Esab India Ltd Management Discussions.

Economic headwinds encountered during 2013 continued to hurt growth during the period under review. There was visibility of intent in removing blockades to growth in terms of policy pronouncements and schemes announced from time to time. We are yet to see the impact of this at the ground level and continue to hope for a turnaround in the manufacturing segment that is key to your Companys prospects.

The index of industrial production (IIP) languished in negative to marginally positive levels during the period and steel consumption continued to be low. Paucity of funds and poor overall business sentiments were dampeners coming in the way of capital investments and projects. Despite relatively favorable trends on commodity and oil prices, the overall business environment remained challenging due to a combination of domestic and global issues.

Key drivers for your Companys prospects including Steel growth remained negative to flat through the year. Power and infrastructure segments suffered from policy and funding issues. Execution of policies especially kick starting investments on infrastructure could create the much needed impetus for manufacturing segment growth.

To sustain and expand its presence in various product segments and across locations, the Company launched new products in both consumables and equipment businesses. These have been well received in the market. Your Company continued to focus relentlessly on productivity and costs. The management has been reviewing capacities in the light of current and projected demand to realign capacities and facilities wherever necessary. The Company has initiated a project for shifting certain operations from its Plant at Khardah to its other Plants. It is expected that this would enable achieve significantly improved levels of capacity utilization and costs. The Company has also been working on initiatives to right size the organization with a view to achieving flexibility and global productivity levels.

OUTLOOK, OPPORTUNITIES AND THREATS

The Business outlook appears relatively positive for the medium term if the policy changes and infrastructure spends take effect. We also bank on improved liquidity and lower financing costs for customers to achieve better turns on working capital and improved margins. The short term outlook is getting increasingly harder to predict as there are multiple interwoven elements including many that are not localized to India.

A favorable tax regime and implementation of GST can have significant changes in the way businesses work on supply chain and logistics with potential short term disruptions during the transition phase. In summary, execution by the Government is key and even if a part of the promises translate to actions, there would be reasonably positive implications for the economy and the Company.

Our new product launches and a potentially leaner organization would augur well for our sales and profitability. We are targeting to grow our service activities to cushion the impact of any sustained difficulties in the manufacturing segment.

Margins and working capital are expected to be under strong pressures with over capacities, aggressive pricing and credit terms by competitors.

RISKS AND CONCERNS

Risks arising from delayed implementation of Government policies, exchange rate risks from a weaker rupee and global trends on oil prices can have a significant impact on the short term profitability. Competition from unorganized players with local advantages can have an impact especially on mass market products in Consumables. There are also potential industrial relations related risks given the current restructuring of capacities. Increasing legal and statutory requirements bring compliance risks including local requirements in locations that we operate in.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company operates in an environment where internal controls are continuously evaluated by Management and by the Internal auditors. The scope and coverage for Audits are drawn up based on detailed discussions including feedback on concerns from previous year. Findings from internal audits are reviewed regularly by the Management and by the Audit Committee of Directors and corrective actions and controls put in place wherever necessary. The Company is also subjected to reviews and audits as part of listing requirements in the USA of its Holding Company. These reviews help supplement the Companys efforts in strengthening internal controls.

The reviews by Internal Auditors are scheduled and cover the various manufacturing and office locations. The scope of their work includes review of controls on accounting, statutory and other compliances and operational areas in addition to reviews relating to efficiency and economy in operations.

The Company being a subsidiary of Colfax Corporation is bound to comply with the requirements of Sarbanes Oxley Act ( SoX). For reasons of independence and accountability, we have engaged our internal auditors to help draw up the documentation and process requirements on Internal controls. We have been reviewing gaps in internal controls and addressed these through remediation processes as prescribed under SoX.

It is expected that our efforts as above would help us greatly in complying with the framework under Internal Controls on Financial Reporting, which is mandated from the next financial year.

FINANCIAL PERFORMANCE OF THE COMPANY INCOME AND EXPENDITURE

Net Sales (Including Service Income) grew by 1.4% on a comparable basis in a small but significant reversal of declining sales trends witnessed from 2011. This was achieved in an extremely challenging environment. Relatively better performances in the R & M business and Exports that were aided by a weakening Rupee, helped in softening the impact of declines in all other product groups. Other income was higher on a comparable basis by about 29.3% due to increase in dividend income from mutual funds, redemption gains on mutual funds and foreign exchange gains. Cash surpluses were deployed in debt and liquid funds.

Material costs as a percentage to sales increased from 63.5% to 64.7% due to a combination of poorer product mix, increases in steel costs and price pressures, especially on mass market products.

Overheads including employee costs were higher at 26.2% of Net Sales and Service Income as against 24.7% in 2013 on a comparable basis. The increases were primarily on account of;

- Employee costs higher by 5% on a comparable basis driven by retirement benefits costs increases based on actuarial valuations.

- Higher costs on transportation outwards and sales promotion expenses in line with changes in terms of trade and customer mix.

Depreciation was lower by 2% as compared to 2013 with reduced capital expenditure and aging Plants. The Company has continued to provide for Depreciation at rates aligned to the erstwhile Schedule XIV of the Companies Act, 1956. The rates are different from those recommended in Schedule II of the Companies Act, 2013. The decision to continue with the same rates as before is based on a technical evaluation of useful life of assets.

BALANCE SHEET

The Company weathered a difficult year with a focus on fundamentals and efficiencies. Despite strong pressures on working capital, the company closed the year with healthy cash flows and prudent deployment of resources on capital expenditure.

Capital Expenditure was about Rs.741 Lakhs as against 932 Lakhs in 2013 and projects with productivity enhancements and Quality improvements were prioritized to conserve resources.

Current Investments and Cash grew by 14.2% over 2013 due to internal accruals amidst strong pressures on working capital.

Inventories were lower by about 12% in value terms due to strong improvements in supply chain and forecasting process. Measured in terms of days to sales, Inventory fell from 52 days in 2013 to 45 days in 2014-15.

Trade receivables were up from 23 days in 2013 to 36 days. This is reflective of higher sales to end customers and increases in credit cycles to trade.

SUBSIDIARY / JOINT VENTURE / ASSOCIATE COMPANY

The Company does not have any subsidiary, joint venture or an associate company.

HOLDING COMPANY

Colfax Corporation is a Delaware, USA based industrial group with existing global business interests in gas and fluid handling and fabrication technology products and services. Colfax Corporation holds over 73.72% of equity shares of your Company through ESAB Holdings Limited, UK and Exelvia Group India BV, Netherlands which are its 100% subsidiaries.