elecon engineering company ltd Management discussions


Global Economy and India

Global economy growth is estimated to have increased by 6.1% in 2021 despite worsening impact of supply chain issues and surge in pandemic due to new variants. Manufacturing and trade rebounded at a fast pace due to revival in demand and improved consumer and business sentiment. Robust recovery in 2021 was mainly driven by strong consumer spending and increase in investment. However, pandemic outbreaks led to supply chain disruptions which along with rapid recovery in demand resulted in increase in inflation globally. As such, central banks across the globe are pivoting towards policy tightening to rein in inflation and at the same time strike a balance so as to not threaten the ongoing economic recovery.

According to IMF, global growth is projected to decelerate to 3.6% in 2022 as the initial rebound in consumption and investment fades on the back of diminished fiscal support, ongoing geopolitical tension between Russia and Ukraine, inflationary pressure, and lingering supply bottlenecks. Supply chain disruptions along with higher commodity and energy prices could lead to elevated inflation for a longer period and could act as major headwinds to growth prospects. The US Federal Reserve has announced rate hikes this year to tame inflation and other policymakers across the globe face pressure to tighten policy rates. Nevertheless, global economy remains on track for strong but uneven growth due

to variation in pandemic-induced disruptions and the extent of policy support.

The Indian economy grew by 8.9% in FY22 led by growth in the industrial and services sector. The economy gained momentum during the second quarter of the fiscal as the pandemic induced disruption eased significantly. Manufacturing activity picked up and trade growth rebounded strongly as states eased localised restrictions. Several high frequency indicators like E-way bills, rail freight, port traffic, GST collections and power consumption demonstrated a V-shaped recovery. However, consumption demand picked up at a slower pace due to pandemic?s lingering impact on household incomes, spending capacity, and lending. The government announced significant increase in capital expenditure in the union budget to reinvigorate infrastructure development and revive the economy. This is expected to boost private investment and consumption.

According to IMF, the Indian economy is expected to grow by 8.2% in FY23 led by increased infrastructure expenditure and boost in manufacturing activity through Production-Linked Incentive (PLI) schemes and revival in overall demand. The recovery in economic activity is expected to gain strength as both manufacturing and services remain in expansion mode on the back of uptick in consumer and business confidence. Recovery in mobility indicators, robust goods and service tax (GST)

collection, increased toll collections and e-way bill generations signal towards meaningful revival. Moreover, upbeat farm sector and increase in manufacturing activity bodes well for the economy. However, rising inflation on the back of supply bottlenecks and increasing fuel prices could act as dampener to growth. Sustained foreign direct investment, large foreign exchange reserves, and rising export earnings will help the Indian economy to sustain growth in the policy tightening phase. Moreover, the rapid vaccination drive across the country will ensure that the risk of future wave is minimised.

The Engineering Sector and Gears

The Indian Engineering sector is of strategic importance for the growth of the economy as it drives the growth of core sectors of the economy. The technology intensity of India?s engineering export portfolio has largely been skewed towards low- and medium-technology intensive engineering goods. However, riding on the back of reforms and incentives announced by the government for the sector, domestic players have started focusing on improving their capabilities, enhancing quality of offerings, and investing in upgradation of technology to become globally competitive while retaining cost leadership. Engineering goods exports ended the fiscal year on a positive note despite challenges such as supply chain disruption and higher freight rates and input costs. Capacity creation in sectors such as infrastructure, power, mining, oil & gas, refinery, and consumer durables are driving demand in the engineering sector.

Favourable measures such as Production Linked Incentive (PLI) along with increased capex outlay announced in the recent union budget to spur economic growth bodes well for the sector. Increased government expenditure is likely to propel private capex in construction and manufacturing industries such as automobiles, metals, engineering, etc. Moreover, rising exports demand would also lead to capacity expansion. However, the industry needs to continue investing in upgrading technology to seize the huge opportunities and government should support the industry through announcement of favourable policies to improve the ease of doing business and help the industry to compete at a global level.

Global industrial gearbox market is expected to witness robust growth on the back of resurgence of investments in the oil and gas sector and growing adoption of industrial automation in the manufacturing industries. Increasing investments in the end-user industries such as material handling,

wind power, construction, and metal and mining sectors is likely to propel growth in the industrial gearbox market. Additionally, the implementation of stringent government regulations for controlling noise pollution and reducing power overload across industrial units is further augmenting the installation of industrial gearboxes. Introduction of favourable government policies and financial incentives for clean energy sources has also boosted the market for industrial gearboxes. Emergence of advanced technologies, such as artificial intelligence and robotics will continue to drive the global market for industrial gearboxes.

Elecon Engineering - Company Review

Fiscal 2021-22 witnessed strong performance despite negative impact of second wave of the Covid-19 pandemic. Healthy order intake in the Gears business on the back of favourable demand environment led to strong performance in the division. The Material Handling business saw significant improvement in performance due to focus on profitable product business. Efforts were taken towards completing the punch list item being part of the COD process to hand over legacy projects. One of the key focus areas of the management has been in terms of debt reduction which resulted in the decline in interest cost.

The Company?s gear business witnessed strong performance on the back of healthy order inflows and favourable product mix and also due to increased focus towards increasing penetration in the international markets. The Company took various initiatives to reduce logistics cost in exports. During the fiscal, the Company?s order book in Gear business stood at 41,001 lakhs with power, steel, cement, sugar, mining, and fertilizer contributing most to it. The performance in the MHE business was heartening owing to focus on profitable product business. During earlier years, arbitration award worth 6300+ lakhs was granted in company?s favour and while counterparties are pursuing appeal proceedings, Elecon is confident of recovering the same. The Company continued to identify new growth avenues to augment capacity utilization. At the end of fiscal, the Company?s order book in MHE business stood at 12,713 Lakhs.

All the overseas entities have now turned profitable owing to the ongoing strategic initiatives, and the Company is working towards further improving its market reach in USA, Canada and Latin America where it is witnessing positive momentum in the order intake and revenue. Going forward, Elecon will continue to focus on strategies to create long term value for shareholders. In this regard, the

Company will target to becoming net debt free at the consolidated levels by FY23 and will focus on working capital optimization & cost control, debottlenecking and ensuring better utilization of available capacity.

The Company is confident that streamlining of existing operations along with reduction in debt is likely to lead in improvement in EBITDA margins and overall profitability. Moreover, the proposed increase in government capital expenditure announced in the recent budget augurs well for the industry and is likely to result in sustainable growth for the sector in the coming years.

Segment Wise Revenue - Gear Business

During fiscal 2022, the power business contributed close to 15% in the overall business. India is one of the leaders in global energy production and consumption, next only to China and the US. Rapid industrialization and urbanization along with favourable government policies have accelerated capacity addition in the country. In recent times, there has been a visible increase in the deployment of clean renewables and grid-connected distributed generation. In the recently announced budget, government laid out its vision of promoting clean energy transition and climate action and increased funding under the production linked investment (PLI) scheme for domestic solar cells and module manufacturing to 24,000 crore from the existing 4,500 crore in order to facilitate domestic manufacturing for the ambitious goal of 280 GW of installed solar capacity by 2030. The government set a target of installing 500 gigawatts (GW) of non-fossil energy capacity by 2030. All these development augurs well for Elecon?s business in power generation, distribution, transmission, and equipment.

India is the second-largest producer of cement in the world, accounting for more than 7% of the global installed capacity. Spurt in demand from sectors such as housing, construction, and infrastructure has led to increase in cement consumption. The ambitious upgrade of infrastructure spanning roads, railways, ports, airports, mass transport, waterways, and logistics sector under the framework of PM GatiShakti was announced in the budget. Under the plan, government aims to expand the national highways network by 25,000 kilometres in the upcoming fiscal which is part of the ambitious 100 trillion plan for multi-modal connectivity. Railways will also develop 100 PM GatiShakti cargo terminals for multi-modal logistics facilities. Moreover, under PM Awas Yojana, 48,000 crore has been allotted to provide pucca houses to every urban household.

As such, the increasing focus on upgrading infrastructure combined with push for affordable housing by the government bodes well for the growth of the cement industry.

Steel industry has been the pillar of India?s rapid infrastructure development. The government?s focus on infrastructure and construction has led to robust demand for steel over the years. Rapidly developing automobile and railways sector along with government?s initiatives on housing (Housing for All), roads (Bharatmala), ports (Sagarmala), railway (dedicated freight corridors, metros and bullet trains), and airports (Udaan) will continue to drive the growth of the industry. Strong capital expenditure announced in the budget coupled with renewed focus on the affordable housing segment is positive for the industry. The Centre?s PM GatiShakti scheme announced with an aim to accelerate infrastructure development and logistics across India will provide major boost to steel industries.

Shipping plays a critical role in supporting the country?s trade and commerce. India has 13 Major Ports and about 200 Minor Ports and almost 95% of the country?s trade by volume and 68% by value is moved through maritime transport. Over the last few year, the government has undertaken several initiatives to make the Indian maritime sector "atmanirbhar" which has resulted in development of ports, improvement in port infrastructure and expansion of shipping connectivity. Recently, the government has come out with Maritime India Vision 2030 blueprint which envisages coordinated and accelerated growth of the country?s maritime sector over the decade and seeks to develop three world-class mega ports of greater than 300 MTPA cargo handling capacity, increasing trans-shipment cargo share from 25% to 75%, increase share of cargo handled at major ports and ensure infrastructure modernisation. The increasing investment and cargo traffic points towards a healthy outlook for the Indian port sector. With adequate policy support and a growth in external trade, India?s shipping industry has immense potential to scale new heights and support India?s economic growth.

The government has taken various measures for the sugar industry such as increasing fair and remunerative price, increasing minimum support price, and promoting efficient ways of fuel production. Moreover, favourable pricing environments domestically and globally would encourage export prospects and along with higher expected sugar diversion towards ethanol would help in reducing the existing excess stock levels which is a major positive for the sector. Also,

growing disposable income along with urbanisation will translate to higher demand for sugar-rich confectionery products and soft drinks which in turn will drive per capita consumption of sugar. All these points towards a bright future for the industry.

Financial Performance

It can be referred in the Board?s 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
31.03.2022 31.03.2021 31.03.2022 31.03.2021
Debtors Turnover Ratio* 2.09 1.55 2.61 1.87
Inventory Turnover Ratio* 4.96 3.94 4.70 3.75
Interest Coverage Ratio* 5.88 2.25 6.43 2.52
Current Ratio 1.47 1.29 1.64 1.35
Debt Equity Ratio* 0.13 0.31 0.14 0.36
Operating Profit Margin 20.83 18.06 20.60 17.95
Net Profit Margin (%)* 10.80 4.56 11.67 5.52
Return on Net Worth(%)* 10.55 4.44 13.58 6.39

*There is a change of more than 25% in Debtors Turnover Ratio, Inventory Turnover Ratio, Interest Coverage Ratio, Debt-Equity Ratio, Net Profit Margin and Return on Net Worth. Such change in Debtors Turnover Ratio, Inventory Turnover Ratio and Debt- Equity 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 Net Profit Margin and Return on Net Worth are mainly due to Increased Turnover and reduced cost.

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 an 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 Company?s operations and outlook. Any adverse movements in economic cycles in the Company?s target markets and volatility in foreign currency exchange rates could have a negative impact on the Company?s performance. This risk is mitigated to some extent due to the Company?s 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 Company?s 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, 2022 was 565 as against 619 as on 31st March, 2021.

Outlook

The Indian economy is expected to rebound and The Indian economy is expected to grow by 8.2% in FY23 on the back of growth momentum in the manufacturing, agriculture and services sector supported by policy reforms and easing of regulations. However, supply chain constraints and higher energy prices on the back of geopolitical

tensions could curtail growth and stoke inflationary pressures leading to tightening of liquidity measures. Nevertheless, government has shown its intent to support economic growth by announcing higher outlay for capital expenditure in the budget and simultaneously created a conducive environment for private capex. As such, the prospects for the Company remains bright due to growth momentum in core sectors such as power, steel, cement, and mining.

ANNEXURE - A TO BOARD?S REPORT

SECRETARIAL AUDIT REPORT FORM NO. MR-3 FOR THE FINANCIAL YEAR ENDED ON 31st MARCH, 2022

Pursuant to Section 204(1) of the Companies Act, 2013 and Rule No. 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

To

The Members,

ELECON ENGINEERING COMPANY LIMITED Vallabh Vidyanagar - 388 120.

I have conducted the secretarial audit of the compliance of applicable statutory provisions and the adherence to good corporate practices by Elecon Engineering Company Limited (hereinafter called the Company?). Secretarial Audit was conducted in a manner that provided me a reasonable basis for evaluating the corporate conducts/statutory compliances and expressing my opinion thereon.

Based on my verification of the Elecon Engineering Company Limited?s books, papers, minute books, forms and returns filed and other records maintained by the Company and also the information provided by the Company, its officers, agents and authorized representatives during the conduct of secretarial audit during the pandemic of COVID 19 situation across the country, I hereby report that in my opinion, the Company has, during the audit period covering the financial year ended on 31st March, 2022 complied with the statutory provisions listed hereunder and also that the Company has proper Board processes and compliance- mechanism in place to the extent, in the manner and subject to the reporting made hereinafter:

I have examined the books, papers, minute books, forms and returns filed and other records maintained by the Company for the financial year ended on 31st March, 2022 according to the provisions of:

i. The Companies Act, 2013 (the Act) and the rules made thereunder;

ii. The Securities Contracts (Regulation) Act, 1956 (SCRA?) and the rules made thereunder;

iii. The Depositories Act, 1996 and the Regulations and Bye-laws framed thereunder;

iv. Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder to the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial Borrowings (Not Applicable to the Company during the Audit Period);

v. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (SEBI Act?):-

a. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

b. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;

c. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009; (Not Applicable to the Company during the Audit Period);

d. The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (Not Applicable to the Company during the Audit Period);

e. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;

f. The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act and dealing with client;

g. The Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018

h. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (Not Applicable to the

Company during the Audit Period); and

i. The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998 (Not Applicable to the Company during the Audit Period);

vi. Following other laws as applicable to the Company

a. Factories Act, 1948

b. Payment of Wages Act, 1936, and rules made thereunder,

c. The Minimum Wages Act, 1948, and rules made thereunder,

d. Employees? State Insurance Act, 1948, and rules made thereunder,

e. The Employees? Provident Fund and Miscellaneous Provisions Act, 1952, and rules made thereunder,

f. The Payment of Bonus Act, 1965, and rules made thereunder,

g. Payment of Gratuity Act, 1972, and rules made thereunder,

h. The Contract Labour (Regulation) and Abolition Act, 1970

i. The Maternity Benefit Act, 1961

j. The Child Labour Prohibition and Regulation Act, 1986

k. The Industrial Employment (Standing Order) 1946

l. The Employees Compensation Act, 1923

m. The Apprentice Act, 1961

n. Equal Remuneration Act, 1976

o. The Environment (Protection) Act, 1986

p. The Water (Prevention & Control of Pollution) Act, 1974, read with water (Prevention & Control of Pollution) Rules, 1975,

q. Industrial Dispute Act, 1947

r. Sexual Harassment of Women at workplace Act, 2013

I have also examined compliance with the applicable clauses of the following:

i. Secretarial Standards issued by The Institute of Company Secretaries of India.

ii. The Securities and Exchange Board of India (Listing Obligations and Disclosures Requirements) Regulations, 2015. During the period under review, the Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, Standards, etc. mentioned above subject to late filing of certain e-forms.

I further report that

The Board of Directors of the Company is duly constituted with proper balance of Executive Directors, Non-Executive Directors and Independent Directors. The changes in the composition of the Board of Directors that took place during the period under review were carried out in compliance with the provisions of the Act.

Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least seven days in advance and a system exists for seeking and obtaining further information and clarifications on the agenda items before the meeting and for meaningful participation at the meeting.

Majority decision is carried through while the dissenting members? views are captured and recorded as part of the minutes.

I further report that there are adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.

I further report that during the audit period, the Company has:

1. Passed the Special Resolution for Continuation of Directorship of Shri Pradip M. Patel (DIN: 00012138), who retires by rotation, on attaining the age of Seventy-five (75) years on 5th November, 2022.

‘ANNEXURE A?

To,

The Members,

Elecon Engineering Company Limited

Vallabh Vidyanagar - 388 120.

Our report of even date is to be read alongwith this letter.

1. Maintenance of secretarial record is the responsibility of the management of the Company. Our responsibility is to express an opinion on these secretarial records based on our audit.

2. We have followed the audit practices and processes as were appropriate to obtain reasonable assurance about the correctness of the contents of the Secretarial records. The verification was done on test basis to ensure that correct facts are reflected in secretarial records. We believe that the processes and practices, we followed provide a reasonable basis for our opinion.

3. We have not verified the correctness and appropriateness of financial records and Books of Accounts of the Company.

4. Where ever required, we have obtained the Management representation about the compliance of laws, rules and regulations and happening of events etc.

5. The compliance of the provisions of Corporate and other applicable laws, rules, regulations, standards is the responsibility of management. Our examination was limited to the verification of procedures on test basis.

6. The Secretarial Audit report is neither an assurance as to the future viability of the Company nor of the efficacy or effectiveness with which the management has conducted the affairs of the Company.

Place : Ahmedabad CS Ashwin Shah
Date : 3rd May, 2022 Company Secretary
UDIN : F001640D000255366 C. P. No. 1640
Quality Reviewed 2021
PRC:1930/2022