Royal Arc Electrodes Ltd Management Discussions

OVERVIEW

Royal Arc Electrodes Limited ("RAEL" or "the Company") was incorporated in 1996 and has, over nearly three decades, established itself as a manufacturer of welding consumables, including welding electrodes, flux cored wires and MIG/TIG wires. The Company also trades in ancillary and allied products such as cutting wheels, electro-slag strip cladding, SAW flux and TIG/MIG wires, enabling it to service a broad cross-section of fabrication and welding requirements. As Managing Director, I am pleased to present this Management Discussion & Analysis for the year, which sets out the industry environment, our performance, and the opportunities and risks that will shape the Companys path ahead.

INDUSTRY STRUCTURE & DEVELOPMENTS

The Indian welding consumables industry continues to be closely linked to the broader manufacturing and capital goods cycle, drawing demand from infrastructure, engineering, automotive, railways, shipbuilding, energy and construction. As a company listed on the NSE SME Emerge platform, RAEL operates within the "Electrodes & Refractories" segment of the Industrial Products space, competing alongside both larger integrated players and smaller regional manufacturers.

Demand for welding consumables remained resilient through the year, supported by continued government thrust on infrastructure creation, private sector capital expenditure, and steady replacement and maintenance demand from user industries. The Company has also been investing in capacity - gross block and capital work-in-progress both expanded during the year - positioning RAEL to capture incremental demand as utilisation across the industry improves.

Within this landscape, a few structural trends stand out:

- Continued preference among fabricators for organised, quality-certified consumable suppliers over unorganised players, aiding companies with established brands and distribution.

- Gradual technology upgradation in end-user industries toward flux cored wire and MIG/TIG based processes, alongside continuing demand for conventional electrodes.

- Import substitution and "Make in India" oriented procurement by large industrial and infrastructure customers.

- Volatility in key input costs - steel, ferro alloys, copper and other metallic inputs - which continues to be a key variable in margin outcomes across the industry.

OPPORTUNITIES & THREATS

Opportunities

- Rising demand for welding consumables from infrastructure, railways, shipbuilding, energy and general engineering sectors.

- Scope to deepen the product mix toward higher value-added flux cored wire and specialised consumables, supported by the ongoing capacity expansion.

- Expansion of the trading portfolio in ancillary and allied welding products, widening the addressable customer base without proportionate capital investment.

- Potential to grow export markets and dealer/distributor reach as capacity utilisation improves.

- Government policies supporting domestic manufacturing, coupled with the implementation of BIS quality standards, have encouraged greater adoption of certified products, benefiting organised manufacturers with established quality systems and enhancing overall industry standards.

Threats

- Volatility in raw material prices, particularly steel, ferro alloys and copper, which can compress margins if not fully passed through.

- Intense competition from both larger national players and regional unorganised manufacturers on price.

- Elongation of the working capital cycle, with debtor and inventory days remaining a monitorable during the year.

- Supply chain and logistics disruptions arising from geopolitical developments.

- Dependence on a relatively concentrated set of customers and geographies typical of a company of RAELs scale.

GROWTH CATALYSTS

Alongside the industry-level opportunities set out above, a number of Company-specific developments are expected to shape performance over the coming years:

- Capacity expansion at Zaroli (Gujarat): The 4.89 Crore expansion of manufacturing capacity at the Companys Zaroli plant, funded entirely out of IPO proceeds, was completed and fully utilised by 31 March 2026. With this bottleneck removed, the Company is better placed to convert its existing order book from railways, automotive and infrastructure customers into higher output, without the need for further equity dilution.

- New European distribution channel: The Company shipped its first order under a new European distribution arrangement in November 2025, valued at approximately 12.50 lakh, with further shipments expected to follow. This adds a direct, higher-margin European channel to RAELs existing export footprint of over 20 countries, and should support better realisation per tonne over time.

- Working capital strengthening: The full 14 Crore of IPO proceeds earmarked for working capital was deployed by 31 March 2026. With the raw material procurement cycle now better funded, the Company is positioned to service larger orders and shorten delivery lead times without placing additional strain on trade credit.

- Leadership in stainless steel flux cored wire: RAEL is the first Indian manufacturer of quality stainless steel flux cored wires, a specialised product category with limited domestic competition. This first-mover position supports pricing power as fabrication activity across process industries and shipbuilding continues to shift toward higher-specification consumables.

- Investment in captive renewable power: A solar power capacity expansion is planned to increase the Companys reliance on captive renewable energy. Given the energy intensity of welding electrode manufacturing, displacing purchased grid power with captive solar generation should support operating margins by reducing a recurring variable cost over time.

The Company continues to invest in research and development with a focus on improving product quality, developing specialised welding consumables and enhancing manufacturing efficiencies. Its R&D initiatives are aimed at delivering innovative, high-quality products with the objective of developing indigenous alternatives to imported welding consumables thereby supporting the Governments "Make in India" initiative and creating greater value for customers.

These initiatives are drivers management is monitoring and are not guarantees of future performance; actual outcomes will depend on demand conditions, execution and factors beyond the Companys control.

OUTLOOK, RISKS & CONCERNS

Indias broader economic growth outlook remains constructive, supported by continued infrastructure spending, domestic consumption and policy reforms, which should sustain underlying demand for welding consumables. RAELs own growth in recent years - sales have grown at a five-year compounded rate well ahead of the ten-year average - reflects both improving industry demand and the Companys own execution.

At the same time, the Board and management remain watchful of several risks: continued input cost volatility, the need to manage an increasingly elongated working capital and cash conversion cycle, execution risk on the ongoing capacity expansion, and competitive intensity in a fragmented industry. Interest rate and currency movements, while not a major concern given the Companys near debt-free balance sheet, are monitored as part of overall financial risk management. The Companys near-zero borrowings and healthy net worth provide comfort in navigating this environment, and management will continue to prioritise disciplined capital allocation, working capital efficiency and prudent execution of the capacity expansion already underway.

FINANCIAL PERFORMANCE

Income Statement

Revenue increased by ~14% to 116 Crore (FY25: 102 Crore), supported by stronger volumes in the second half of the year (H2 FY26 sales of 63 Crore versus H1 FY26 sales of 53 Crore). Operating profit stood at 15 Crore, with operating margin (OPM) of 13% against 15% in FY25, reflecting the impact of input cost pressures during the year.

Profit before tax was 14 Crore (FY25: 12 Crore). Net profit for the year was 10 Crore (FY25: 9 Crore), with earnings per share of 9.05 (FY25: 8.12). The Board has recommended a final dividend for the year, reflecting the Companys commitment to shareholder returns alongside continued reinvestment in growth.

Particulars (Rs  Crore)	FY24	FY25	FY26
Sales	100	102	116
Operating Profit	17	15	15
OPM %	17%	15%	13%
Profit Before Tax	16	12	14
Net Profit	12	9	10
EPS (Rs )	13.04	8.12	9.05

Key Financial Ratios

In accordance with Schedule V (Part B) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the table below sets out the Companys key financial ratios for FY26 as compared to FY25, with explanations provided for movements of 25% or more.

Ratio	FY26	FY25	Change
Current Ratio	6.80	7.39	-8.0%
Debt-Equity Ratio	0.003	0.011	-78.9%
Debt Service Coverage Ratio	48.61	15.31	+217.4%
Return on Equity (%)	13.13%	15.79%	-16.8%
Inventory Turnover Ratio	5.98	6.32	-31.7%
Trade Receivable Turnover Ratio	4.95	4.88	+1.6%
Trade Payable Turnover Ratio	26.20	14.70	+78.2%
Net Capital Turnover Ratio	2.35	2.81	-16.4%
Net Profit Ratio (EBIT basis)	8.66%	8.85%	-2.2%
Return on Capital Employed	18.53%	20.58%	-10.0%
Return on Investment	1.26%	11.59%	-89.2%
Interest Coverage Ratio	140.63	94.91	+48.2%

Explanatory notes on ratios with a variance of 25% or more:

- Debt-Equity Ratio declined mainly on account of a reduction in total debt, together with a 13.22% increase in shareholders equity - reflecting repayment of short-term borrowings and a further strengthening of the capital base, leaving the Company virtually debt-free.

- Debt Service Coverage Ratio improved sharply as total debt service obligations reduced, while earnings available for debt service remained strong (up a modest 1.93%) - reflecting the Companys robust capacity to service its non-minimal debt from operating profits.

- Inventory Turnover Ratio declined as average inventory rose ~17.75%, outpacing an 11.56% increase in cost of goods sold, as the Company built inventory to support higher order servicing.

- Trade Payable Turnover Ratio rose as average trade payables reduced alongside a 10.60% increase in net credit purchases, reflecting faster clearance of dues to suppliers during the year.

- Return on Investment fell sharply in the absence of the one-time investment gains that had boosted the prior years figure.

- Interest Coverage Ratio improved on the back of continued debt reduction/refinancing and a modest ~1.6% growth in EBITDA.

Balance Sheet & Cash Flow

- The Company remains almost debt-free, with borrowings reduced to near nil (FY25: ?1 Crore), reflecting a strong balance sheet position.

- Net worth strengthened further, with reserves increasing to ?70 Crore (FY25: ?61 Crore) and total assets growing to ?91 Crore (FY25: ?81 Crore).

- The Company continued to invest in capacity, with fixed assets increasing to ?25 Crore (FY25: ?21 Crore) and capital work-in-progress rising to ?5 Crore (FY25: ?2 Crore), reflecting the ongoing expansion programme.

- Cash generated from operating activities was ?8 Crore for the year, investing outflows of ?11 Crore, largely capex-led, resulted in a free cash outflow for the year as the Company continued to invest ahead of demand.

- Return on equity (ROE) stood at 13.1% and return on capital employed (ROCE) at 18.0% for the year.

Working Capital

The Companys cash conversion cycle lengthened during the year to 132 days (FY25: 125 days), with debtor days at 81 (FY25: 75), inventory days at 57 (FY25: 75) and payable days reducing sharply to 7 (FY25: 25). While inventory management improved, the reduction in payable days extended the overall working capital cycle, and this remains an area of active management focus going into the coming year.

Shareholding & Governance

Promoter shareholding stood steady at 72.96% as at the end of the year, reflecting continued promoter commitment to the Company. Public shareholding stood at 21.47%, with the balance held by institutional investors. The Board during the year also approved key governance matters including the reappointment of the Managing Director and Whole-Time Directors, and the appointment of statutory, secretarial, internal and cost auditors, underscoring the Companys continued focus on strong governance.