Kirloskar Pneumatic Company Ltd Management Discussions.

Theme:

Note: In this Report, the word "KPCL" or "Company" refers to "Kirloskar Pneumatic Company Limited".

The image shows two allotropes of Carbon - Coal when subject to extreme pressure and temperature transforms to diamond.

The various allotropes of Carbon have all had an extraordinary role in human lives. They have been the primary source of energy for hundreds of years (Coal), they have been used to write (graphite in Pencils), they are used as refractory insulation in steel making as well as electrical contacts brushes in motors (graphite). And they are a symbol of eternal value - Diamonds

As the world moves from the silicon age to the graphene age its yet another allotrope of Carbon thats showing the way:

At KPCL, we have been making Compressors for many years for many applications. Right from basic air compressors to compressors for various refrigerants, compressors to handle natural gas, compressors to handle other gases and hydrocarbons. Not just compressors, we provide complete package solutions for various requirements - be it for a CNG gas station or a Petrochemical complex needing process refrigeration.

Be it for LPG bottling or for climate control in submarines. Not to forget the compressors that we deliver to the Oxygen plants. We do it all. In good times; in tough times.

After all working with Pressure is our business :

Overview:

KPCL is a diversified product company serving key sectors viz. Industrial, Oil & Gas, Infrastructure & Food Processing markets. The Companys broad in-house resources provide the capability to engineer, design, manufacture, construct, commission and service products and systems.

Your Companys manufacturing facilities at Hadapsar, Saswad and Nashik are modern and investments have been planned to ensure that State of the Art manufacturing technologies will always be in place. Your Company has highly qualified and trained Service Personnel across India with Sales & Service networks in place at strategic locations in India.

Your Company is a dominant market leader in some of the areas of its business and is now looking at exports to the Middle East, South East Asia, Indo China, South and West Africa. Your Company has also decided to strengthen the Sales & Service network in countries targeted for exports. This growth in export revenue will be achieved with a combination of Products & Projects.

Your Company has two business segments - Compression Products / Systems and Transmission Products, having a wide range of products and solutions.

Indian Economy & Economic Prospects:

India has emerged as the fastest growing major economy in the world as per the Central Statistics Organisation (CSO) and International Monetary Fund (IMF), and it is expected to be one of the top three economic powers of the world over the next 10-15 years, backed by its strong democracy and partnerships.

As per the IMF in April 2021, India will have a sizeable upward revision of 12.5 percent in GDP on account of continued normalization of its economy and a more growth-friendly fiscal policy, but the current surge in Covid infections presents a worrisome downside risk.

Recently, the Reserve Bank maintained its 10.5 percent GDP growth estimate, but the rising cases as the biggest impediment to recovery.

Although a recovery is now underway, and the pandemic is receding in some countries, elsewhere, second and third waves of infections are raging, notably in India and some of the ASEAN economies. While exports and manufacturing generally have held up, due to surge in global demand for pandemic related supplies, services are taking longer to recover, adding to sectoral divergence.

There is uncertainty surrounding projections of growth rate issued by multiple agencies like IMF, RBI, etc. Setbacks in the vaccine rollout, questions about the potency of the vaccine against new variants of the disease, and a resurgence of the virus, together, constitute a key downside risk. On the upside, however, a faster vaccine rollout would propel the economic recovery. Strong international cooperation remains essential to ensure adequate vaccine production and universal distribution at affordable prices. In this respect, the efforts of India has been commendable, and therefore we should hope that we continue to make supplies available to other countries, while ensuring adequate supplies at home.

The impact of the second wave may not be as disruptive as the first one, despite the daily case load touching three times of the first waves peak, as administration is experienced and prepared to handle the wave. Also, businesses and other economic agents are better prepared and there is a significant amount of learning by doing, which can help them withstand and navigate through the second wave of COVID-19 crisis, Additionally, the vaccine will also enhance safety and reduce the fear element among the vaccinated community.

Industry Structure and Developments, Segment Analysis, Risks and Concerns, Opportunities & Threats and Outlook:

1. Compression Products:

Your Companys product portfolio includes Air, Gas and Refrigeration Compressors, Packages and Systems. These products primarily serve Oil and Gas, Cold Chain, Industrial markets and Defence needs of compression systems. The Companys in-house resources provide the capability to engineer, design, manufacture, construct, commission and service systems.

a. Air Compressors (ACD ):

We make a wide range of compressors for various requirements. The global air compressor market is said to be about $ 30 Bil and continuing to grow at over 3%. The Indian market is said to be about Rs 4,500 crores and is largely fragmented with the top 4 players having a combined share of less than 60%. Most players continue to import key inputs - be it the Impeller or Rotors. The smaller players and niche players import complete air ends.

In terms of products, Air Compressors can be broadly classified as Reciprocating Compressors, Screw Compressors and Centrifugal Compressors. Over 60% of the market is now with Screw Compressors. KPCLis probably the only Company that manufactures in India all the three products with all inputs - be it Impellers or Screws - made in its plant in India. Further KPCL is also unique in that it has the capability to design Rotor profiles for various applications / uses in India and to manufacture the same in its plant on state-of-the-art machines. In this sense, the decision to take the less travelled route of working on understanding the ‘Know why and to build our own IP rather than go for straight forward ‘Know how transfer is starting to paying off. In the last couple of years, a core team of Designers have been working with The City University UK to understand, assimilate and develop our own designs. A slew of best-in-class products are in the offing. Clearly the best is yet to come.

b. Refrigeration Compressors & Systems (ACR ):

The refrigeration compressor market is over $ 60 Bil globally. A significant part of this is for transportation and storage of perishable goods. The temperature tends to be about O C. We do not address this market. We are in the range from -10 C and below.

This market is about $ 8 Bil and growing by over 3% annually. The Indian market is about Rs 1,200 crores and growing at about 8%.

The key industries that we address are Cold Storages, Ice plants, Fisheries, Milk / Dairy, Meat plants, Pharmaceutical, Fertilizer and Chemical plants, Oil & Gas plants etc. The key products are the reciprocating compressors for industrial refrigeration, Screw compressors packages for various refrigerants and Centrifugal compressors for large Refineries & Petro-chemical plants. We are market leaders in the Ammonia compressor segment. Ammonia is the most economical and safe refrigerant. In addition it has the lowest environmental impact. Most Cold Chains, Ice plants and Fisheries use this. KPCL has the widest range of these compressors and we deliver this through a strong distributor network to the Cold Chain OEs. With increasing emphasis on food processing and storage, this segment is expected to grow dramatically in the years ahead.

We also build a range of Vapour Absorption Chillers (VAC) that are extensively used in Pharma, Paper plants and other industry having large quantity of steam. Our VACs are seen as far more efficient than those available in the market. This is a growth area for us.

KPCL are leaders in delivering complex Heat, Ventilation & Air Conditioning (HVAC) systems to the Naval ships and submarines. There are new developments happening in this space with the introduction of the ‘sliding-bearing units. This will not only enhance the performance of the HVAC units but also make it more robust.

The large refrigeration systems that we deliver to the Oil & Gas sector and the Petrochemical sector are complex ‘fail-safe systems that ensure smooth plant operations. KPCL have a leadership position in India in this space.

One notable area that we would address going forward is the Screw Compressors for the Pharma and Food processing Industry (500 TR and above). This is under development and we hope to have a solution for this segment which is currently being served by imports.

c. Gas Compressor Systems ( PGS ):

The global market for gas compressor systems is about $ 3 Bil. This includes the Upstream Midstream and Downstream systems. This is currently growing at over 5% due to newer gas finds / production. In addition to the traditional Natural Gas, we have newer gas production from Shale gas, Coal bed methane and Bio gas. Based on the distance to be transported, gas is carried in pipes or liquefied and carried in cryogenic tankers. In all cases, right from the extraction at the well, production at the plant, carrying it through pipeline and finally delivering at the gas stations into the motor vehicles, KPCL is involved with its compressor systems. The Indian market is rapidly evolving and is expected to double as the percentage of gas in the energy basket moves from 6 % to 12%.

With strong Proven Track Record (PTR) as a prerequisite to participate in this industry, KPCL will significantly benefit from this market growth in the coming years.

Broadly, KPCLs offering in this space falls into two groups: The CNG packages for the Gas Stations and the complex Compression Systems for the gas plants and gas / oil wells.

All compressors used in this space are predominantly, reciprocating compressors and are expected to be compliant of American Petroleum Industry (API) standard.

KPCL is unique in that it manufactures the compressors for the CNG packages in India unlike most others. This gives it a sustainable competitive advantage. We make, deliver, commission and run these plants 24 x 7 x 365 days across 15 States in India.

Performance: During the year, revenue for the Compression Product segment was Rs 7,853 Million (Previous year Rs 7,752 Million), which marginally grew over previous year. The Compression segment contributed about 95% of our total revenue. In this, Air Compressor sales constitutes about 15% to 18%, Refrigeration and Compression System contributes about 30% to 35% and Gas Compression System constitutes about 45% to 50% of total sales.

KPCL has record sales of CNG packages during the year through the city gas distribution companies. KPCL not only delivered and commissioned most of these plants but actually operated them through pandemic across 15 states on 24/7 basis throughout the year. We expect this volume to grow in the coming years with allotment of 136 GAs in the 9"1 and 10th round of the city gas distribution bidding process. This is expected to create demand for around 8,000 CNG stations in the next eight years.

During the reporting year, KPCL continues to deliver large gas package system to the Oil and Gas sector and this business though it was muted in first half, picked up very well in second half.

2. Transmission Products:

Gears & Transmission ( TRM ):

This has its origins in the 60s when the Indian Railways needed Gears and Transmission on a war footing. KPCL stepped into this and built a robust business. Over the years this requirement changed. At KPCL too, we changed; we moved on to make Hydro-Pneumatic Suspension for the tanks and started building customised gearboxes. The change was both time consuming and expensive as new capabilities had to be built. High performance CNC machines needed to be bought. New skill sets had to be developed. The Company had to take a strategic call in going this way: Do we invest; work through the learning / proving curve (particularly with Defense supplies the approval is a long process) or we simply exit the business? We took a long term view: Compressors were our Core Business and the fastest growing segment was clearly going to the Centrifugal Compressors. And in a Centrifugal compressor the heart is a High Speed Gear Box !

Building a sustainable competitive advantage meant that we needed to have an integrated Value Chain - we needed to keep and build our Gear business.

Today we build one of the finest range of Centrifugal compressors with a fully integrated Value Chain - gears, impellers, castings, high precision grinding and super-balancing - all done in-house. As this segment grows, KPCLs right-to-win position in this will ensure leadership in this market.

Your Company offers a wide range of products that includes - Traction Gears, Customised Gearboxes and Specialized Products. These products primarily serve Indian Railways and other industrial markets sub-divided into segments - Steel, Cement, Power, Sugar and Wind Power, etc.

Performance: With muted demand in railway business and sub-megawatt wind turbine business, during the year, revenue for the Transmission Product segment was Rs 313 Million (Previous year Rs 478 Million).

3. Other:

RoadRailer (RR):

In the 90s Wabash US, popularized the intermodal - Road & Rail - transportation concept in the US. It quickly moved on to other parts of the world that had long distances to cover. For KPCL this was the typical Kirloskar iron plough moment *- to go out and pioneer a concept that could fundamentally change the way things are done.

India had long distance haulages; relatively poor / crowded road network with no specific cargo carriage ways; plus KPCL had been working with the Indian Railways of over 30 years with its gear and transmission business. A detailed plan for building the RoadRailers in India under license; getting the necessary approvals from the Railways; Permits to run the Railers on the road for end-to-end connection with the customers; setting up the terminals at Chennai and Delhi were all done. The Nashik plant of KPCL was suitably modified to build the RoadRailers. The KPCL team was sent to Wabash for training.

The project finally started rolling by 2016. KPCL was creating a category in India all alone; Dealing with Railways for trying out and running RoadRailers as a 50 unit train on its tracks from Chennai to Delhi and back, States for road permit and with logistic partners who needed to pick cargos from customers and have it delivered at the destination. It was not easy but we persisted. Last year, in spite of over the 4 months Covid shut down and all other challenges, we operated over 1,250 RoadRailers between Chennai & Delhi. Clearly the concept has now been accepted by the Customers. We expect to rapidly scale up the numbers as well as the routes across India going forward.

* Indias 1st iron plough was introduced in 1904 by our founder Late Shri Laxmanrao Kirloskar

Technology:

KPCL has over the years built its in-house capability to design, manufacture and test Compressors and Compressor systems. With over 90 engineers engaged in Design and Development activity, we would be bringing out a slew of newer products going forward.

We have strengthened our design capability by further investment in software packages that allows us to simulate various conditions and to have predictable outcomes.

The DSIR registration for R&D is being renewed and a strong focus on building our IP through Patent filing is initiated.

In the last few years, significant investment has been made in modernising the plant at both Hadapsar and at Saswad. The latest of CNC machines from Japan and Europe have been installed and commissioned to deliver consistently superior quality products.

The captive foundry is being upgraded to give a special thrust in using material science as a competitive advantage.

KPCL has embarked on its Industry 4.0 journey. We today have nearly all our Screw compressors with ‘smart sensors and IOT making them easier to track, monitor and service. The plants have more connected machines that allow us to optimise machine utilisation and throughput.

Clearly all this will allow us to move from a ‘Right-to-play position to a ‘Right-to-win position.

Internal Control Systems and their Adequacy:

Your Company is very conscious of the risks involved in supply of products and execution of projects and a very elaborate Risk Management Process is in place for the Company and the Company wide Risk Management Matrix is derived from Divisional Risk Management Process. There is a continuous monitoring on receivables and generations of free cash. More details are given in Directors Report.

Operating Performance:

During the year under review, revenue from operations remains almost at the same level as compared to previous year. Operating profits however increased due to product mix and lower cost compared to the previous year. With a strong order board at the start of the year, your Company is poised to achieve better results in the year.

During the year, there were no significant variations in the key financial ratios such as Debtors Turnover, Inventory Turnover, Debt Equity Ratio, Interest Coverage Ratio, Current Ratio, Operating Profit Margin and Net Profit Margin as compared to previous financial year.

As on 31st March, 2021 your Companys return on net worth improved to 11.80% as compared to 10.80% in the previous financial year resulting from increase in profit for the year.

Safety, Health and Environment:

Your Company is one of the few IMS (Integrated Management System - ISO 9001, ISO 14001 and ISO 45001) Certified Companies. During the year, at the time of Surveillance Audit along with up-gradation to ISO 45001, your Company received a certificate certifying that Company has established and applies an Integrated Management System - ISO 9001, ISO 14001 and ISO 45001, which is valid up to 27th August, 2021. Your Company is committed to comply with all statutory and regulatory requirements. Your Company has been making efforts in building awareness among employees, suppliers and service providers. Your Company has given a lot of attention to improving greenery all around its manufacturing plants. Energy conservation initiatives, safety initiatives and quality initiatives are being taken on a regular basis to ensure sustainability.

The Company has a well-equipped Occupational Health Centre that delivers qualitative preventive health services not only to its employees but also to their families and to the society at large. First- Aid preparedness and an equipped ambulance are available at all times in the factory premises. Medical surveillance that includes pre-employment, periodic medical examinations and occupational rehabilitation is ensured so that employee health and well-being are maintained. Hospitalized employees are given meaningful help and reassurance. Annual Wellness Planner ensures that all employees are covered under preventive health checks and health promotion programmes. Special Awareness drives regarding the COVID-19 preventive protocols were conducted at all locations. All COVID-19 positive cases were assisted during the year.

Corporate Social Responsibility ( CSR ):

Inspired by our founder Late Shri S L Kirloskar all our CSR initiatives are focused in the areas of Education, Environment and Health. CSR initiatives in your Company are planned, budgeted, implemented and reviewed regularly. CSR provides a volunteering platform to the employees and about 20% of employees volunteer to actively contribute for a social cause every year.

Your Company has contributed an amount of Rs 9.2 Million by way of donation to Kirloskar Institute of Advanced Management and Studies for promoting education.

Awareness on Sanitation is a national agenda. Your Company through Kirloskar WaSH Initiative creates awareness about water, sanitation and hygiene among students from schools in the vicinity of Hadapsar, Saswad and Nashik plants by deploying employee volunteers. Additionally School Health Initiative offers preventive health checkups to students and teachers of many of these schools. This year during post COVID-19 reopening of some of these schools, need based supports like face masks, hand sanitizers, liquid soap, sanitization equipment & material, awareness display posters etc. were provided by expanding the scope under these two initiatives. Uniquely physically challenged children of one of the supported residential schools (Society for Welfare of Physically Handicapped & Research Centre, Pune) were provided with artificial orthopaedic aids / appliances during COVID-19 Pandemic situation thus reducing their hardships considerably.

To create awareness about HIV AIDS amongst different sections of the society your Companys DISHA project reaches out to members of the general community including secondary school and college students. This year DISHA Initiative provided supports in the form of grocery kits, face masks, hand sanitizers etc. to PLHIV (People Living with HIV) and other socio-economically affected families in the vicinity of the Company particularly from Tadiwala and Ramtekdi slums of Pune during COVID-19 pandemic.

Your Company has started supporting various initiatives in schools associated with Ramnadi Restoration Mission through its RRM School Project in addition to participating in an online Ramnadi Festival and other Kirloskar Vasundhara Initiative related activities. This year river restoration message was propagated for children by painting walls in these schools associated with the project.

Your Company is supporting Education of girls, by supporting daughters of workmen of Cold Storage Units from UP, Gujarat, Rajasthan and MP. This unique CSR Initiative, named KaShi, is implemented by employee Volunteers from Regional Offices of the Company in North and West in collaboration with respective State Cold Storage Associations.

Socio-economically challenged girl students I from 5th to 10th Std. from a school in the vicinity of Saswad Plant are supported for development through Bharari Initiative. This year Bharari Online learning was facilitated through Madhavi Kapur Foundation (100 Day Planner for 9th and 10th Std.) To enable eLearning in COVID-19 Pandemic situation Bharari Classroom with virtual learning / audio visual facility was set up in this school and tablets were provided to 10th Std. students going for Board examination.

People, Processes and Systems: Its Customer first, always :

KPCLonce again won the CM National HR excellence award with a score of over 650.

This is a testimony to the robust HR practices that the company has. During this unprecedented time of pandemic, the company supported its employees, their family as well as our business associates in many ways. We also ensured that the plants and the service set up ran as best as it could, safely, to deliver on our promise to our customers. Over 350 CNG stations across 15 States in India was run by KPCL team right through the pandemic. We delivered over 24 compressors for Oxygen plants on an emergency basis. We had to rush VACs to Pharma companies to meet their urgent requirement. We were called in to quietly do some emergency work for our defence forces faced with an extraordinary situation at the border. The KPCL team rose to the occasion as one. There were challenges; nearly 15% of the KPCL team were infected and recovered over the last 14 months. Unfortunately two of our colleagues didnt make it. Yet in all this our resolve remained steadfast: Customer first, whatever it takes!

The IMS audits and certification were done remotely and the company continued to invest on its participative culture through 5S, Kaizen & CFT. We participated in National Competition and won several awards.

Values:

Asa part of the Kirloskar Group, KPCL is known for it Values and Ethics in all its dealings. With the pandemic induced uncertainty, a revisiting of the Values was thought of as appropriate and timely. The six Values that will help us in our Strategy and Decision making are:

Human Resources and Industrial Relations:

The Human Resources (HR) department at KPCL is driven by the mission To be an employer of choice. We look at the employees entire work life cycle, to ensure timely interventions that help build a long- lasting and fruitful career.

Recruitment & Staffing: With the growth of business, we continued to focus on having the most befitting managers with the most relevant job-experience to fill in the vacancies. As such, we do have a robust recruitment and Human Resources Management Process. Changes are made in the process based on employee feedback. Selection of new employees is done through a rigorous process to ensure the right candidate is selected. With the projected growth of the business, more number of engineers are getting trained to manage higher level of manufacturing efficiencies.

The annualized attrition rate for FY-21 stands at 4.3%, as compared to Industrial Average of around 6.0%. We continue to work on simplifying internal processes. HR process owners collaborate with various teams in the Organization to ensure that employees are able to work at their productive best.

Career Planning: Aspiring managers do need a career path to contribute better. Accordingly, the Critical Role Holders are identified as part of the succession process. This year due to COVID-19 restrictions most of our L&D initiatives were rolled out through a virtual platform. These programs covered important topics like Data Analytics and Presentation, Developing Analytical Skills, Managing My Career, Personal Effectiveness for Managers, Personal Leadership, and Team Development etc.

Learning & Development: L&D initiatives are at the foundation of KPCL. Competency Development continues to be a key area of strategic focus for us. During fiscal 2021, the total training provided for employees was over 1.6 days per employee though there were restrictions for in person trainings due to COVID-19. Some of our employees are internal trainers and shared their domain knowledge in the Company. Such an intervention not only fosters a climate of mutual learning, but also encourages others to be a part of the larger community of internal-trainers at KPCL. We recognize their contribution through rewards.

Rewards & Recognition: It is understood that employee-motivation is key to many success stories. Acknowledging ones value-addition and recognising them play an important key role. Recognition schemes are monetary as well as non-monetary. Achievers are recognized every quarter for outstanding achievements as Star of the Month, Spontaneous and Team Rewards by Senior Management. As always, we have continued to focus on the much needed performance differentiation to ensure that our high-potential (HiPo), high- performing employees are driven towards higher purpose and goals. They are being groomed as our Talent-Pipeline to succeed to key roles in future. This year we conducted Virtual Reward and Recognition for our Achievers Felicitation.

Apart from the above, we do measure our performance, with intent to raise the bar of better performance; also to scale up the deliverables from HR team.

In addition to the above, we have mechanisms in place to foster a positive workplace environment, free from harassment of any nature. We have institutionalized the Prevention of Sexual Harassment Initiative (PoSH) framework, through which we address complaints of sexual harassment at the workplace. Our policy assures discretion and guarantees non-retaliation to complainants.

Communication: An attempt to encourage company-wide employee-communication is one of our pursuits. Dialogue is maintained with employees throughout the year through quarterly performance sessions, in-house magazine (Susamwad) and intranet (Shashwat). The employees are aware of various developments in the Company.

Your Company has been selected by CM time and again to showcase Business Excellence, HR, Safety & EHS Policies and their implementation. Many companies regularly visit your Company to get a firsthand impression of these processes. This year we enhanced our reach to our employees through Virtual Round Table sessions (Google meet) across all Business Divisions every quarter. These sessions helped us in communicating Business strategies and gather ideas and suggestions from our employees supporting the theme. The relations with the employees at all levels continue to be cordial.

Cautionary Statement:

This Report contains statements relating to future business developments and economic performance that could constitute ‘forward looking statements. While these forward looking statements represent the Companys judgements and future expectations, a number of factors could cause actual developments and results to differ materially from expectations. The Company undertakes no obligation to publicly revise any forward looking statements to reflect future events or circumstances. Further, investors are requested to exercise their own judgement in assessing various risks associated with the Company and also the effectiveness of the measures being taken by the Company in tackling them, as those enumerated in this Report are only as perceived by the Management.