Ador Fontech Ltd Management Discussions.

ANNEXURE1

ECONOMIC AND BUSINESS ENVIRONMENT

The Indian economy started the fiscal year 2018-19 with a healthy 8.2 percent growth in the first quarter due to strong economic resilience. The growth rate thereafter plummeted to 7.3 percent in the second quarter due to rising financial volatility, standardised monetary policy in advanced economies and re-routing of investments. Further, the rising crude prices caused weak rupee position and faster outflow of investment from the country.

Despite a faint growth rate, the Indian economy remains one of the fastest growing economies and has sustained a GDP rate of 7.2 percent during the fiscal year 2018-19. It has out-shined France as the sixth largest economy in the world and is expected to become the fifth-largest economy in the upcoming fiscal year.

INDUSTRY STRUCTURE AND DEVELOPMENT

Welding is a precise, reliable, cost-effective and high-tech method for joining materials in manufacturing industries. It is broadly divided in to fabrication and maintenance/ repair welding. The industry contributes significantly to the gross domestic product (GDP) in several ways, such as support to welding intensive industries, auxiliary products, complimentary goods, employment etc. While the Indian welding industry has been dominated by low technology and very rare technological innovations, in recent years however, the demand for automatic and semi-automatic welding production systems and unconventional methods are rising. The future of welding holds greater promise as methods are devised for joining dissimilar and non-metallic materials, coupled with innovations like Nano and 3D technology for metal printing, which may per-se-dominate the repair market and facilitate quick replacement of parts, thereby reducing down time in case of breakdown and facilitate preventive maintenance in general.

CURRENT YEAR OUTLOOK

The current years outlook is positive. An analysis of market segment in terms of (i) Heavy engineering (ii) Railways (iii) Construction (iv) Ship Building (v) Cement and (vi) Steel, reflect buoyancy, given the initiatives of the Government like Make in India, Cluster development, SME support programmes, Concept of SMART manufacturing etc. The repair welding segment which is sub-servient to fabrication is expected to thrive on increased utilisation capacities necessitated by the maintenance of equipment, parts and components.

OPPORTUNITIES

While there is a window of opportunities, the most essential are:

• Rapid growth in robotic welding: The global robotic welding market is expected to reach US$5.96 billion by 2023 growing at a compounded annual growth of 8.91% per annum. Asia Pacific is anticipated to be the largest market for robotic welding in the coming years. Incidentally, the best supporter for robotic welding is the Indian Railways, which needs to keep its tracks running and maintained all across the sub-continent.

• Welder safety requirements: The increasing knowledge about the health hazards associated with breathing harmful levels of welding fumes and gases is driving companies to invest more in occupational safety. The air purifying systems and use of respiratory protection equipment provides safe breathing environment, that allows the shop floor personnel to work in a peaceful and homogeneous environment.

RISK, THREATS & CONCERNS

Lack of standardised specifications and tedious approval process has resulted in the growth of unorganised sector, which presently occupies 50-55% of the market share. Furthermore, one of the biggest challenges faced is considerable imports, which has negatively impacted the market share of local participants in various industries like cement, steel, power, ship building, automotive and transportation. Other challenges or concerns include (i) Lack of knowledge of end users in the application of welding techniques and cost economies (ii) Inadequate testing facilities and (iii) Low thrust on Research and Development.

BUSINESS ORGANISATION

When performed effectively, a weld repair can ensure that the product can over perform its design requirements and even extend the lifetime of any structure.

The real imperative need & value addition devolves primarily in establishing the need for repair. The work predominantly starts from the scrap yard and shop floor to analyse:

The strength of Ador Fontech Limited lies in:

• Providing a complete range of products and services for reclamation and surfacing solutions.

• Presence of ‘Application Engineering Specialists at almost all important industrial locations, all over India.

• Existence of customer focused ‘Authorised Dealer network.

• Partnership with world class agencies and technologies.

The Company will remain focussed on its core areas of business operations, both in the short and long term.

INTERNAL CONTROL SYSTEM AND ITS ADEQUACY

The Company has an effective system of internal controls reviewed by the Management and Auditors periodically. The Company will move its operations in to a new ERM (Enterprise Resource Management) in order to upgrade its operational processes and work systems. The Board and Management of the Company have provided immense efforts during the design stage to ensure adequate internal checks, controls and compliances.

HUMAN RESOURCE DEVELOPMENT

The Company believes that Human Resource plays a pivotal role in its growth prospects. There were 204 employees on the muster roll of the Company as at March 31, 2019. The Company also deploys workers in its shop floor both at the Peenya and Nagpur factories, in addition to administrative/office upkeep functions. The Company promotes just and fair HR practices, employee-friendly approach, both for its regular and contractual workers by ensuring on time credit of salaries/wages, contribution to retiral funds, besides medical support for self and family. The Company emphasises on carrying out a people- oriented attitude towards its employees and ensures highest level of work ethics across the organisation.

Further, through the aegis of DOTES (Documentation, Training and Educational Services)-a center of learning at Ador Fontech Limited, the Company provides in-depth training to its employees in the areas of technical and soft skills development.

PERFORMANCE ANALYSIS

(i) Balance sheet analysis

Overall the Balance Sheet of the Company remained healthy as at March 31,2019. The salient features include:

• Improved working capital management.

• Continuation of debt free status.

• Funding of capex through internal accruals.

(ii) Income statement analysis

In comparison to the previous year:

• Total revenue of the Company went up by 21%

• The profit before tax had risen by 50%.

• In view of lower tax rate at 25%, the profit after tax also registered an increase of 58%.

(iii) Material event(s) which may have an impact on the Company

The growth of the Country in terms of GDP, performance of core sector industries & leverage from the fabrication sector are factors that will have to be reckoned.

SAFE HARBOR AND DISCLAIMER STATEMENT

Any statement(s) forming part of this document that are not statement(s) of historical facts should be considered as forward looking statement(s). There are a number of important factors that could cause the Companys actual results to differ materially from those indicated by the forward looking statements. Ador Fontech Limited disclaims any obligation to update any forward looking statements to reflect future events or circumstances unless required to do so by law.

FINANCIALS AND RATIO ANALYSIS

Particulars

2018-19

2017-18

Standalone Consolidated Standalone Consolidated
KEY FINANCIALS
Revenue from operations 18,443 18,643 15,084 15,204
Total income 18,723 18,934 15,474 15,602
Earnings before interest, depreciation and tax (EBIDAT) 2,283 1,972 1,728 1,534
Depreciation 276 328 302 346
Earnings before interest, exceptional items and taxes (EBIT) 2,007 1,644 1,426 1,188
Interest expense - 15 - 15
Exceptional items - - 84 84
Profit/(loss) before tax 2,007 1,629 1,342 1,089
Tax expense 625 530 444 394
Profit/(loss) after tax 1,382 1,099 898 695
Total comprehensive income 1,440 1,158 943 740
Equity dividend (percent) 175% - 150% -
Reserves and surplus 10,865 10,103 10,055 9,577
Net worth 11,215 10,453 10,405 9,927
Gross property (Plant, equipment and intangible assets) 3,795 4,146 3,734 4,018
Net property (Plant, equipment and intangible assets) 1,674 1,874 1,865 2,051
KEY INDICATORS
Working capital turnover ratio 2.3 2.4 2.0 2.1
Debtors turnover ratio 7.5 7.5 5.4 5.4
Interest coverage ratio - 109.6 - 79.2
Inventory turnover ratio 5.6 5.2 4.5 4.2
Current ratio 4.4 3.7 4.1 3.7
Debt/Equity ratio - 0.03 - 0.02
Earnings per share 7.9 6.3 5.1 4.0
EBIDAT/Sales ratio 12% 11% 11% 10%
Gross profit margin percent 35.1% 35.3% 34.6% 34.7%
Net profit margin percent 7% 6% 6% 4%
Return on capital employed 18% 16% 13% 12%
PARAMETERS
(i) Average debtors 2,459 2,476 2,813 2,822
(ii) Average capital employed 11,177 10,384 10,579 10,025
(iii) Working capital 8,194 7,827 7,462 7,262
Current assets 10,575 10,694 9,881 9,948
Current liabilities 2,381 2,867 2,419 2,686
(iv) Borrowings - 301 - 188
(v) Gross profit 6,478 6,590 5,212 5,274
(vi) Cost of goods sold 11,965 12,053 9,872 9,930
(vii) Average inventory 2,155 2,326 2,173 2,338