attacks and secure data thefts, which also includes monitoring the networks for cyber threats through Security Operations Centre (SOC) to detect and respond to cyber security events. We will continuously buttress our cyber security defences and place responsible guidelines along with security controls to strengthen our security roadmap in managing risks in data, IT systems and cyber security across the Group businesses.

  Production As our manufacturing facility is capital-intensive, a large proportion of its costs are fixed. As a result, decrease in utilisation of plant capacity leads to under absorption of costs and, thereby impacts its earnings adversely. Moreover, influence of force majeure could result in delays or interruptions of production and supply chain, leading to non-fulfilment of market demand. The period between failure at plant and arrangement from alternative source could impact the Company’s net assets, financial position and earnings. During the year 2021, we were partially affected by the second wave of COVID-19. However, during the latter part of the year, it recovered well to reach higher milestones. We regularly review market conditions and align our production plan accordingly, where necessary alternative source can be realised from another plant within Schaeffler Group. Maintaining safety stock helps reduce losses. To minimise the probability of occurrence of unplanned interruptions, we take extensive fire prevention measures. Several cost containment measures were identified and implemented in material, employees and process expenditure to overcome the loss arising out of the pandemic.
  Loss of market share We face competition in every field of our operations. As a result, we are exposed to dual risk of either being displaced by existing or new competitors or its products being replaced by product innovations or new technological features. Customer dissatisfaction on price, quality, delivery performance and design could lead to loss of market share. We ensure close cooperation with our key customers on product development. It has implemented strict product quality controls to reduce the likelihood of substitution. We are also developing products, which will help us step up the value chain from components to systems. We are expanding our local footprint to comply with local content requirements under ‘Make in India’ programme of government.

  Warranty and liability We are known for our high standard of product quality. We leverage a certified quality management system besides continuously striving to improve quality processes. Notwithstanding these, there is a risk that poor quality products get delivered. Usage of defective parts can lead to damages, unplanned repairs or recall on the part of customer, which can result in liability claim or reputation damage. We respond to such risks by adopting strict quality control measures and continually improving its production processes to minimise the probability of warranty and liability risks materialising. Adherence to quality standards is strictly implemented. All product and recall liability risks are insured.

  Product piracy Our product brands – INA, LuK, and FAG are associated with best-in-class standards of quality, durability and reliability, making them increasingly susceptible to product piracy. We protect our intellectual property by making by special markings on products, which makes counterfeiting difficult. Secondly, we follow a strict vigilance process to ensure timely detection of counterfeiting instances and initiation of legal actions against the offender. Moreover, digital anti-counterfeit app is regularly upgraded to support these initiatives. We are further evaluating other technology driven initiatives to overcome this risk.

  Pandemic Although intermittently, the pandemic continued its impact on people well-being in 2021. The impact was largely subdued due to efficient vaccination drive initiated by the Indian government, right from beginning of the year. Due to virus mutations, still future implications and duration of the pandemic cannot be predicted. These may have an adverse impact on our regular operations and sales. We are closely monitoring the course and implication of pandemic to take targeted measures in safeguarding our profitability and liquidity position. Several cost containment measures are identified and implemented to overcome the loss arising out of pandemic. Keeping human well-being first, several measures are implemented by us like work from home, pandemic insurance, assistance in vaccination and hospitalisation, if needed, dividing plants into cluster zones, among others.

Legal risks        
  Compliance As a Company with operations at different locations, we comply with laws and regulations across the country. It is possible that violations of any existing law occur, despite careful observance of such legal requirements. We have in place a comprehensive Compliance Management System, wherein laws and regulations applicable to us are mapped. Each compliance requirement is mapped to relevant process owner. The system sends alerts and reminders to each process owner to enable him to comply with the requirements in a timely manner. Our management regularly reviews a comprehensive compliance report. The system is also updated regularly to capture regulatory changes and amendments.

Financial risks        
  Tax We are subject to tax audits. Tax authority’s interpretation of the tax law or of relevant facts made in current or future tax audits may differ from us. This may lead to adjustments to tax base and increase in the tax liabilities, as additional tax payment because of an adjustment to the tax base could have an impact on the Company’s financial position. We extensively evaluate corporate tax and international tax, both internally and with external tax experts, before implementing within the Company. The implementation strategy is well documented, reviewed periodically and amended as necessary.

  Pension We have pension obligations towards our employees. Such obligations are measured using actuarial valuation based on assumptions with respect to the discount rate, increases in personnel payments and statistical life expectancy. Planned assets are invested with external agencies, which are subject to fluctuations in value. A change in these parameters could have an impact on our net assets. We use government bond rate as discount rate and invest in pension fund with a Government of India enterprise (LIC). Quarterly actuarial valuation is carried out, adequate provisions are established in books of accounts and annually funds are appropriately transferred to LIC.
  Currency We are exposed to currency risks due to our cross- border transactions. The largest currency risks from operations result from fluctuations in the USD and Euro exchange rates. We have INR as the inter-company invoicing currency with German entities. This leads to substantial reduction in our foreign exchange exposure and nullifies currency volatility impact. Additionally, we have a a structured hedging strategy to counter currency risks. The strategy is followed consistently and reviewed periodically.
  Liquidity The risk that we will not be able to meet its payment obligations when due is referred to as liquidity risk. Such risks can arise if financing needs cannot be met by existing funding arrangements, including surplus cash balance. Even though we are cash surplus and does not expect any liquidity risks, it has put efficient liquidity management measures to mitigate associated risks. We monitor liquidity risks using a rolling liquidity plan with a forecast period of twelve months. Short-term cash flows are monitored daily, involving key stakeholders.

Risk with high probability, high financial impact

Risk with low probability but high impact on financials or high probability but low impact on financials

Risk with low probability, low financial impact