Elecon Engineering Company Ltd Management Discussions

GLOBAL ECONOMIC OVERVIEW

The global economy entered 2025 with cautious stability. After enduring a prolonged period of unprecedented shocks ranging from the Covid pandemic to global geopolitical instability, green shoots of stabilization began emerging in 2024. Inflation moderated from multi-decadal highs, while labour markets showed signs of normalization, with unemployment and vacancy rates returning to pre-pandemic levels. Global growth has hovered around 3% in recent years.

However, the international trade landscape has once again been thrown into a frenzy with clouds of uncertainty threatening to destabilise the global economy, which was looking to get back on track. A series of tariff increases initiated by the United States was proposed to be countered in equal measure by most of its major trading partners. Although the tariff war has been paused for the time being, the sword still hangs over the neck of the global economy. If implemented, the effective global tariff rates will rise to their highest levels in a century. This represents a major spanner in the works of the global economy, considerably dragging down the growth outlook at a time when international trade dynamics were already unstable and looking for some fresh impetus.

The IMF has projected global GDP growth to decelerate to 2.8% in 2025 and marginally recover to 3.0% in 2026. That is significantly below the historical average growth of ~3.7% seen over 2000-2019. Advanced economies are expected to grow at just 1.4%, with the U.S. slowing to 1.8% and the Euro Area to 0.8%, amid increased policy uncertainty and weaker demand. Growth in the emerging markets and developing economies are expected to slow to 3.7% in 2025 and 3.9% in 2026.

While the trade war threat still looms, recent developments such as the trade deal between the US and the UK, the positive tone coming out USs trade talks with China, and India and US working constructively on a bilateral trade deal provide some sense of relief and hope. A retreat from protectionist measures and renewed multilateral cooperation could help restore growth momentum. Policymakers must prioritize transparency, debt sustainability, and coordination to mitigate risks and bolster medium-term growth prospects.

INDIAN ECONOMY

India remains a standout performer on the international stage and is expected to continue leading global growth. Despite a slight downward revision from its earlier forecast in January 2025 to factor in heightened global trade tensions and uncertainty the IMF has projected India to remain the fastest-growing major economy over the next two years, with Indias GDP expected to grow at 6.2% in 2025 and 6.3% in 2026.

The bright outlook stems from Indias strong macroeconomic fundamentals, resilient domestic consumption, and its ability to maintain a steady trajectory while navigating a complex global landscape. IMFs reaffirmation of Indias resilience and potential underscores its expanding role as a global growth engine.

Retail inflation in India eased to a 6-year low of 4.6% in 2024-25. It eased further to 3.16% in April 2025. This highlights the effectiveness of RBIs monetary policy in successfully balancing economic expansion and price stability. With inflation under control, RBI has been stepping on the pedal to support growth with two back-to-back rate cuts in February and April 2025.

The HSBC Manufacturing PMI hit a 10-month high of 58.2 in April 2025, inching up slightly from 58.1 in March 2025. The Manufacturing PMI has remained above the 50-mark since July 2021, indicating sustained growth in the manufacturing sector in the country.

With an approximately 10% Y-o-Y increase in its budget for 2025-26, the government has allocated Rs 11.2 Lakh Crores for capital expenditure, underlined its continuing thrust on investment-led growth in India. The outlook for the Indian economy continues to be positive, driven by macroeconomic stability, pro-growth monetary policy environment, and resilient domestic demand.

Industry Outlook

Engineering & Capital Goods Sector

Indias capital goods sector is playing a pivotal role in the countrys industrialization journey. With a contribution of approximately 1.9% to Indias GDP, the sector includes machinery, electrical equipment, and construction products, all of which are vital for infrastructure expansion.

Government initiatives have played a key role in strengthening Indias capital goods sector. The Ministry of Heavy Industries has implemented several targeted policies, including Production Linked Incentive (PLI) schemes, aimed at boosting domestic production and reducing dependence on imports. These measures align with the broader "Make in India" campaign, which seeks to increase the manufacturing sectors contribution to GDP, generate employment opportunities, and enhance technological capabilities. As a backbone of industrial growth, the capital goods sector supports large-scale manufacturing and infrastructure projects across the country. With the momentum of increasing urbanization, expansive infrastructure development, and robust policy support, the sector is well-positioned to drive sustainable industrial growth and elevate Indias competitiveness in the global market.

GEARBOX INDUSTRY

The industrial gearbox industry is experiencing steady growth, driven by the increasing adoption of automation across a wide range of sectors and continuous technological advancements in gearbox design and performance. Gearboxes are critical components in automated applications such as CNC machines, robotic systems, conveyor mechanisms, and assembly lines, where precision, efficiency, and reliability are essential.

Additionally, the rising demand for heavy-duty machinery across various industries, particularly in construction, mining, and energy, is further accelerating market expansion. The push for infrastructure development and large-scale public works projects is boosting the need for robust industrial gearbox drives in construction equipment, including cranes, lifts, hoists, and other material handling machinery. In these high-load, high-demand environments, gearboxes must deliver exceptional durability and performance.

As companies strive for higher operational efficiency and throughput, the role of industrial gearboxes becomes even more pivotal.

All in all, the increased industrial process automation and rising need for energy efficiency will continue to drive demand for gearboxes and the outlook for the sector remains positive.

COMPANY PERFORMANCE - ELECON ENGINEERING

Operational Highlights - 2024-25

2024-25 has been another remarkable year for Elecon. The Company delivered its best-ever performance in 2024-25, recording its highest Revenue, EBITDA and PAT. This achievement, especially after considering the slow start to the year, demonstrates Elecons resilience and strength during times of global macroeconomic challenges.

Despite soft momentum in the earlier part of the year, Elecon overcame the challenges, showcasing its ability to hold its ground during adverse times. The Company roared back with a robust performance in the latter part of the year and has delivered on what it had committed on an annual basis.

After election-led domestic slowdown and global macroeconomic uncertainties impacted the business in the first half of the year, the Gear division saw a robust recovery in the second half and ended the year with a growth of 5.6%. While the first half demonstrated Elecons resilience in navigating challenging and volatile market conditions, the second half has shown the Companys ability to capitalize on improving industry dynamics. Looking forward, the demand continues to be steady across domestic as well as export markets. In the domestic market, the Company is seeing consistent momentum in the power, steel and cement industries. Enquiry levels across the export markets are showing promising signs as well.

Elecons industry-leading turnaround time, consistent aftermarket support, and customized solutions continue to make it a preferred OEM partner globally. Our partnerships with the OEMs in overseas markets is delivering better-than-expected results in terms of order inflow and revenue.

The MHE division continued to grow from strength to strength in 2024-25, delivering a robust 72.8% growth during the year. This growth momentum is underpinned by a strong order book, with demand largely driven by the steel, power and cement industries. The pivot towards product supply and sharp focus on after-market services continued to bear fruit for Elecon. The Company expects sustained and profitable growth trajectory in the MHE division to continue.

At Rs 2,380 Crores, 2024-25 also saw strong momentum in terms of order intake, reflecting a 19.4% growth for the year. With a strong order backlog of Rs 583 Crores in the Gear division and Rs 365 Crores in the MHE division as at March 31, 2025, there is strong visibility for the coming year.

Elecon has firmly established itself as the leader in India and as one of the largest industrial gearbox solution providers in Asia. Our successful OEM partnerships in international markets underline our confidence in expanding our geographical presence. The references and credibility we gain through these partnerships serve as a catalyst for further expansion.

The Companys wide product range, technological capabilities, focus on innovation, operational excellence, and strategic international partnerships positions it well to harness future opportunities in both, domestic and global markets. The focus on steady cash flow generation and maintaining financial discipline remains unwavering.

Sector-Specific Growth Drivers

Elecons gearboxes and material handling equipment find its use across sectors such as steel, power, cement, fertilizers, mining etc. The steel, power and cement sectors contributed 20%, 16% and 11% respectively to the Companys Order Intake during 2024-25.

Cement

The cement sector has undergone significant consolidation following a series of acquisitions. The domestic cement industry also faced operational challenges in 2024 such as moderate capacity utilisation levels, lower realisations, slower pace of volume growth and pressure on margins. After seeing soft demand in H1 2024-25 due to the election and extended monsoon, the growth momentum picked up in the second half of 2024-25, driven by a pick-up in construction activities.

While realisations were under pressure in H1 2024-25, prices saw some stabilisation in the second half of the year. Given the governments budgetary allocation towards capital expenditure, cement demand is expected to grow steadily. That should support prices, profitability and capacity expansion for the cement industry. The cement sector is likely to see 43-45 Million tons of capacity expansion in 2025-26.

The outlook for the cement sector is positive, driven by rising demand, reduced competition, and cost efficiencies. Volumes and prices are expected to increase. These factors lay the foundation for steady capacity expansion, which in turn will aid growth for Elecon.

Steel

In India, steel demand is expected to grow at 8-9% in calendar year 2025, significantly outpacing the growth rates of other countries.

This optimistic outlook reflects a strong trajectory for the Indian steel industry. The growth in steel demand is primarily attributed to a transition towards metal-intensive construction in the residential and infrastructure sectors. Large-scale government initiatives such as the Pradhan Mantri Awas Yojana (housing for all) and the Gati Shakti Master Plan (infrastructure development) are expected to be major catalysts. Additionally, rising demand from sectors like engineering, packaging, and industrial manufacturing will further contribute to this growth.

Power

Indias electricity consumption grew by ~6%, driven primarily by weather- related demand. The ongoing expansion in Indias power sector, driven by rising electricity demand, substantial capacity additions in Coal based Power plants and government policy support, is creating strong business opportunities for Elecon. These developments, along with increased traction in the aftermarket segment, position Elecon well to capitalize on the sectors growth momentum.

FINANCIAL PERFORMANCE

It can be referred in the Boards Report under heading "Financial Results" in this Annual Report.

Financial Ratios

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

*There is a change of more than 25% in Interest Coverage Ratio and Debt Equity Ratio. Such change in Interest Coverage Ratio is mainly due to reduction in finance cost and debt. Such change in Debt-Equity Ratio is mainly due to entrance of new lease agreement by the Company.

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 ineconomic 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 March 31,2025 was 740 as against 687 as on March 31, 2024.

Strategic Outlook

While the global macroeconomic landscape poses some challenges, the Indian economy continues to demonstrate resilience and is expected to lead global growth.

A stable government, growth- focussed policy and steady domestic demand combine to create a conducive environment for investments.

Elecon will remain committed to maintaining its leadership position in the domestic market, while at the same time expanding its global presence through strategic partnerships. The focus on innovation and R&D remains unwavering. The company will also continue to drive operationalefficiencies and strive to maintain its strong cash flow generation and financial discipline. With a robust order book, diversified sector presence, and a culture of excellence, Elecon is well- positioned to deliver sustained and profitable growth, thereby creating long-term value for its stakeholders.