leel electricals ltd Management discussions

ECONOMIC SCENARIO AND OUTLOOK

The year 2018 was the defining year for the Indian economy. Indias GDP reported a growth of 6.6 percent in FY 2017-18 as compared to 7.1 percent of the previous year.

The year 2018 was marked by a number of key structural initiatives to build strength across macro-economic parameters for sustainable growth in the future. The growth in the first half of the year suffered despite global tailwinds. While the first quarter of the year saw the impact of demonetisation settling down, in the next quarter, introduction of the landmark Goods and Services Tax (GST) brought in some uncertainties as businesses adjusted to the new regime.

The credit growth has also remained subdued due to the twin balance sheet problem that India has been facing. The issue here is that balance sheets of Indian companies and banks both have been under stress. While Indian companies remain over-leveraged, the banks are reeling under high non-performing assets.

However, the weakness seen at the beginning of 2017, seems to have bottomed out as 2018 set in. Currently, the economy seems to be on the path to recovery, with indicators of industrial production, stock market index, auto sales and exports having shown positive results. Indias economic outlook remains promising and is expected to strengthen further in FY 18-19.

Industrial growth also recovered with the Index of Industrial production (IIP) registering an impressive growth rate of 7.5% in January 2018 as compared to 2.4% in January 2017. The cumulative growth for the period April-Jan 2017-18 stood at 3.7% in contrast to 5.1% growth registered during April-Jan 2016-17.

India has already made a strong comeback after period of slow-growth, regaining the tag of "fastest growing economy," in the world as per the Central Statistics Organization (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. Indias GDP is expected to grow 7.3 per cent in 2018-19. Improved domestic conditions, potential revival in rural sector and small scale businesses resulting in an increase in FDI flows into the country and increase in infra-structure projects will drive Indias growth in 2018 and beyond. Further, Indias rise in World Banks Ease of Doing Business Index, from 130 to 100 is a significant achievement and is consequently attracting more investors to the country. Moreover, the government has made huge strides towards financial inclusion and pushing the expansion of digital India, India is steadily moving towards greater formalisation of the informal economy. The World Bank has further stated that private investments in India is expected to grow by 8.8 percent in FY 2018-19 to overtake private consumption growth of 7.4 percent, and thereby drive the growth in Indias gross domestic product (GDP) in FY 2018-19.

The global economy has turned a corner, with demand rising robustly since late-2016 and it is likely to accelerate further. More than 75 percent of the world economy is now enjoying an upswing, with forecasts anticipating global growth to rise to 3.7 percent in 2018 from 3.6 percent in 2017. Growth in advanced economies is at its fastest in three years, with OECD lead indicators pointing to slightly above trend growth.

As the global economy is in its heights after recovering from the shocks of 2008 crisis, Indias ability to stave off the economic gales was helped by the fact that it is much less dependent than most countries on global flows of trade and capital and therefore, the recovery in global economic conditions should help India boost its domestic growth. Indias exports, despite having seen some deceleration in the last quarter of the year, have seen an overall healthy growth at 9.9% for FY17-18 as compared to a rise of 5.2% in FY16-17. There was an augmentation in the spot levels of foreign exchange reserves to close to US$ 422 billion, as on March 23, 2018.

Indias gross domestic product (GDP) is expected to reach US$ 6 trillion by FY27 and achieve upper-middle income status on the back of digitisation, globalisation, favourable demographics and reforms.

However, the biggest challenges for 2019 for Indian economy will be as to how the economy would maintain its recovery in the face of increasing inflationary pressures, coupled with rising oil prices, a higher fiscal deficit as well as an increasing debt burden, twin balance sheet issues and trade protectionism. The key to this conundrum lies in the revival of consumer demand and private investment.

INDUSTRY STRUCTURE AND DEVELOPMENT

Heating Ventilation and Air Conditioning (HVAC) systems have become one of the core building blocks for modern infrastructure, encompassing various sectors like real estate, metro rail etc., all these factors are expected to spur the market for HVAC systems in India.

HVACR application segment is estimated to register the highest CAGR by 2022, the high growth is attributed to the growing building & construction industry and increased government investments in infrastructure projects resulting in installation of HVACR systems. With healthy growth anticipated in the real estate sector, the Country is expected to witness strong infrastructure development, which would boost the market for HVAC systems over the next five years. The Indian market is projected to grow at a CAGR of 9.48 percent over the next four years, the rate of urbanization is growing at 32% Y-Y which is fuelling the construction of retail, hospitality, and commercial properties and in turn, expanding the market in Tier-2 cities as well. As a result of the growing momentum toward smart cities, it is expected that the demand for air cooling systems will continue to grow.

On the other hand, the Indian Air-conditioning market is projected to grow at a CAGR of 12% over the next four years. As a result of the growing momentum toward smart cities, it is expected that the demand for air cooling systems will continue to grow. The air conditioner market is estimated at 7.2 million units in 2020 and it is poised for a 15% growth over the next couple of years, the market is witnessing a steady shift in demand for integrated systems. With advancements in air conditioning technology and rising demand in both developed and developing regions, the air conditioning systems market is expected to experience high growth in the coming decade.

The construction of Metro rail network in Kolkata and then in Delhi, it is also expanding gradually in Tier 1 and Tier 2 cities like Lucknow, Jaipur, Bangalore and Hyderabad, thereby creating significant demand for HVAC systems in India, your Company is one of the oldest supplier of HVAC systems to the Indian Railways and Metro Rails and we are hopeful to carry the inheritance in future as well.

Due to the rapid expansion of real estate, development in commercial properties, shopping complexes, hospitals, more offices and corporate hubs across the Country including small cities and towns, besides this, the rising middle class population, rising disposable income and introduction of the organized retail outlets are driving the demand for HVAC systems across the country.

The momentous growth in real estate, retail, hospitality and commercial sectors are boosting the demand for the HVAC systems across the country and as a result the HVAC market in India is forecast to reach US$ 3.97 billion by 2019 and US$ 7 Billion by 2022. However, with the rising demand for energy efficient products in the country the HVAC market is expected to undergo significant brand shift over the coming years.

After some overall sluggishness in the Indian economy over the past several years, the Indian HVAC market is expected to grow by 9% in 2018. The Indian HVAC market is also expected to witness growth on account of changing lifestyle, increasing per capita income, rising expenditure by consumers on comfort solutions and rising investments by corporate in India.

ROOM AIR CONDITIONING

As per the market estimates, Indian room Air Conditioner (AC) volumes is expected to grow from 4.7 Million in FY 17 to 7.2 Million in FY 20, implying 15% CAGR. This growth is expected to be driven by growing penetration of ACs (4-5% currently v/s 30% global average), higher disposable income, growing urbanization, and the year round AC usage trend. Given the improving macroeconomic conditions, ACs are now considered as a necessary rather than a luxury item, with many houses even installing multiple ACs. Earlier, AC was considered as a seasonal product (used mostly during summer months). However, manufacturers have now started offering heating/ cooling options so that it can be used throughout the year.

The room AC Industry is shifting towards energy-efficient models (eg. 5-star/inverter ACs) over past few years, as customers are increasingly becoming aware of lifetime costs of ACs vis-a-vis upfront costs.

To promote energy-efficiency, the BEE initiated star labeling in 2007 for fixed speed ACs, where the compressor cuts off or cuts in when the desired temperature has been achieved or the room temperature increases. This program was conducted in 2006, involving key stakeholders such as consumer organization and manufactures of ACs/components. January 2007 became a voluntary year for AC star ratings. It was made mandatory from January 2010 for 1 star to 5 star ACs. The ratings were upgraded in January 2012 and 2014. Also, the first energy efficiency ratio (EER) came into force in 2015.

Over past few years, demand has been continually shifting toward energy-efficient ACs (5-star/inverter), which contributes - 30-35% of overall industry volumes. According to the Bureau of Energy Efficiency (BEE), all ACs that operate on invertor technology will have to be compulsorily rated from 2018. Consequently, the rating for fixed and variable compressors will be merged. The split AC market is expected to transition to inverter technology over next few years, with Inverter ACs projected to account for 30% of the market by FY18 and 50% by 2020.

BUSINESS OVERVIEW

Your Company is one of the largest manufacturers of evaporator and condenser coils for air conditioners and heat exchangers / radiators serving the entire spectrum of Heating, Ventilation, Air Conditioning and Refrigeration (HVAC&R) Industry and has been present in the air conditioning industry for more than two decades and achieving the highest quality standards. The Companys extensive range of condenser and evaporator coils are used as original equipment in residential and light commercial unitary products, central plants including Air Handling Units (AHU), commercial refrigeration, precision and transport air conditioning applications and Radiators, Condensers, Oil Coolers, Charge Coolers, after Coolers in passengers vehicles, heavy commercial vehicles, off highway vehicles, industrial, agriculture and diesel engines.

Your Company is a supplier of HVAC systems to Rail/Metro/ defence applications and has its strong presence in packaged air conditioning and oil cooler segment of the Indian Railways. The Company has captive facility for sheet metal fabrication and heat exchanger coils, and thus gives it an added advantage and control over quality over such critical components.

Your Company is also an Original Equipment Manufacturer (OEM) supplier to manufacturers of air-conditioners in India, and provides customized air-conditioning solutions for institutional clients like Railways, Metro Rail, Defence Industry etc. caters to both domestic and international markets. With IRIS certification, the company is exploring opportunities in Railway business from international rolling stock and locomotive manufacturers.

Your Company has global presence with six state-of-art manufacturing facilities located in Bhiwadi, (Rajasthan), Tauru (Haryana), Pantnagar (Uttarakhand), Kalaamb (Himachal Pradesh), Ranipet (Tamil Nadu), Haridwar (Uttarakhand) in India and two overseas manufacturing facilities in Prague, Czech Republic in Europe and one in New Zealand. The products manufactured are wide range of room Air Conditioners, Roof Mounted Air conditioners, wide range of Heat Exchangers, Air handling units, Fans and other components. All the manufacturing facilities are equipped with high grade delivery technologies, latest equipment and large scale manufacturing facility. With its extended capacity to design, develop, manufacture and maintain highly engineered HVAC systems, your Company is uniquely positioned in the HVAC systems space as well as in the heat transfer industry.

OEM Segment & Packaged Air Conditioning

Your Company is a prominent supplier of Room Air Conditioners (RACs) to the leading brands in India as well as overseas and over the years the Company has evolved rapidly to become the staunch supplier of high quality Air Conditioners to well-known sellers of air-conditioners in India and abroad. The Company has the facility for in-house production of coils and manufactures complete Room Air Conditioners including Window Air Conditioners and Indoor Units and Outdoor Units for Split Air Conditioners ranging from 0.75 tons to 2 tons across all the energy ratings.

Your Company has In-house facility of production of critical parts i.e. Coil, Fan, Sheet metal , In-house product development labs out of this one lab is solely dedicated for validating mass production unit and 1T ODU in 18" Chassis platform.

The Company has made requisite modifications and improvements in accordance with the standards issued for AC Industry sector related to the conservation of energy.

Your Company has introduced the D.C. Inverter technology as per the B.E.E norms as declared in 2018 and for the energy saving process, introduction of Brushless D.C motors in the air conditioning applications have also been designed by us. The Company is also certified the products for the Export market as per the safety norms i.e. the G-marking in the products which provides the electrical safety EMI/ EMC.

Your Company has started the manufacturing of inverter air conditioners, being designed and developed by the Company and developed the new technologies products such as WiFi enabled product along with the use of environmental friendly refrigerant such as R410A & R32.

The other variant of ACs being manufactured by the Company like split and window Acs are energy efficient star rated products as per BEE (Bureau of Energy Efficiency) norms.

The energy efficient products will play a vital role for the future of the air conditioners in India and around the globe as almost all the countries are focusing on energy efficiency products.

Heat Exchangers & Components

Your Company is also a supplier of HVAC systems to Rail/Metro/defence applications. In view to match itself with the international standards, your Company has set up a "State of the ART" manufacturing facility in Bhiwadi (Rajasthan) dedicated for the Fabrication, Assembly and Testing of HVAC units.

With an annual capacity of 6 Lacs heat exchangers, your Company has made strong presence as well as customer base in North India.

During the year under review, the Company has successfully manufactured and supplied 348 HVAC Units in a record time of one year, which are successfully mounted & running in the Metro Coaches of Delhi Metro.

The Bhiwadi plant of the Company has taken a leap forward in technology absorption for Rail HVAC units from Toshiba, a Japanese company for aforesaid Delhi metro Project. Under this Technology Transfer the Companys production engineers received extensive training in Toshibas plant and thereafter Japanese team consisting of manufacturing / Quality/testing personnel have been stationed in Bhiwadi plant continuously for one year for upgrading the skills of our workmen and Engineers. This division is now capable of manufacturing Rail HVAC units to any International Standards.

In house R&D division of Bhiwadi unit is also one of the strength of the Company. We are capable to Design & Develop the HVAC units from 5 KW to 70 KW and design team is equipped with Psychrometric Test Lab-one of first kind of lab in India.

During the year, the Company has also been awarded IRIS (ISO/TS 22163:2017) certification and EN15085 Certificate - a certificate for wielding of railway vehicles and components. With these high rated certifications, the Company is exploring opportunities in Railway business from national and international rolling stock and locomotive manufacturers.

Your Company is the also leading manufacturer of fin and tube type heat exchangers for HVAC & R applications and is technology- driven and knowledge-based leader in its fields of operations. The Companys Factories have state-of-the-art facilities for making heat exchanger of Aluminum, Copper fins with seamless smooth/grooved copper tube, coupled with end plate and casing made of galvanized iron, copper, brass and aluminum.

The Company has also developed dry coolers which are usually used to cool the fluid like water, oil etc. Since its development last year, the market of the Companys dry coolers has grown and supplies have started to Engine manufacturers and DG set manufacturers.

Being an ISO 9001:2008 certified Company, we have a well-defined quality control process that is structured to meet the international benchmarks of quality. Besides, our R&D team works in concurrence with the swiftly changing industrial requirements, giving us an advantage of innovation, engineered with sophisticated technology. The Company is also rapidly expanding its footprints overseas and its product line is currently exported to the Middle East, Africa, Europe and North America.

FINANCIAL PERFORMANCE:

Segment-wise Standalone performance

During the year ended March 31, 2018, the total income stood at Rs. 2003 crores as compared to Rs.3024 crores. The segmental revenue from continued operations during the year under review stood at Rs.1604 crores as against Rs.1540 crores, registering a modest growth of 4.17% over the previous year. EBITDA for the year before exceptional item stood at Rs.146 crores as against Rs.274 crores during the corresponding year. Figures of the year under review are not comparable with the corresponding year, due to the sale of Consumer Durable Business. There was an exceptional item during the year related to sale of consumer durable business and voluntary insolvency of foreign subsidiary. For details please refer Board report and Note No. 48 of standalone financial statements.

During the year under review, the Net Sales from OEM & Packaged Air-conditioning segment was adversely impacted primarily due to implementation of new energy norms for air conditioners effective from January 2018 as a result of which lot of pre-buying of product took place in Q318 which resulted in subdued growth by various consumer brands in last quarter of the financial year as dealers/ distributors started de-stocking in anticipation of price rise post implementation of new energy norms. The Bureau of Energy Efficiency (BEE) introduced a new star rating methodology called Indian Seasonal Energy Efficiency Ratio (ISEER) for air conditioners in 2016, which came into effect w.e.f. Jan18. As a result, the prevalent 5/3 star norms were downgraded to 3/1 star, resulting in pre-buying during the December quarter of FY18 in anticipation of price rise. As a result of this, the off take by the various brands has been very low as compared with the corresponding previous year. Despite the fact, the sales from this segment grew from Rs.936 crores to Rs.964 crores.

Revenue from heat exchanger and components segment remained subdued due to weaker market sentiments of HVAC industry during the quarter under review. The revenue of the segment stood at Rs.640 Crores as compared to Rs.604 Crores during the previous year.

During the year under review, the Company had sold its Consumer Durables business to Havells India Limited on May 08, 2017. Till May 08, 2017, the Consumer Durable Business reported revenue of Rs. 424 Crores.

Consolidated Performance:

On the consolidated basis, the revenue from the operations for the year ended March 31, 2018 was Rs. 2,342 Crores as compared to Rs. 3,373 Crores during the previous year. EBIDTA for the year stood at Rs. 134 Crores as compared to Rs. 273 Crores in the previous year. The consolidated profit before exceptional item and tax stood at Rs. 20 Crores and after exceptional item & tax was Rs. 510 Crores as compared to Rs. 104 Crores and Rs.70 Crores respectively during the previous year. The total comprehensive income for the year stood at Rs. 511 Crores as compared to Rs. 70 Crores during the previous year. The performance of each of subsidiaries is explained in International Operations and Performance head.

International Operations and Performance:

During the financial under review, your Company has 6 direct wholly owned subsidiaries and 2 indirect subsidiaries i.e. LEEL Coils Europe s.r.o. (formerly Lloyd Coils Europe s.r.o.), Janka Engineering s.r.o. ("Janka"), Noske Kaeser Rail & Vehicle Germany (under liquidation), LEEL Services s.r.o., Noske Kaeser US Rail & Vehicle LLC (non-operational) and Noske Kaeser Rail & Vehicles New Zealand alongwith its 2 subsidiaries-Noske Kaeser Rail & Vehicle Australia Pty Ltd. and Noske-Kaeser Equipamentos de Aquecimento, Ventilagao e Ar Condicionado Ltda (liquidated) :

(i) LEEL Coil Europe s.r.o. (LCE): The last fiscal year has shown economic development in majority of the European countries and LCE has got benefited from sales growth in traditional markets as well as in new fast growing segments, the total sales of LCE increased from Euro 31 million of last year to Euro 34 Million in the financial year under review. Recovery has been observed in markets of France as well as good growth was reported in Germany and Italy, while rest of EU and Russia were mostly flat. However, negative market trend continued in UK and Spain. Our important segment of Rooftops reported increase of 9%, Heat Pump segment, after a slower previous year jumped by nearly 20% in the current fiscal year. The Data Centres Cooling segment also shown high growth and sales increased from Euro 3.5 Million last year to current sales of Euro 4.9 Million. Despite the positive sales development, subsidiarys profitability, suffered a drop and EBITDA was recorded as Euro 0.51 Million as compared to Euro 0.98 Million of previous year. The reason for decrease in EBITDA was decline in margin level across the product range. This has been caused by two main factors - growing metal prices, which have not been properly passed to customers; and increased labour cost, as well as lack of available workforce. To resolve the issue of low profit margins, an average price increase of 5% was implemented for all new orders effective from January 2018 and internal policy for regular price revision has been adopted.

In March, 2018, LCE participated in one of the most significant European trade fairs in Italy and met with both existing and prospective customers.

LCE has been evaluating extension of its product portfolio by adding heat exchanger coils with small 5 mm tube diameter. This kind of product is becoming a trend not only in smaller residential AC units but more and more also in commercial AC segment. Popularity of this solution is apparently driven by the F-Gas regulation and related pressure to minimize usage of expensive refrigerants. LCE has made the first step in this direction by investment into a fin die, which was installed in the last month of the Financial Year. The new fin die will enable to make first samples that can be further tested together with our customers.

In coming years LCEs main objective will be continuing effort to stabilize profitability by close review of generated profit margins for each customer and product. Individual approach will be taken to improve profitability across the product range and to ensure correct price adjustments relating to fluctuations of metal prices at commodity markets. Beside the planned improvement of cost and price controls, the subsidiary will actively look for new business opportunities on the market.

(ii) Janka Engineering s.r.o (Janka): Jankas total sales also seen increased volume and reported revenue as of Euro 12.3 Million as compared to Euro 11.3 million of last year Following a positive development in local construction industry, Janka was able to secure larger number of projects for the Building Technologies division, which made for nearly 70% of the total sales volume. Other divisions have not performed well in terms of sales and resulted in lower turnover. Total EBITDA for the year was a Euro (0.5) Million as compared to Euro (0.8) Million of previous year.

As Janka has been reporting poor financial performance over a long period of time and all the efforts by the management to revive the business had not yielding any results. As its entire net worth of the Company was eroded and thus, it has been decided to divest its stake and sell it off alongwith its trademark rights to Multicraft Group acting through its subsidiaries PZU Czech, a.s. and Shiftry Holdings Ltd. for a transaction value of Euro 1.75 Million. The transaction shall be completed in the current financial year.

(iii) Noske Kaeser Rail & Vehicle, Germany (NKG): NKG, total sales have fallen by nearly 60% from Euro 4.8 Million previous year to current Euro 2.0 Million. As a result of the extreme lower sales, lower margin level and past years adjustment, the total EBITDA for the year was further fallen and was reported to the level of Euro (-1.6) Million. In view of the financial losses, lower sales volume and limited prospects for the future turnaround, the Company filed for insolvency in May 2018. For details please refer subsidiaries details in Boards Report.

(iv) LEEL Services s.r.o: LEEL Services s.r.o. is a newly incorporated entity established by spin off process among LCE, Janka and LEEL Services s.r.o. It now provides rent and administrative services to the LCE and Janka. For the period under revied, it reported turnover of Euro 0.3 Million with EBITDA of Euro 0.1 Million.

By spin off project, all the real estate assets, trademarks as well as bank loans of LCE and Janka have been transferred to LEEL Services s.r.o. All service functions of both companies (finance, HR, IT) including the employees have been also transferred to LEEL Services. The new subsidiary provides facility management and service support to the other subisidiaries. Ordinary business has thus been fully separated from the real estate management, the other subisidiaries can now fully focus on their core business and also their financial statements will not be impacted by non-operational effects. For details regarding spin off please refer Boards Report.

(v) Noske Kaeser Rail & Vehicles New Zealand (NK NZ): During the period under review, NK NZ alongwith its two subsidiaries reported total revenue of NZD 8.02 Million as against NZD 6.7 Million of previous year, profit before tax stood at NZD 0.08 Million as against previous years NZD 0.09 Million, and profit after tax stood at NZD 0.02 million as against 0.06 Million of previous year. In the year under review, the subsidiary focused on securing new assignments, with most of the new opportunities in the recondition market sector, being overhauls and upgrades. In the current financial year the focus would be securing future production work from the third quarter of 2018. During the year it continued to deliver HVAC units for the Vlocity DMUs in Melbourne and completed the delivery of the Perth B-series EMU Project. It has also received follow-on orders for a further 13 x 3 car sets of equipment for the Vlocity DMUs which are proposed to deliver by July, 2019. Some key achievements over the last 12 months of the subsidiary was Implementation of SAP into the NZ operation, securing the first of the GT46 Standard Gauge locomotive HVAC upgrades, Exhibiting at AsiaRail (Bangkok), AusRail (Brisbane) and Asia Pacific Rail (Hong Kong) and working with Black Diamond Technologies to deliver the next generation Hydrobox design for the New Zealand domestic hot water heat pump market.

(vi) Noske-Kaeser Rail & Vehicles Australia Pty Limited (Indirect subsidiary through NK NZ): The service operation in Australia continues to deliver a high standard of support to several key customers in Perth and Melbourne with a stable experienced workforce and a good reputation across the industry. Some key achievements over the last 12 months were establishment of new workshop in Malaga to be located closer to our customers in Perth, successful completion of the Perth B-Series stage I overhaul program after four years delivering NZ $3.2 million in revenue at high margin and securing of maintenance work with GE in WA on locomotives based in Karratha.

(vii) Noske-Kaeser Equipamentos de Aquecimento, Ventilagao e Ar Condicionado Ltda. (Indirect subsidiary through NK NZ): As there was no operation in the Company the same has been voluntary dissolved and as on the date of approval, the applicable authority had also approved the dissolution and now this entity ceased to exist.

(viii) Noske Kaeser US Rail & Vehicle LLC (NK US): NK US remained non-operational during the period under review.

EXPORTS

The Company also exports air conditioners as OEM to major brands and added new customers in countries like Kenya, Oman, Uganda, Angola alongwith the existing customers in Dubai, Sri lanka, Nepal, Bahrain in Middle East. For the heat exchangers, the Company is focusing on US and European market by providing value added products across all the categories.

OPPORTUNITIES AND THREATS, RISK AND CONCERNS

Opportunities

HVAC systems are becoming one of the key building blocks in modern infrastructure; these systems are found in almost all the upcoming commercial as well as residential buildings. The rapid infrastructural advancements as well as urbanization and growth in commercial as well as residential properties are some of the factors that will boost the demand for HVAC systems in India, thus it will positively impact the demand of Companys varied product ranges in the coming years.

The HVAC market in India is forecast to reach US$ 6 trillion by 2027 on account of changing lifestyle, increasing per capita income, and rising expenditure by consumers on comfort solutions. The continuous growth in real estate, infrastructure-based developments, technological advancements and surge in tourism are some of the factors that will positively influence the Indian HVAC market over the period of next five years. Moreover, extreme climatic conditions, rising disposable income, growing construction activities in both commercial and residential sectors coupled with various government initiatives aimed at improving energy efficiency are some of the other major factors expected to boost India HVAC market in the coming years.

The Government of India had launched "Saubhagya" US$2.5 Billion programme on September 25, 2017 with the main objective to electrify and provide power connections to almost every household in the Country by the end of March, 2019. As a result of rapid electrification of the rural areas of the country, the demand of HVAC systems is likely to improve in the near future.

Threats & Concerns

a) The expectations of the consumers are very high as more and more multinational Companies are entering in India with cutting edge technology, advanced equipments, state of the art execution forwarded by a great piece of commissioning, operation and maintenance and creating extreme competitive market for the industry.

b) The consumers of modern India focuses more on quality products and also continue to be very price sensitive, they are more brands centric and that adversely impacts price sensitivity and overall margin.

c) The continuous innovation and technology advancement leads to intense rivalry amongst the producers. Furthermore, major raw materials such as metals are exhibiting increasing trend over the past few years posing margin pressures.

d) As around 69 percent of Indias population still lives in rural areas, availability of products to rural villages located in remote areas are difficult due to inadequate infrastructure and distribution channels and poor road connectivity.

e) Air conditioner is a seasonal product therefore delayed/ short duration summer affects the overall business performance.

f) Indias core inflation has gone up significantly over the past few years. Thereby input costs of raw material especially of Aluminum, Copper and Sheet Metal has gone up and has led to reduction of margins.

g) The changes in quality standards issued by the Govt. are very dynamic and technologies are required constant upgradation and thus involves high investment in R&D and decrease in margin.

Risk

Risks which could impact the Company relate to exchange rates, interest rates, credit risks and volatile commodity prices risks as well as operating risks, arising out of high input costs, especially in the case of fixed price contracts and changes in technology which impact the Companys product offerings. In addition, a general slow- down in the global and local economy tends to aggravate risks faced by the Company. All such risks are periodically identified and assessed in terms of the Companys risk management framework and appropriate action is undertaken to minimize and mitigate the impact. Risks and the effectiveness of the risk management process are also periodically reviewed by the senior management and the Board.

FUTURE OUTLOOK

The technology in AC manufacturing has undergone tremendous changes as we witnessed a shift of about 35% market from conventional to Inverter based technology in FY2019. The Company has developed in-house inverter Air conditioners and supplying to various brands in India and also developed Heat and Cool Split AC with R 410 A and R 32 refrigerants which are environmental friendly.

To tap the growing market in AC industry, the Company has identified strategic locations, with a long term perspective, for setting up manufacturing facilities to tap the growing domestic markets and also in close proximity to the sea port for accessing the export markets. During the year the Company has invested in its existing facility for ramping up its production, R&D, technology to meet with the new energy efficiency norms and new green refrigerant. The Company is also investing in ramping up the capacity at its Coil unit located at Ranipet, TN to cater the growing demand of heat exchangers in export market.

Our vertically integrated manufacturing infrastructure is equipped to manufacture the basic components, condenser, evaporators, sheet metal components, powder coating, injection moulding and all copper fittings and parts required in manufacturing of RAC. This gives us competitive edge such as cost effectiveness, reduced volatility in margins, hedge against demand volatility and maintenance of quality standards.

With our its deleveraged balance sheet, we are quite optimistic and remain extremely well positioned to deliver strong results, grow our businesses and unlock the opportunities that lie ahead across our product offerings.

INTERNAL CONTROL SYSTEM AND ITS ADEQUACY

We have effective and adequate internal audit and control systems, commensurate with our business size to safeguard assets and protect against loss from any un-authorized use or disposition. Regular internal audit visits to the operations are undertaken to ensure that high standards of internal controls are maintained at each level of the organization. The Companys internal controls are supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures.

ENVIRONMENT, HEALTH & SAFETY

The Company undertakes all its operations with a high concern and sincerity for environment and its surroundings as well as the safety and health of people. To improve the consistency of the organizations approach towards environment safety controls, the Company implemented ISO 9001 and OHSAS 18001 and introduced a series of global standards, principles and practices that each operation should adopt. ISO 9001 focuses on managing organizations impact on the external environment, to reduce pollution and comply with regulations and OHSAS 18001 focuses on managing your organizations internal environment to ensure a safe and healthy workplace.

The Company has taken many steps towards conservation of energy such as installation of LED lights in the plants, use of electricity instead of fuel in the production process to reduce the fuel consumption and carbon emission. During the year, the Company also imparted Environment Management System (ISO 14001:2015) training to the employees at various level of the organization, the training will help the employees at various levels to achieve the intended outcomes of the environmental management system, which provide value for the environment, the organization itself and other interested parties. The ISO 14001:2015 is intended for use by the Company to manage its environmental responsibilities in a systematic manner that contributes to the environmental pillar of sustainability.

Audits were conducted against these standards and improvements are ongoing. Improving Safety performance continues to be a priority for the Company. Improvements have been made in the methods of internal communication, knowledge sharing and reporting on safety matters. The HR team conducts EHS programs to educate employees about safety programs, make them aware of the Companys health and safety policy and conduct formal safety trainings for all workers to prevent accidents, report unsafe conditions and protect the environment.

HUMAN RESOURCE

The Company has a robust HR system in place to fulfill the need of qualitative work force throughout the organization. The Company strongly believes in nurturing talent within the organization and in line with this belief, the Company has put in place several initiatives that focus on leadership and talent development across grades. The Company has also taken numerous long term initiatives to ensure the readiness of talent, skills and resources for a long period of time. We have built a robust leadership bench not only at the senior management level but also for all critical positions up to the middle management level and frontline roles in sales, service & operations. The Company continues to endeavor at providing employees with a rewarding, productive and successful association, with a view to equip the Company to address the business challenges of a dynamic economic environment, the HR function focused on retaining and attracting suitable talent, enhancing the technical / behavioral skills of the employees and optimizing employee costs.

During the year, the Company imparted internal and external Quality Management System raining to the employees at various levels of the organization with an aim to improve the ability of the employees to consistently provide products and services that meet customer and applicable statutory and regulatory requirement and aims to enhance customer satisfaction through the effective application of the system, including processes for improvement of the system and the assurance of conformity to customer and applicable statutory and regulatory requirements.

The Company strives to provide a safe and harassment free working environment to all of its employees, in line of the same the Company has adopted the Code of Ethics & Business conduct and Whistle Blower Policy which lays down the principles and standards that should govern the actions of the Company and its employees.

The Companys HR strategies are aimed at finding a balance between employees goals and aspirations with those of the Company. With a view to equip the Company to address the business challenges of a dynamic economic environment, the HR function focused on retaining and attracting suitable talent, enhancing the technical / behavioral skills of employees and optimizing employee costs.

Our philosophy and Goals:

• To create a friendly, dynamic work environment under a team concept while maintaining professionalism.

• To recruit & retain best people, develop their skills, cultivate New Leaders & capitalise on their collective intelligence by applying Human insights to transform the organization.

• Provide an enjoyable and rewarding environment for all individuals to learn, grow and develop to their fullest potential.

• To develop all professionals to their fullest potential through the following:

i. Progressive Experience and Responsibilities Based on Ability

ii. Performance Review Process

• Encourage our staff to be involved in and contribute to the community and to professional activities and organizations.

• Provide a competitive Environment, Products and services to attract and retain a diverse, high calibre staff.

• Support the leadership efforts with a strategic workforce plan that creates a climate of innovation and excellence

• Create strategic processes that support Organisational goals with innovation

The Company does not engage in any form of child labour/forced labour/involuntary labour and does not adopt any discriminatory employment practices. The Company has implemented OHSAS 18001 which focuses on managing organizations internal environment to ensure a safe and healthy workplace. The Company has a policy against sexual harassment and a formal process for dealing with complaints of harassment or discrimination. The said policy is in line with Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013 and Rules made thereunder. The Company, through the policy ensures that all such complaints are resolved within defined timelines. During the year, no case was reported.

The total permanent staff strength of the Company as on March 31, 2018 was 552.

Disclosures with respect to the remuneration of Directors and employees as required under Section 197 of the Act and Rule 5 (1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (Rules) have been appended as Annexure to the Boards report. Details of employee remuneration as required under provisions of Section 197 of the Companies Act, 2013 and Rule 5(2) and 5(3) of the Rules are available at the Corporate Office of the Company during working hours, 21 days before the Annual General Meeting and shall be made available to any shareholder on request.

CAUTIONARY STATEMENT

"Statements in the "Management Discussion and Analysis" describing the Companys objectives, projections, estimates and expectations or predictions may be forward looking statement within the meaning of applicable securities laws and regulations. Actual results could differ substantially and materially from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions effecting demand/supply and price conditions in the domestic and price conditions in the domestic and overseas markets in which the company operates, changes in the government regulations, tax laws and other statutes and other incidental factors."