Orient Electric Ltd Management Discussions.

1. Overview

The fiscal year 2019-20 was punctuated with general elections in the opening month and pandemic outbreak in the closing month.

What unfolded in between was a creditable performance of the businesses of Orient Electric Limited (OEL) across all reporting periods. Whilst the premium positioning started paying back with encouraging consumer response, the distribution outreach enabled increase in market share and the efficient supply chain consistently delivered the products at the right time and the right place. Thereby, the financial performance together with strong seasonal support, customer-friendly new product innovation and increased distribution strength invited market attention and improved investor confidence. Activity was clearly noticed for OEL stocks in the bourses over the course of the year with increase in shareholding by Domestic Institutional Investors. The digitisation program E-wings took off mid-year and accelerated pace to make OEL future-ready and in rolling out a string of new tech-supported interventions early next fiscal. All this was made possible with a strong, motivated and capable team of employees at every level. With increasing employee engagement, employees voiced their opinions enthusiastically in the first ever Great Place to Work survey, resulting in OEL being certified Great Place to Work in February 2020. Topping it up, OEL emerged #1 among consumer durables brand in the Fortune Next500 companies for FY 2019-20.

Despite growth through the year, Corona virus (Covid 19) lockdowns timing in the last month of last quarter which happens to be the peak business season has resulted in the moderation of growth. With the uncertainty of the pandemic looming large on life and business, far-reaching impact on the Indian and global economy is anticipated. We expect that business will steadily improve in a new economic reality that prioritizes social distancing in physical interactions and heavily prefers digital medium for transactions. We believe that our continuing Digitization drive and our continued focus on consumer centric innovation will enable us to emerge stronger and sharper in the new business environment.

2. Segment-wise Business Analysis

A. Economy overview

Global view: The Global economy had a chequered FY 2019-20 with China-US trade dispute dominating the narrative for much of the year. As a near term fallout of the trade dispute, commodity prices hardened and there were duty implications on certain imports to India. Apart from Brexit and other protectionist overtures, International financial markets brought back the focus on Corporate Governance with one of the most anticipated IPOs of FY2019-20 being pushed to go back to the drawing board with its IPO plans.

The coronavirus outbreak (Covid19) in early February brought industrial production and life to a near halt in China, severely impacting critical component availability. The demand-side impact from Covid19 outbreak multiplied manifold as 200+ countries were affected and multiple countries went into lockdown mode by the middle of March.

Indian Economy: India emerged as the fifth- largest global economy in 2019, overtaking the UK and France. According to the first advance estimate of Central Statistic Organisation published in January 2020, the Indian economy was estimated to have grown at a 11-year low of 5% in FY 2019-20, compared to 6.8% in FY 2018-19. The full-year GDP growth numbers are awaited as on the date of this report.

Private consumption growth, the prime driver of the Indian economy accounting for about 60% of the countrys consumption, was estimated to have declined from FY2018-19 levels. Demand in several sectors remained sluggish owing to a 40-day General Election period in the first quarter and weakness continued well into the year due to muted infrastructure/ industrial growth, general liquidity tightening amid multiple NBFC insolvencies.

The economy faced severe headwinds through Q4 FY 2019-20. While there were supply-side issues due to China shutdown, the demand-side of the economy started slowing down with preventive measures undertaken by the Government and finally came to a near standstill with the lockdown imposed from March 24, 2020. The uncertainty and unpredictability of the situation is likely to continue to influence the economic slowdown well into FY 2020-21 and beyond till Covid19 is contained and normalcy is restored across the world.

Covid19 impact: The accelerated outbreak of Covid19 worldwide has substantially slowed down the pace of economic activity in India with complete uncertainty, in a period that is generally seen to thrust and thrive in the closing fortnight of every financial year. The pandemic rapidly gathered momentum during March 2020, to trigger a Janata Curfew on 22nd March 2020 followed by factory closures from 23rd March 2020 and a country-wide lockdown w.e.f. 24th March 2020. OEL complied with all government advisories and guidelines to temporarily shutdown its plants, warehouses and offices across the country. It has also taken every possible action to ensure complete sanitisation, hygiene and protection at all locations, staying ready to resume business activities post-lockdown. As the March- June period generates maximum cash for OEL, the Company expects temporary working capital pressures during this period till the restoration of normalcy. The Company is well placed to tide over the situation with available cash credit lines. As a response to the emergent situation, OEL has re-phased the capital projects planned for FY 2020-21 basis business priorities. The greenfield project in South India and digitisation initiative will continue to remain as top priorities for the Company with re-scheduling of the timelines basis the relaxation of restrictions by Government authorities.

B. Industry overview

The Electrical Consumer Durables industry grew above the GDP growth rate largely on account of higher demand off take and growing premiumization across product lines in the Consumer Electricals industry. Delayed summers of FY 2018-19 contributed to increased sales off take across Fans, Coolers in Q1 FY2019-20 & extended winters resulted in higher-than- normal growth for water heaters & roomheating equipment across Q2, Q3 FY 2019-20. Competition continues to intensify in Ceiling Fans & Appliances segments with the entry of new players. Revenues for the fiscal were significantly affected due to business shutdown in the closing days of March, especially for summer products.

Lighting & Switchgear industry faced margin pressures due to increased component prices and intensified price-led competition, leading to lower price realization. Demand in LED lighting also saturated with market transition nearing upper thresholds & the replacement demand softening due to longer life of LED lighting coming into play. This situation was further aggravated by year- round real estate segment slowdown impacting usual demand expansion.

The Indian electrical products space, comprising of the public, home and professional product segments, is passing through several transitions: from the analog to the digital and from the conventionally functional to smarter devices.

In the case of Lighting products, for instance, the growth of LED technology applications is catalysing the development of human-centric lighting, street lighting, fagade lighting solutions and their connected versions. The mature ceiling fans segment is being driven by a growing focus on energy-efficiency and premium positioning. Energy-efficiency, convenienceenhancing connected features will drive the product innovation agenda in this arena for the foreseeable future.

While short-term growth is expected to remain muted as the economy recovers from lockdown induced historic lows, the medium-term outlook for Indias electrical products and durables markets continues to be upbeat on account of enhanced aspirations and a stronger introduction of relevant consumer products.

C. Segment-wise Review and Analysis for the Company

i. Electrical Consumer Durables

OEL retained its position as one of the key players in the home appliances and fan segments (Electrical consumer durables) in FY 2019-20. The economic headwinds of the pandemic outbreak coupled with a subdued season resulting from lockdown in Q4, FY 2019-20 have moderated the growth that OEL had otherwise enjoyed through the year. Therefore, for the year ended March 31, 2020, OELs Electric Consumer Durables Segment revenues stood at Rs 1491.6 Cr. with a 12.2% year- on-year growth and a PBIT of Rs 181.8 Cr. with 20.5% growth.

OELs focus continued to remain on premium range of products. OEL continued to be the largest Indian manufacturer and exporter of fans. OELs coolers and fans product categories continued to consistently perform and water heaters experienced good tailwinds throughout the year.

The performance of this business during the year under review was marked by product innovation coupled with a focus on manufacturing excellence, enhanced quality, widening footprint, new product launches and introduction of smart features. Concurrently, the business deepened its premium positioning, strengthened brand influence and profitability.

Major strategic initiatives undertaken during the year are:

Eleganza series Air-circulators: OEL launched in January 2020, the unique Eleganza series of air-circulating luxury chandeliers, strengthening the Companys premium product portfolio & positioning, and extending the Companys range into the Luxury segment.

i-Series fans: In February 2020, OEL launched the new Inverter i-Series fans range powered by the Electronically Commutated Motor (ECM) technology, saving nearly 50% energy over conventional fans, also with loT & voice controls.

loT-enabled appliances portfolio expansion:

OEL continued to deepen its presence in the air-cooler and water heater segments through smart solutions and state-of-the-art designs. Multiple models of loT-enabled air-coolers & water heaters, operable through smartphones & voice assistants, were introduced in the year. OEL also launched energy-saving inverter air-coolers in March 2020, which deliver up to 50% savings in energy consumption and are embedded with smart & connected features.

Strengthening partnership with DeLonghi group: OELs partnership with the globally renowned DeLonghi Group was strengthened with enhanced distribution and product portfolio augmentation in the year.

ii. Lighting & Switchgear

For the year ended March 31,2020, OELs Lighting & Switchgear Segment reported a 6.6% increase in revenue to Rs 570.2 Cr and a 1.5% growth in PBIT to Rs 59.7 Cr despite the sluggish growth of the countrys construction and real estate sectors. This performance was the result of preparedness to address emerging consumer needs through smart design and proprietary manufacturing capabilities. This resulted in a favourable sales mix from increased sales of Consumer & Professional Luminaires.

The Company focused on enhancing the experience of all stakeholders: distributors, retailers, electricians and consumers, through the development of products that enhanced health, safety, savings, convenience and aesthetics.

Major strategic initiatives undertaken during the year are:

EyeLuv series of lighting: OEL introduced EyeLuv lighting series in July 2019. EyeLuv series aims to address the ocular health-centric concerns in the lighting space through the development of flicker- control products.

Wireless call-bells: Powered without battery, Wireless Bells which function on kinetic bell push were launched in September 2019.

Smart plugs: Continuing its journey to introduce smart and connected products, OEL introduced loT-enabled smart plugs in December 2019 which allow for wireless control & operation of appliances/ devices through smartphones & voice-control devices.

Kris switch range: Launch of the new range of switches based on Triple Arc Blocking Technology (3AB) with aesthetic finish, highest level of safety and endurance in March 2020.

Deepening footprint: The Company continued to penetrate deeper into its established geographies as a part of its growth strategy.

Covid-19 impact on OELs segments

At a time when a large portion of the aggregate business coming from the Electrical Consumer Durables segment is primarily season dependent, spanning between March to June every year, this untimely and abrupt closure has allowed very little time to adequately plan and respond to this situation. Similarly, the Lighting & Switchgear segments also remain impacted with business disruption expected to stretch well into the next fiscal. By and large, the implications are likely to affect the industry.

D. Major Opportunities/Drivers

Under-penetration of consumer appliances:

Consumer appliances are under-penetrated in India vis-a-vis developed nations. Channel expansion, expected to improve with improving aspirations, will continue to drive growth and penetration in the coming years.

Increase in disposable incomes: While disposable income component of GDP will remain stressed in the short term, it is expected that with full resumption of normal economic activity, previous levels of spending power will return in the medium term, strengthening the consumption of electrical consumer products and durables.

Government Rural housing projects: Towards its stated aim of Housing for All, the Governments target to build over 2+ crore houses by 2022 via its affordable housing schemes,is expected to widen the headroom for the consumer durable sector.

Urbanization: Indias urban population is envisaged at 40% of its total population by 2030 from the current 34% levels, which will catalyse offtake for ECD, Lighting & Switchgear industries.

Energy-efficiency focus: Increasing awareness on energy-efficiency through the use of superior technologies & supported by Government initiatives like UJALA (Unnat Jeevan by Affordable LEDs and Appliances for All), SEEP (SuperEfficient Equipment Programme) etc. is set to further result in profitability improvement & revenue expansion. With high priority of government on BEE star-rating in Fans, the organized sector is poised to grow in both volume and value terms. Street Lighting transition to LED technologies continues to be a major growth driver in the institutional segment.

Rising smartphone usage: Increasing smartphone penetration & usage will drive up the adoption of smart & connected products hastening portfolio premiumization and improving replacement demand across products. Increasing data consumption and smartphone usage will also improve access across geographies to best- in-class products via e-commerce.

E. Major Threats

Closure of markets: The virus outbreak in March 2020, originating in China had brought all nonessential activities of the economy to a near halt as Governments chose containment as the way out to tackle unprecedented health crisis. Such market closures will adversely impact the revenue-generation capability, growth and profitability of the business in the near term until normalcy is restored.

Unpredictable weather: Erratic weather conditions like delayed summers or winters, shorter seasons than usual, irregular rains and winter mildness could impact the offtake of fans, air coolers and water heaters.

Material costs: Enhanced raw material or resource costs could adversely impact the overall product cost structure which can put pressure on profit margins.

Commodity & Currency: Unprecedented swings in forex rate and commodity prices due to global macro economic factors may create short term economic pressures.

Covid19 after-effects: Goods and services markets are likely to suffer a setback as a result of poor consumer sentiments leading to lower retail footfalls and muted consumer demand coupled with liquidity challenges and inventory pile-up from season shrinkage. The Manufacturing and Logistics Segment will also face challenges with the short-term displacement of migrant workers.

3. Strategic Focus Areas

A. Creating High-Performance Team

OELs long-term performance is predicated in creating and sustaining a high-performance team, which thus remains its most important strategic priority. In the year under review, OEL invested in 360-degree assessments and 9-box high- potential/ high-performance classifications for identifying critical talent and establishing a strong leadership pipeline. Concrete steps were taken towards building a learning organization through instructor-led training programs, augmented by anytime-anywhere available online learning modules and executive coaching programs across all levels of the organization.

OEL employs structured University-entry programs through GET (Graduate Engineer Trainees) and MT (Management Trainees) programs for building a leadership pipeline. Sustained measures to enhance employee engagement with the Companys Leadership included periodic Town halls, skip-level meetings and coffee sessions. OEL rewarded exceptional performances through quarterly HiFlyer ceremonies, where employees were recognised and rewarded by the Companys leadership for demonstration of Orients values of Excellence, Integrity, Collaboration, Trust, and Care.

B. Innovation and Product design

In its quest to stay relevant in a competitive landscape, OEL strengthened its R&D investments, augmented the existing team and established engineering design team with competencies across motors, aerodynamics, materials, electronics, sustainability and packaging. In the year under review, OEL has undertaken the building of a state-of-the-art dedicated R&D centre for centralizing all R&D work and professionals. The R&D centre is expected to commence operations shortly after lifting of lockdown. As part of its long-term plan, OEL aims to continue its market leadership in introducing first-to-market products in the categories it operates in.

OEL received Frost and Sullivans award for New Product Innovation Leadership & Indias Best Design Project 2019 for Ultimo Tower Coolers. Multiple new products were launched throughout the year.

New Product Launches in the year

Fans Lighting Appliances Switchgear
• Eleganza series • EyeLuv series: • Energy-efficient • Smart plugs
• Energy-efficient fans/ i-Series Flicker control LED lamp Inverter Coolers • Salus Bloom chrome plates
• Affordable inverter fan/ Hector • EyeLuv series expansion into Luminaire & Battens • High capacity desert coolers • KRIS switch range
• Breakfast series of Kitchen Appliances

C. Strengthening Brand ‘Orient Electric

OEL strengthened its brand through the launch of technology-intensive products, reinforcing its position as an innovator and thought leader in the countrys crowded consumer durables space. Brand recall was reinforced through robust advertising and promotions on TV, print, digital, social and word-of-mouth publicity. OEL received the India Content Leadership 2019 award for delivering Best Content in a 360-degree Marketing Campaign for Orient EyeLuv series LED lights and was acknowledged as a Superbrand 2019 for Fans and Coolers.

D. Nurturing Channel Partnerships E-commerce platforms: OEL leveraged its online presence, partnering with major online platforms to launch and promote its products with expanded range.

Exports: In its journey of widening and deepening international footprint, OEL commissioned a branch office in Dubai to drive its Middle East business.

Retail presence: OEL strengthened its retailer relationship through enhanced ease of transactions, continuous engagement, portfolio widening, stable terms of trade and in-shop promotion activities. OELs retailer loyalty program, Orient Connect, continued to improve engagement levels across retailers.

Institutional relationships: A dedicated effort to foster institutional relationships through the KAM model has been initiated. Government e-Marketplace has been prioritized by the formation of a dedicated central team with Leadership oversight.

Influencer engagement programs: OEL continued to engage with Electricians/ Architects/ Interior Designer & Building contractors through regular contact programs round the year.

E. Digitization

A 3-year digitization road map was prepared with an aim of enhancing channel connectivity, speed- of-doing-business, process efficiency, data- driven decision making and sales effectiveness.

Christened e-Wings, the digitization journey was kicked-off with successful SAP S4/HANA migration. A central Project Management team has been established for driving all Digital initiatives at OEL. Multiple digitization projects are set to be commissioned in the coming year.

F. Harnessing Quality and manufacturing efficiencies

OEL continues to focus on improving product quality, process efficiency and cost- competitiveness through shop floor automation. OEL intends to adopt industry best-practices including Industry 3.0/ 4.0 readiness across manufacturing facilities. Along with initiatives in existing plants, the greenfield project in South India is also expected to help achieve this objective.

G. Optimizing Supply chain

The implementation of racking systems coupled with warehouse management systems in select warehouses improved inventory management and cost productivity. OEL plans to further unlock significant efficiencies in its supply chain by expanding racking implementation across warehouses and leveraging technology to improve freight efficiency and warehouse utilization.

4. Risk Mitigation

Risks are an integral part of any business. At OEL, risks are managed in line with prevailing best practices in risk management.

During the financial year, OEL has strengthened its Risk Management framework by revisiting the nature of all business risks together with the respective mitigation plans and re-assigning responsibilities, with due diligence of revised risk framework conducted by independent experts. Reinforced ERM (Enterprise Risk Management) process is periodically reviewed by the Board for measuring its effectiveness as per policy. The process evaluates each risk associated with various business transactions and undertakes effective mitigation strategies to minimise the impact.

In view of Covid19, OELs business continuity plans & risk mitigating actions are being relooked at and further sharpened.

5. Finance

In the year under review, OEL reported growth across quarters till Quarter 4. Covid19 pandemic had severely impacted market sentiments and disrupted OELs business. Some of the leading performance indicators and their trajectories are presented here.

During the financial year, the Company opted for lower rate of income tax (25%) pursuant to the Taxation Laws (Amendment) Ordinance, 2019.

The Company has decreased debt by Rs 36 crores, improving its Debt-Equity ratio from 0.44 end- March19 to 0.27 as at end-March20.

Key initiatives for working capital improvement

To improve the working capital and cash conversion cycle, together with supporting key business partners, OEL has extended Channel financing & Vendor financing facilities through its banks. Furthermore, renegotiation of credit terms with vendors, restructuring credit management policy for channel partners, facilitating user friendly cash management portal for the distributors has enabled the improvement in the ongoing working capital requirements during the year.

6. Human Resources

OEL has always prioritized the engagement of its 997 employees as a key pillar to support organizational growth. The effectiveness of OELs people-centric initiatives are reflected in increased revenues, profitability, and productivity. A testament to the inclusive workplace and People- First culture, OEL has been certified Great Place to Work for the period, February 2020 to January 2021 by Great Place to Work institute.

FLOE (Future Leaders of Orient Electric) program, a comprehensive development journey for critical talent, aimed at creating a succession pipeline and enhancing career progression was initiated this year. The inaugural cohort of employees have commenced their development journeys.

7. Corporate Social Responsibility (CSR)

The year under review was the first full year of OELs CSR outlay since de-merger. As a responsible corporate citizen, OEL spent ~ Rs 1.55 crores in 2019-20 on giving back to society.

OELs CSR spends were directed towards Healthcare, Women Empowerment & Education, promoting Heritage, Art & Culture and Livelihood Improvement.

8. Internal Controls Systems

OELs governance framework is aligned to comply with all relevant laws of the land. The internal control system provides efficiency, reliability and completeness of accounting records thus helping the Company in timely and accurate dispersion of financial and management information. These controls help OEL to ensure compliance of all applicable laws and regulations. These internal controls also facilitate optimum utilization of resources, protect Companys assets and investors interests. The clearly defined organization structure, delegation of authority, code of conduct, and standard operating procedures enable all OELs employees to conduct business in an orderly and efficient manner.

OEL has IFC (Internal Financial Control), Whistle Blower Policy and Fraud Risk Framework Policy to address different risks. A comprehensive Internal Audit Programme has been worked out in alignment with business priorities and developments, approved by the Audit Committee. The findings of the Internal Audit Programme are reviewed by the Audit Committee periodically. Internal Audit function updates Management periodically on any findings and advises Management on immediate action areas. The Audit Committee of the Board regularly reviews significant audit findings of the Internal Audit Function, covering operational, financial and other areas and providing guidance on strengthening internal controls.

9. Cautionary Statement

Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimations and expectations may be forward-looking statements within the meaning of applicable law and regulations. Management has based these forward-looking statements on its current expectations and projections about future events. Such statements involve known and unknown risks, significant changes in the political and economic environment in India or key markets abroad, tax laws, litigation, labour relations, exchange rate fluctuations, interest and other costs and may cause actual results to differ materially.