Elecon Engineering Company Ltd Management Discussions

Global Economy and India

In 2023, global economic expansion demonstrated resilience, as inflation decreased at a faster pace than expected. However, outcomes varied among countries, with robust growth seen in the United States and numerous emerging markets, while most European countries experienced a slowdown.

Projected global growth stands at 3.1% for 2024 and 3.2% for 2025. However, this projection for 2024-25 falls below the historical average of 3.8% (2000-19). Elevated central bank policy rates aimed at curbing inflation, reduced fiscal support due to high debt burdens dampening economic activity, and sluggish underlying productivity growth contribute to this outlook.

Global Economic Growth (In %)

Particulars	Year-on-Year
	Estimate	Projections
(In %)	2023	2024	2025
World Output	3.2	3.2	3.2
Advanced Economies	1.6	1.7	1.8
United States	2.5	2.7	1.9
Euro Area	0.4	0.8	1.5
Germany	-0.3	0.2	1.3
France	0.9	0.7	1.4
Italy	2.5	1.9	2.1
Spain	1.9	0.9	1.0
Japan	0.1	0.5	1.5
United Kingdom	1.1	1.2	2.3
Canada	1.1	1.2	2.3
Emerging Market and Developing Economies	4.3	4.2	4.2

Inflationary Pressures Subsiding

Inflationary pressures are subsiding faster than anticipated across most regions, driven by the resolution of supply-side issues and tightening monetary policies. Global headline inflation is predicted to decline to 5.8% in 2024 and 4.4% in 2025, with a downward revision to the 2025 forecast. Near-term inflation expectations have fallen in major economies, with long-term expectations remaining anchored.

Geopolitical Tensions Loom as Significant Downside Risk to Economic Recovery

The escalation of conflict in the Middle East presents a significant downside risk. This, alongwith escalating geopolitical tensions in other regions, could negatively impact commodity markets, trade, and financial connections, leading to increased uncertainty and decreased confidence. With weak growth, substantial debt burdens, and high real interest rates, the risk of financial strain is heightened. Additionally, recent subdued economic activity raises concerns about slower-than-anticipated growth in China, potentially causing adverse effects globally. Conversely, the recent strong economic performance in the United States, coupled with decreasing inflation, suggests that growth could surpass projections, possibly due to improved supply conditions.

The Indian Economy: A shining star

In 2023, India demonstrated remarkable resilience amidst global challenges, maintaining its position as the worlds fastest-growing major economy. Factors contributing to this performance include growing demand, moderate inflation, stable interest rates, and robust foreign exchange reserves. Despite prevailing pessimism in developed nations and escalating geopolitical tensions, India recorded a GDP expansion of 6.1% in the Jan - Mar 2023, reaching 7.8% in the Apr-June 2023, 7.6% in the July-Sept 2023 and 8.4% in Oct-Dec 2023.

India is anticipated to sustain its growth momentum, outpacing China and other major economies according to OECD projections. However, geopolitical uncertainties and global economic slowdowns could pose challenges to Indias domestic demand. Despite these risks, Indias economy remains optimistic, as indicated by positive consumer confidence and household income perceptions.

Indias manufacturing push, especially in sectors like semiconductors, electronics, electric vehicles, renewable energy, and defense, aligns with its ambition to become a $10 trillion economy. Government initiatives, including increased capital expenditure and production-linked incentive schemes, aim to bolster manufacturing capabilities and infrastructure.

In March, Indias manufacturing sector surged to a 16-year high, reaching a PMI of 59.1, propelled by increased orders, inventory upturn, and heightened job creation. This growth trend follows months of steady improvement, with Februarys PMI at 56.9 and Januarys at 56.5. Notably, new orders expanded at the fastest rate in nearly three-and-a-half years, supported by strong demand domestically and in export markets.

Looking ahead, forecasts project a growth rate of around 6.4% for the upcoming fiscal year, with inflation expected to moderate. The Reserve Bank of India has maintained an actively disinflationary stance, keeping the repo rate unchanged. However, potential rate cuts may be considered in 2024 if inflation remains within the specified range and geopolitical tensions do not disrupt global oil prices.

Indias macroeconomic indicators remain strong, with growth expected to reach 6.5% in FY2024 and 6.2% in FY2025. The RBIs projections suggest a decline in retail inflation, providing further stability. Despite external uncertainties, Indias foreign exchange reserves have surpassed USD 600 billion, providing a buffer against global economic challenges. Overall, the outlook remains optimistic, with government initiatives expected to further fuel this growth.

The Engineering Sector

In the aftermath of COVID-19, the world has encountered turbulent geopolitical conditions, disruptions in global supply chains, trade imbalances, escalating energy costs, and a worsening climate crisis. Amid these challenges, India stood out as the bright spot. The current focus on Make in India has led to enhanced emphasis on strengthening the manufacturing capabilities which has brought the spotlight to the Capital Goods sector. Currently the sector contributes 12% of the total manufacturing output, and in turn manufacturing sector contributes around 17% to the GDP of the country.

Favourable government policies, notably the Production Linked Incentive (PLI) Scheme, alongside Indias increasing demands in construction, infrastructure, and global markets, continue to uplift the industry. In the engineering sector, demand is fueled by investments and capacity expansion in crucial areas such as power, infrastructure, mining, oil, as well as in sectors like general manufacturing, automotive, process industries, and consumer goods.

The Governments Vision Plan 2030, aimed at positioning the country as a manufacturing and export hub for construction equipment and driving the development of world-class infrastructure, has not only enhanced exports but also stimulated growth in the sector. With China +1 and economic slowdown in leading manufacturing hub like Europe, Indian products have emerged as the preferred choice. The industry continues to invest in technology to enhance operational efficiency and maintain global competitiveness. The sector has witnessed increased order booking on the back of increasing consumer demand and infrastructure development. However, supply chain disruptions such as the red sea crisis acts as a headwind to the sectors growth prospects.

The Gearbox Industry

The global industrial gearbox market is experiencing significant growth, driven by several key factors. Firstly, favorable government policies across various regions stimulate growth within the industrial gearbox sector, including incentives, subsidies, and supportive regulations aimed at encouraging industrial development and investment in machinery and equipment.

Secondly, theres a notable surge in construction and building activities worldwide, especially in emerging economies and developing regions. Rapid urbanization, infrastructure projects, and increasing industrialization have heightened the demand for industrial gearboxes, crucial components in various construction and manufacturing machinery.

Moreover, the rising adoption of industrial automation across diverse industries has fuelled demand for industrial gearboxes.

Furthermore, theres a trend towards increased utilization of renewable energy sources like wind and solar power, addressing environmental concerns and reducing reliance on fossil fuels. Industrial gearboxes play a critical role in wind turbines and solar power systems, facilitating the conversion of kinetic energy into usable electrical energy. As the global shift towards renewable energy accelerates, the demand for industrial gearboxes for renewable energy applications is expected to grow significantly.

The outlook for the sector remains optimistic.

Elecon Engineering - Company Overview

The Company achieved its highest-ever revenues and profit after tax. This remarkable performance underscores the Companys resilience, even amidst a global economic slowdown. Within the Gears segment, robust performance was observed domestically. Strong order inflows came from end user industries such as steel, power, cement, and paper. This growth was fueled by government emphasis on infrastructure development. In the international market, we successfully onboarded 11 new OEMs. Their estimated annual business volume amounts to approximately €6.0 million. Commercial production is slated to commence in FY25. Elecon has capitalized on robust replacement demand in key overseas regions, further bolstering its business prospects. The Companys industry-leading lowest lead time has positioned it as a reliable partner for clients worldwide. Elecons commitment to timely delivery and operational excellence sets it apart in a competitive landscape. The segment delivered record breaking revenues growing at 25% on a YoY basis with EBIT Margin standing at 25.6%. The order inflows during the year stood at 1,601 Crs. Registering a growth of 15% on a year on year basis, highlighting strong demand from the end user industries.

The MHE Segment continued its strong performance. The segment has witnessed a sharp turnaround with revenues growing at 36% on a YoY basis with EBIT Margin standing at 23.3%. The shift toward product supply and aftermarket services contributed to the successful turnaround of this segment. Additionally, there has been a sharp improvement in profitability due to a better product mix. The order inflows during the year stood at 393 Crs.

Elecon has firmly established itself as a leader in India and stands as one of the largest gear solutions providers in Asia. Our successful OEM partnerships in

European markets have bolstered our confidence in expanding our market presence through references. The references and credibility we gain through these partnerships serve as a powerful catalyst for further expansion. Concurrently, we are dedicated to expanding our footprint in newer geographies. The Companys unwavering dedication to growth extends to its product development efforts. Several exciting products are currently under development, and their impending launch is expected to further enhance Elecons market position. Elecons strategic moves, successful partnerships, and innovative product pipeline position it for continued success and growth in the competitive landscape.

The Companys has delivered strong cash flows backed by a healthy balance sheet. Its unwavering focus on optimizing operational efficiency is evident in its strong financial performance, steady cash inflows, and resilient balance sheet.

At Elecon, our values and principles form the bedrock of our identity. We prioritize sustainable practices, envisioning a future that shines even brighter. By wholeheartedly embracing diversity, ensuring safety, and actively uplifting our communities, Elecon fosters a socially responsible ecosystem where everyone thrives.

Segment Wise Revenue - Gear & MHE Business

Elecon with its widest range of gears finds applications in a diverse range of end user industries - Steel, Power, Cement, Sugar, among others.

The Steel sector contributed ~17% to the consolidated revenues of Elecon. The Indian steel sector is the worlds second largest and represents one-eighth of the nations manufacturing GDP.

• Indias Steel Demand: The construction sector, bolstered by government initiatives like Smart Cities and Affordable Housing,drives steel demand in India. Over the past three years, the sector has experienced robust double-digit growth (11% to 13%). Projections indicate an 8% growth in Indian steel demand over 2024 and 2025. By 2025, Indias steel demand is estimated to be nearly 70 million tonnes higher than in 2020. The infrastructure segment remains a key driver and is likely to sustain momentum.

• Global Trends:

• MENA and ASEAN: These regions are poised for accelerated steel demand growth during 2024-2025, following a slowdown in 2022-2023. However, challenges in ASEAN (such as political instability and competitiveness erosion) may impact future growth.

• Developed World: Anticipate a strengthening recovery with 1.3% growth in 2024 and 2.7% in 2025. Notably, the EU is expected to show meaningful steel demand growth in 2025, while the US, Japan, and Korea remain resilient.

India, as the second-largest cement producer globally, contributes to over 8% of the global installed capacity. Looking ahead, the Indian cement sectors capacity is projected to expand at a compound annual growth rate (CAGR) of 4-5% over the next four years, culminating in an installed capacity of 715-725 million metric tons (MT) per year by the start of the 2028 financial year. Cement consumption is anticipated to reach 450.78 million tonnes by the end of FY27.

Increased investments in the sector are driving this positive trajectory. Notably, foreign direct investment (FDI) inflows related to the manufacturing of cement and gypsum products have surged, reaching US$ 6.10 billion (5.08 lakh crore) between April 2000 and December 2023. Furthermore, the National Infrastructure Pipeline (NIP) has introduced ambitious projects worth 102 lakh crore (US$ 14.59 billion) for the next five years, further bolstering the industrys growth prospects.

However, its important to note that in FY25, the sector may experience some slowdown due to the general election and a high base year. Despite this, the overall outlook remains positive for sustained growth.

The power sector is expected to witness a surge in demand, with electricity sales projected to rise about 2% in 2024 compared to 2023. India, China, and Southeast Asia are expected to drive a significant portion of this growth. Renewable energy is expected to play a key role in driving power generation, with the share of renewable generation rising from 21% in 2023 to 24% in 2024 and 25% in 2025. This is driven by significant capital expenditure in the renewable energy space. Electrification of transportation, buildings, and industrial segments is expected to further boost electricity demand, with projections of a 16-36% compound annual growth rate in electricity demand from the transportation sector. Supply chain disruptions, rising costs, and extreme weather continue to impact the power sector. However, innovation and investment trends, buoyed by recent legislation, can help achieve secure, reliable, clean, and affordable electricity.

The sugar sector in India is expected to have a bright outlook, driven by factors like Surging Global Raw Sugar Prices. Global raw sugar prices have soared to 11-year highs, creating a favorable environment for the Indian sugar industry. This surge is expected to continue, especially during the peak summer season, when demand traditionally spikes. Large integrated sugar mills in India stand to benefit significantly from this price upswing.

Another driver being a compelling trend within the sector is the diversion of sugar production towards ethanol manufacturing. This strategic shift aligns with global efforts to promote cleaner fuels and reduce dependence on fossil-based energy sources. Lastly, The Indian Government has been proactive in supporting the sugar industry. Measures like the Sugar Loan Program and Sugar Marketing Allotments bolster prices and production. These initiatives provide stability and encourage investment in the sector.

Financial Performance

It can be referred in the Boards Report under heading "Performance of the Company" in this Annual Report.

Financial Ratios

Pursuant to Regulation 34 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015-

Particulars	Standalone		Consolidated
	31.03.2024	31.03.2023	31.03.2024	31.03.2023
Debtors Turnover Ratio*	4.53	3.53	4.90	4.02
Inventory Turnover Ratio*	9.70	6.72	7.62	5.66
Interest Coverage Ratio*	113.19	43.34	74.64	39.26
Current Ratio*	2.92	2.31	3.05	2.52
Debt Equity Ratio*	0.03	0.02	0.04	0.05
Operating Profit Margin	25.86	23.45	24.49	22.15
Net Profit Margin (%)	18.95	15.72	18.35	15.53
Return on Net Worth(%)*	22.53	17.46	22.45	18.83

*There is a change of more than 25% in Debtors Turnover Ratio, Inventory Turnover Ratio, Interest Coverage Ratio, Current Ratio, Debt Equity Ratio and Return on Net Worth. Such change in Debtors Turnover Ratio and Inventory Turnover Ratio is mainly due to higher efficiency on Working capital improvement. Such change in Interest Coverage Ratio is mainly due to reduction in finance Cost and debt. Such change in Current Ratio is mainly due to increase in current assets and effective working capital management. Such change in Debt-Equity Ratio is mainly due to entrance of new lease agreement by the Company. Such change in Return on Net Worth is mainly due to

Increased Turnover and reduced debt.

Risk and Concerns

The Company could be susceptible to strategy, innovation and business or product portfolio related risks if there is any significant and unfavourable shift in industry trends, customer preferences or returns on R&D investments. Elecon does have the benefit of being very well entrenched with many of its customers, involved in their critical and strategic initiatives. Therefore, client concentration related risks are mitigated to that extent.

Risks emanating from changes in the global markets such as the recent financial meltdown, regulatory or political changes and alterations in the competitive landscape could affect the Companys operations and outlook. Any adverse movements in economic cycles in the Companys target markets and volatility in foreign currency exchange rates could have a negative impact on the Companys performance. This risk is mitigated to some extent due to the Companys presence in multiple and diverse markets. The Company also takes necessary steps such as forex hedging to mitigate exchange rate risks.

Elecon operates in a highly competitive industry, replete with multiple competitors, in both India and abroad. Shifts in clients and prospective clients dispositions could affect its business. While the Company has strong domain expertise, robust delivery capabilities and significant project experience, there is no guarantee that it will always get the better of competition.

The Companys operating performance is subject to risks associated with factors that may be beyond its control, such as the termination or modification of contracts and non-fulfilment of contractual obligations by clients due to their own financial difficulties or changed priorities or other reasons. Elecon does have mechanism in place to try and prevent such situations as well as taking insurance cover as necessary.

Internal Controls System

The Company has mechanisms in place to establish and maintain adequate internal controls over all operational and financial functions. The Company intends to undertake further measures as necessary in line with its intent to adhere to procedures, guidelines and regulations as applicable in a transparent manner.

Internal Controls are continuously evaluated by the Internal Auditors and Management. Findings from internal audits are reviewed by the Management and the Audit Committee. The corrective actions and controls have been put in place wherever necessary. Scope of work of Internal Auditors covers review of controls on accounting, statutory and other compliances and operational areas in addition to reviews relating to efficiency and economy in operations.

Development in Human Resources/Industrial front

The Company has a strong committed work force nurtured and backed up by its professional culture coupled with innovative HR process aimed at strategic alignment with the business objectives. It has been the tradition of the Company to maintain excellent industrial relations at all levels. This has ensured that we have a committed and dedicated workforce with a high level of enthusiasm.

The number of employees as on 31st March, 2024 was 687 as against 652 as on 31st March, 2023.

Outlook

The Indian economy has been performing well, with robust consumption activity and increasing disposable income. Despite geopolitical uncertainties, the demand remains resilient. In the financial year 2023-24, the real GDP (at constant 2011-12 prices) is estimated to reach ?172.90 lakh crore, growing at a rate of 7.6% compared to the previous years growth rate of 7.0%. Globally, the economic outlook is cautiously optimistic. The risks to global growth are broadly balanced, and a soft landing is possible.

Global growth is projected to be 3.1% in 2024 and 3.2% in 2025. This forecast is slightly higher than the previous estimate due to resilience in the United States, emerging markets, and fiscal support in China. Inflation is falling faster than expected in most regions, and headline inflation is expected to decline to 5.8% in 2024 and 4.4% in 2025.

As an organization, we remain mindful of challenges posed by geopolitical tensions in West African conflict zones, supply chain disruptions, and the upcoming election period in India. Nevertheless, we maintain confidence in delivering strong performance in FY25 and sustaining current margins.