Terruzzi Fercalx India Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

INDUSTRY OVERVIEW

The Indian economy has faced a number of challenges during the last year which resulted in growth slow down, inflationary pressures and weakening of the rupee. This has been in the background of unsupportive external environment, domestic structural constraints and political uncertainties. The outlook for the current year is projected to be better, but a major uncertain factor is the outcome of the general elections.

The overall economic slowdown has impacted the industrial sector with lower investments, inordinate delay in projects alongwith other domestic and global factors has resulted in lower industrial growth including in the capital goods industry. During the last year, very few projects in the steel sector have been finalized. However, the Union Budget 2013-2014 has put emphasis on containment of inflationary pressures, mitigation of structural bottlenecks and raising investments.

After witnessing the lowest growth in GDP during the last decade, the Indian economy in 2013 has seen economic expansion drop to levels even below the crisis year of 2008-2009. Domestic supply bottlenecks and policy obstacles have seen growth decelerate and industrial output slump. The existing projects have been delayed due to financial constraints and implementation gaps. The high inflation and the tight monetary policy also continued to challenge the economic revival. The Government and RBI have taken measures to reduce fiscal deficit to provide stability and protect the credit standing. New investments are expected in almost all the major industrial sectors. These changes are expected to yield positive results in the coming years and your company will surely have its share of benefits in the India growth story.

FINANCIAL AND OPERATIONAL PERFORMANCE

During the year ended 31st December, 2013, sales and other income was Rs. 1,233.23 lacs as against Rs. 1,113.30 lacs for the year ended 31st December, 2012. There was a loss before taxation of Rs. 500.92 lacs for the current year ended 31st December, 2013, as compared to loss before taxation of Rs. 436.34 lacs for the year ended 31stDecember, 2012.

SEGMENTAL INFORMATION

The Company has only one reportable business segment viz. engineering goods & services, which is being considered as the primary segment. Disclosures as to the secondary segment, i.e. Geographical Segments are given below:

Outside India Within India Total
Rs. Rs. Rs.
1. Segment revenue
Sales and income from operations 94,964,929 26,773,205 121,738,134
(37,568,420) (72,011,229) (109,579,649)
2. Carrying amount of assets by geographical location of assets
Segment assets 24,540,117 180,643,017 205,183,134
(1,135,257) (234,971,272) (236,106,529)
3. Additions to fixed assets
Additions to fixed assets - 144,164 144,164
(-) (558,958) (558,958)

Notes:

1) Secondary segments are identified by the management as per the requirements of Accounting Standard (AS) -1 7 Segment Reporting" taking into account the organisation structure as well as the differing risks and returns.

2) The segment revenue and assets include revenue and assets, which are identifiable with each segment and amount allocated to the segments on a reasonable basis.

3) Figures in brackets are corresponding figures for the previous year.

OPPORTUNITIES & THREATS

The Company has access to the latest technology and systems as well as markets in China, Europe, South America, Africa and other parts of the world, where the Promoters, Terruzzi Fercalx SpA have a presence and has sub-contracted part of the orders received by them in Zambia & Mongolia to the Company.

The aggressive competition by international and local companies in the area of Lime Kilns and Furnaces in the Indian market continues to be a major problem, especially while bidding for large public sector projects which has significantly reduced the order load. The Company has been exploring all avenues to reduce overheads, develop new markets and introduce new products and services. Concerted marketing efforts are also being made and which has started to show results and to improve the order position.

Due to various reasons, inspite of all efforts made by the Company, the erection and commissioning of two large public sector projects under execution have still not been completed which has affected the Companys cash flow and profitability. The paucity of new orders is a matter of grave concern.

However, sourcing from India by Terruzzi Fercalx Group is expected to grow in the future. The Company with the help of Terruzzi Fercalx Group has expanded its geographical footprint into the international & domestic market and has taken a number of initiatives which are expected to yield good results in the forthcoming year.

Apart from downturn in the Indian economy, which is the reason for major projects not being finalized, India is a very price sensitive market, which was also a cause for paucity of orders. This has been addressed by changing the strategy of importing key equipments from the Parent Company. Instead, we are now manufacturing them in India and this has resulted in the Company being more competitive. The Company has won 2 orders for hydration plants which will be manufactured in India.

INTERNAL CONTROLS

The Audit Committee of the Board of Directors meets on a regular basis to review the control systems and to take stock of the situation. Any significant findings by the Internal Auditor are reviewed by the Audit Committee.

The Company has also set up internal systems and control mechanisms to ensure:

• On going risk assessment, identification of new risks and implementation of effective mitigation processes to safeguard the Companys interests.

• Transparency and efficiency of operations and resource management.

• Accuracy in financial reporting by implementation of systems framework for detection of errors and frauds.

• La w andregulatory compliance.

As a subsidiary of an Italian Company, the Company has established rules with respect to internal controls and reporting in close consultation with the Holding Company and the Auditors.

RISK MANAGEMENT

The Company has set processes in place to ensure that it has a proper and continuous identification and management of risk. tI has set up a Committee to monitor, evaluate & mitigate risk.

INFLATION RISK

The continued inflationary pressure continues to be a major problem, though it has eased as compared to the previous year it is still at a high level.

RISK MITIGATION

Efforts are being made to counter the inflationary pressure through both price adjustments and elimination of operational inefficiencies as well as incorporation of escalation clauses in longer period contracts, wherever possible.

FINANCIAL RISK

Financial risks include liquidity for working capital requirements and non-fund facilities like Bank Guarantee limits required for large projects and the penalty clauses in large public sector orders.

RISK MITIGATION

With the support of the Holding Company, M/s. Terruzzi Fercalx SpA, the Company is in a stronger negotiating position with bankers and financial institutions. The working capital of Company is being financed out of advance payments received from customers and credit facilities from banks.

INTEREST RATE RISKS

The Company does not have any long term borrowings and therefore, does not face any impact on account of interest fluctuations on this account. However, the Company has cash-credit facilities sanctioned by the Bank and volatility in interest rates will have an impact on the present and future credit facilities.

FOREIGN EXCHANGE RATE RISKS

The Company is exposed to foreign currency fluctuations on foreign currency assets and liabilities. The Company proposes to absorb the effects of foreign exchange rate fluctuations by following established risk management policies. The Company proposes to enter into forward and option contracts which will not used for trading or speculation. However, there are certain transactions which cannot be covered under forward and option contracts, to which the Company is exposed to the risk of fluctuations in foreign currency.

TECHNOLOGY OBSOLESCENCE RISK

The Companys ability to remain competitive depends on its ability to adapt to changing technology and cutting costs.

RISK MITIGATION

With the association of Terruzzi Fercalx SpA, the Company is assured of access to world technology for the group products.

RISK OF CYCLICAL BUSINESS

The business in the capital goods sector is cyclical in nature and the Companys projects business is predominantly from sectors like steel and chemical which have witnessed volatility.

RISK MITIGATION

The Company continually reviews significant developments taking place in the industrial sector and also closely monitors the projects under execution. The Company is endeavoring to reduce the impact of the cyclical business risks by developing other products and services.

PROJECT MANAGEMENT RISK

Your Company faces risks associated with project execution with a large portion of the business coming from few projects. As the duration of the project is 18 months or more, delays can affect the Companys finances and reputation.

RISK MITIGATION

The Management reviews the risks related to key projects at all levels, on a case to case basis depending on their size and complexity. The Management has established processes and systems for reviewing the progress and costs of projects. The Company has strengthened the existing processes and increased the Management bandwidth in these areas, with resources dedicated to Project Monitoring & Control as well as by strengthening/augmenting skills in areas like erection works.

CLIENT RISK

Excessive exposure to a few clients could impact the Companys revenues and profitability in the event of loss of those clients.

RISK MITIGATION

The Company is developing long-term relationships with its major customers as well as enlarging its customer base thus mitigating the risk of inconsistent revenues.

CLIENT LIABILITY RISK

A Client Liability Risk arises in the advent of a failure or deficiency in services rendered to a client. Such failure or deficiency could result in a claim for damages against the Company.

RISK MITIGATION

The Management pays adequate attention to the negotiation and documentation of contracts wherein an effort is made to limit the contractual liability for damages.

HUMAN RESOURCE RISK

The Companys main asset is qualified, experienced and skilled personnel, since the engineering industry is knowledge based. Attrition in human resources could drain valuable knowledge and customer experience and thus have an adverse impact on revenues. As the size of the Company is relatively small, there is a constant risk of trained ana efficient personnel being recruited by larger Companies at remuneration levels which are not economical for Companies of our size and turnover.

RISK MITIGATION

The Company creates and maintains a team of talented and experienced staff. The Company imparts efficient and effective training to its staff, blending them into productive resources by creating challenging opportunities on projects. The Company manages the careers of its employees in order to groom them to assume higher responsibilities. The Company also keeps abreast of HR practices and compensation levels in the industry. The Management recognizes human resources as its greatest asset and makes a special effort to train, develop and retain its employees. The knowledge and skills available with the Holding Company are accessible to the Company arid the training is imparted by the Group Companies, as and when deemed desirable.

CONTINGENT LIABILITIES

Details of contingent liabilities are given in Schedule 24 - "Accounting Policies and Notes forming Part of Accounts" for the year ended 31st December, 2013.

STATUTORY COMPLIANCE

Compliance of SEBI regulations and the provisions of the Listing Agreement are ensured by the Board of Directors.