Thejo Engineering Ltd Management Discussions.

ENVIRONMENT

The current financial year (FY 2015-16) has been one of the toughest years for our industry in its history since the customers across all segments uniformly faced hostile environment.

Most of the projects in the core sector industries to which the Company caters, have been stalled. Commodity prices have fallen drastically across the globe. Steel sector, which is one of the key sectors catered by the Company, had faced severe pressure due to falling demands and increased dumping from China. Other clients in copper, coal, iron ore sectors also faced similar situation.

Given the headwinds in the seaborne market for iron ore, and the weak demand from domestic steel companies, NMDC Ltd. has continued to cut iron ore prices in Q3 FY16 as well, further revising down the price of lumps by 12% in October 2015, and again in December 2015, when lump prices were reduced by a sharper 16%. The December 2015 correction marks the 10th rate cut initiated by NMDC since November 2014, with prices of fines declining by 51% and lumps by 52% during the period.

The minimum import prices for steel announced by the Government in February 2016 is expected to give the much required boost to the steel sector to recuperate from the current fall.

Some of our key clients reduced their production levels and certain mining units were closed temporarily. This adversely affected our business volume and flow of our receivable as well.

Internationally, the major Australian miners are undertaking cost cutting initiatives and weaker Australian dollar has created uncertainty in that region. The impact of current recession is also felt in Brazil and Chile.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Uncertain global economic conditions and problems in core sector in India had its impact in our domestic and international product sales. Due to decline in prices of crude oil and rubber, there is a pressure from the clients to reduce the current prices. This has adversely affected our service and sales turnover. The Company has focussed its attention on value added products and has reduced the raw rubber trading activity during FY 2015-16 due to the steep fall in the prices of raw rubber. In line with economic slowdown, all the activities of the Company including manufacturing, services and Operation & Maintenance saw a marginal dip in terms of turnover in FY 15-16 compared to the previous year.

COMPANY PERFORMANCE AND KEY DEVELOPMENTS

As the Members are aware, the Company is engaged in rubber and polyurethane based engineered products manufacturing, marketing and servicing activities, all under one roof. The services business caters to installation and maintenance of conveyor belts and allied services such as belt splicing, pulley lagging, belt reconditioning, rubber lining, etc. The products business centres around design, development, manufacture and supply of Rubber and Polyurethane based engineered products for belt cleaning, spillage control, flow enhancement, impact and abrasion protection and screening applications.

STATUS OF UTILIZATION OF PROCEEDS RAISED FROM IPO

As on 31st March, 2016, the funds raised by the Company from IPO were utilized fully for the purposes stated in RHP as follows:

(Rs. in lakhs)

Purpose Amount Utilized
Setting up of Polyurethane Unit 68.28
Expansion of existing Manufacturing Unit 686.59
Setting up of in-house R&D Centre 283.06
Setting up of Lining Unit 169.04
Investment in Thejo Australia Pty Ltd 642.00
IPO Issue Expenses 218.68
General Corporate Purposes 33.01
Total 2,100.66

RESEARCH AND DEVELOPMENT

The approval of Department of Scientific and Industrial Research for the R&D Centre was renewed during 2016. The R&D Centre is focussing on developing new and innovative products as well as bringing continuous improvement of existing products so as to meet the needs of the customers and to tap new markets. The sustained efforts of Research and Development team helped the Company to develop diverse product ranges under varied conditions such as mill liners, and high tension belt splicing compounds capable of withstanding some of the hardest working conditions in leading mines.

SAFETY

As part of its policy of giving utmost importance to safety, the Safety Department of your Company is continuously evaluating every process at its manufacturing as well as work sites, and taking necessary steps for the safety of personnel as well as of properties. The Company conducts safety review on regular basis and takes appropriate steps based on the findings.

OPPORTUNITIES AND THREATS OPPORTUNITIES

The products as well as services offerings of the Company are intended for the core sector industries. The opportunities for the industry in which the Company operates are intertwined with the opportunities for core sector industries.

Despite the current sluggishness in the domestic core sector, the prospects of the core sector industries are expected to be bright in the medium term. Moreover, the Company’s portfolio includes installation and maintenance services and products catering to both the categories. As a result, even during the period of sluggishness, any loss of business in installation-related work is expected to be compensated to a fair extent by increased maintenance works as the maintenance of existing systems would be given due importance during periods of slowdown.

The Company has started its Operations & Maintenance Division under which it offers comprehensive services. Despite the dip in turnover during FY 2015-16, there is a perceptible momentum in favour of the concept of Operations & Maintenance and the market is expected to grow exponentially. The Company expects to tap a sizeable portion of the increasing demand for Operations & Maintenance Services. On the export front, the Company has explored International Markets and has accordingly set up its branch office in Perth, Australia and subsidiaries in Brazil and Chile. It takes considerable time to achieve breakthrough in these markets and we expect good business and returns from them in the medium term.

THREATS

There are only limited number of organized players in the service segment in which the Company operates. However, competition from the unorganized sector is a challenge for the services business of the Company. In Operation & Maintenance, there is intense competition from organized segment especially during times of cyclical downturn.

Policy change in respect of core sector industries will have direct impact on the business of the Company as it primarily caters to core sector industries in the domestic market.

The prices of most of the raw materials used by the Company are highly volatile. The volatility is expected to continue in the near future as well. The Company is mitigating this risk by framing appropriate procurement and pricing policies.

FUTURE OUTLOOK

The policy framework formulated by the new Government during last year is expected to create a conducive environment for the growth of commerce and industry in our country. However, speedy and successful implementation of key components such as GST, Land Acquisition Amendment Bill, Labour Code on Industrial Relations Bill, etc will determine the pace at which the impact will be felt at the grass root level.

FINANCIAL PERFORMANCE

The financial performance of the Company in the year under review has remained in line with the previous year but for the fall in turnover on account of the conscious decision taken to slow down trading in raw rubber. While the manufacturing division has maintained the turnover, the Services Division saw a fall of about 6% and Trading Division about 33% in terms of turnover. Export has shown a growth of about 61% on product front compared to the previous year. Your Company is expanding its business in overseas markets through its subsidiaries and branch, which is expected to improve the export turnover further. The production of moulded and extruded rubber products was 1,062 tonnes during 2015-16, registering a negative growth of 2.66% over the previous year (1,091 tonnes). The production of adhesives during the year under review was 262 tonnes, showing a negative growth of 4% over the previous year (273 tonnes).

SEGMENT WISE PERFORMANCE

Your Company has 3 segments of revenue – Manufacturing Units, Service Units, and Others. Audited financial results of these segments are furnished in Note 25.4 forming part of the Financial Statements.

RISK AND CONCERNS

The Company has put in place Risk Management Policy and Procedures for identification, assessment, management, monitoring and minimization of risks. It has identified potential risks under various categories like Business Dynamics, Operations, Liquidity, Market/Industry, Human Resources, Systems and Disaster Management. The Company is periodically reviewing the risks and their identification, assessment, monitoring and mitigation procedures. It does not perceive any major technological, operational, financial or environmental risks in the near future.

However, continuing uncertainty in domestic and global markets, constraints in infrastructure, recent developments in the price of gold and iron ore adversely affecting gold and iron ore mining activities across the globe and latest developments in global mining activities are causes for concern in the near/medium future.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Your Company has adequate internal control systems combined with Delegation of Powers and periodical review of the process. The control system is also supported by internal audits and management reviews of documented policies and procedures.

DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS

During the year, the Company, as part of on-going exercise in skill upgradation, deputed different classes of its employees to programmes and seminars which would help them to add to their professional knowledge and skills. The Company has also conducted in-house skill development programme for workers in association with National Skill Development Corporation of India.

In order to increase the linear relationship between performance and reward, increments / incentives and ESOP are being provided based on performance. The Company continued to identify and implement initiatives which enhance productivity and efficiency.

CAUTIONARY STATEMENT

Certain statements in the Management Discussion and Analysis describing the Company’s views about the Industry, objectives and expectations, etc. may be considered as ‘forward looking statements.’ The Company has tried to identify such statements by using words such as ‘expect’, ‘anticipate’, ‘hope’, ‘likely’, ‘plan’, ‘projected’, ‘believe’, etc. While making these statements, the Management has made certain assumptions which it believes are prudent. There is no guarantee that the assumptions would prove to be accurate. Actual results may differ substantially or materially from those expressed or implied in the statement. The Company undertakes no obligation to update any of the forward looking statements, whether as a result of any future events, change in assumptions or for any other reason, whatsoever. The forward looking statements are purely intended to put certain things in perspective based on the assumptions and estimates of the Management and in no way solicit investment. Members and others are requested to make their own judgment before taking any decision to invest in the shares of the Company.

INTERNAL FINANCIAL CONTROL SYSTEM

The Company has in place adequate internal financial controls with reference to Financial Statements. During the year, such controls were tested and no reportable material weaknesses were observed.

SUBSIDIARY COMPANIES

As on date of this Report, the Company has four subsidiaries, namely, Thejo Hatcon Industrial Services Company, Kingdom of Saudi Arabia (Thejo Hatcon) with 51% shareholding, Thejo Australia Pty Ltd., Australia (Thejo Australia) with 74% shareholding, Thejo Brasil Comercio E Servicos Ltda, Brazil (Thejo Brasil) with 99.99% shareholding and Thejo Engineering LatinoAmerica SpA, Chile (Thejo Chile) with 99.62% shareholding.

The Audited Consolidated Financial Statements of the Company for the year ended 31st March, 2016 are annexed to the Financial Statements. These Statements have been prepared as per Accounting Standard 21 issued by the Institute of Chartered Accountants of India.

PERFORMANCE OF SUBSIDIARY COMPANIES

Thejo Hatcon Industrial Services Company (Thejo Hatcon) is engaged primarily in rubber lining and related industrial services activities. During the period 01st April, 2015 to 31st March, 2016, Thejo Hatcon achieved a turnover of SAR 2.42 million (Rs. 415.48 lakhs) with a loss of SAR 0.90 million (Rs. 149.66 lakhs). During the year, Thejo Hatcon has bagged an order for SAR 2.9 million from M/s Cleveland, which would be executed in FY 2016-17.

Thejo Australia Pty Ltd (Thejo Australia) is a servicing Company, primarily engaged in belt splicing, belt jointing and related activities. During the period 01st April, 2015 to 31st March, 2016, Thejo Australia achieved a turnover of AUD 3.60 million (Rs. 1,771.63 lakhs) with a loss of AUD 0.53 million (Rs. 239.57 lakhs).

Thejo Brasil Comercio E Servicos Ltda (Thejo Brasil) is primarily engaged in selling of bulk material handling products. During the period 01st April, 2015 to 31st March, 2016, Thejo Brasil achieved a turnover of BRL 0.13 million (Rs. 24.76 lakhs) and it incurred a loss of BRL 0.25 million (Rs. 48.32 lakhs).

Thejo Engineering LatinoAmerica SpA (Thejo Chile) is primarily engaged in selling bulk material handling products. During the period 01st April, 2015 to 31st March, 2016 Thejo Chile achieved a turnover of USD 0.07 million (Rs. 44.54 lakhs) and had incurred a loss of USD 0.33 million (Rs. 211.56 lakhs).

CONSERVATION OF ENERGY, RESEARCH AND DEVELOPMENT, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO

Particulars relating to conservation of energy, technology absorption, foreign exchange earnings and outgo, as prescribed under Sub-section 3(m) of Section 134 of the Companies Act, 2013 read with the Companies (Accounts) Rules, 2014 are given in Annexure 1 forming part of the Board’s Report.

CORPORATE SOCIAL RESPONSIBILITY COMMITTEE

Your Directors have constituted a Corporate Social Responsibility Committee (CSR Committee) comprising Mr. K.J. Joseph, Mr. Thomas John, Mr. V.A. George and Mr. V.K. Srivastava as Members.

The Committee has been entrusted with the responsibility of formulating and recommending to the Board, a Corporate Social Responsibility Policy (CSR Policy), indicating the activities to be undertaken by the Company, monitoring the implementation of the framework of the CSR Policy and recommending the amount to be spent on CSR activities. The CSR Policy is provided in the Corporate Governance Report.

During the year 2015-16, the Company was required to incur CSR expenditure of Rs. 23.74 lakhs being 2% of the average net profits for the immediately preceding three financial years. In compliance with this requirement, the Company spent Rs. 24.18 lakhs on the eligible projects approved by the Board on the recommendation of the CSR Committee, thus fully meeting the CSR target for the year under review. A brief outline of the Company’s CSR Policy and Projects undertaken are given in Annexure 2 to Board’s Report.

EXTRACT OF ANNUAL RETURN

The Extract of Annual Return in Form No. MGT-9 as per Section 134 (3) (a) of the Companies Act, 2013 read with Rule 8 of Companies (Accounts) Rules, 2014 and Rule 12 of Companies (Management & Administration) Rules, 2014 is attached as Annexure 3 forming part of the Board’s Report.

NUMBER OF MEETINGS OF BOARD

The Board of Directors met five times during the Financial Year 2015-16. Further details are given in the Corporate Governance Report forming part of the Board’s Report.

DIRECTORS’ RESPONSIBILITY STATEMENT

Your Directors state that:

a) in the preparation of the annual accounts for the year ended 31st March, 2016, the applicable accounting standards have been followed and there are no material departures from the same;

b) the Directors have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at 31st March, 2016 and of the profit of the Company for the year ended on that date;

c) the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d) the Directors have prepared the annual accounts on a ‘going concern’ basis;

e) the Directors have laid down internal financial controls to be followed by the Company and that such internal financial controls are adequate and are operating effectively; and

f) the Directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems are adequate and operating effectively.

POLICY ON DIRECTORS’ APPOINTMENT AND REMUNERATION

The policy of the Company on Directors’ appointment and remuneration, including criteria for determining qualifications, positive attributes, independence of a Director and other maters provided under sub-section 3 of Section 178 of the Companies Act, 2013, adopted by the Board of Directors is given in the Corporate Governance Report forming part of the Board’s Report.

AUDITORS’ REPORT

The Auditors’ Report for the year ended 31st March, 2016 does not contain any qualification.

AUDITORS

M/s. Joseph & Rajaram, Chartered Accountants, Chennai, retire at ensuing Annual General Meeting and are eligible for re-appointment.

SECRETARIAL AUDIT

The Board appointed Mr. G. Porselvam, Practising Company Secretary, to conduct Secretarial Audit for the Financial Year 2015-16. The Secretarial Audit Report for the Financial Year is attached as Annexure 4 to the Board’s Report. The Secretarial Audit Report does not contain any qualification, reservation or adverse remark.

PARTICULARS OF LOANS, GUARANTEES AND INVESTMENTS

Full particulars of Loans given, Investments made and Guarantees given which are required to be disclosed under Section 186 (4) of the Companies Act, 2013 are given in Annexure 5 forming part of the Board’s Report.

PARTICULARS OF CONTRACTS OR ARRANGEMENTS MADE WITH RELATED PARTIES

Particulars of contracts or arrangements with related parties required to be given under Section 188 (2) of the Companies Act, 2013, in Form No. AOC-2, are set out in Annexure 6 forming part of the Board’s Report.

COMMITTEES OF THE BOARD

Currently, the Company has four Committees of the Board of Directors, namely the Audit Committee, Compensation / Nomination and Remuneration Committee, Corporate Social Responsibility Committee, and Shareholders’ and Investors’ Grievance Committee. The terms of reference of the Committees are provided in the Corporate Governance Report forming part of the Boards’ Report. The composition of the Committees is as follows:

Name of the Committee Composition of the Committee Status
Audit Committee Mr. M P Vijay Kumar Independent Director, Chairman
Mr. N Ganga Ram Independent Director, Member
Mr. A Satyaseelan Independent Director, Member
Compensation / Nomination and Remuneration Committee Mr. N Ganga Ram Independent Director, Chairman
Mr. V K Srivastava Independent Director, Member
Mr. M P Vijay Kumar Independent Director, Member
Corporate Social Mr. V K Srivastava Independent Director, Chairman
Responsibility Committee Mr. K J Joseph Non-executive Director, Member
Mr. Thomas John Non-executive Director, Member
Mr. V A George Managing Director, Member
Shareholders’ and Investors’ Dr. C N Ramchand Independent Director, Chairman
Grievance Committee Mr. V K Srivastava Independent Director, Member
Mr. K J Joseph Non-executive Director, Member
Mr. Thomas John Non-executive Director, Member

All the recommendations made by the Audit Committee were accepted by the Board of Directors, without any exception.

VIGIL MECHANISM

The Company has put in place Whistle Blower Policy and established the requisite Vigil Mechanism for employees and Directors for reporting concerns about unethical behaviour, actual or suspected fraud or violation of law to a designated Committee. The Committee consists of Mr. M.D. Ravikanth, Chief Financial

Officer & Secretary, Mr. S. Premjit - Head EMD & Mr. Thomas K Abraham – Head HR & Admin. This mechanism also provides for adequate safeguards against victimisation of reporting employees. The Policy has been disseminated to all the employees through display on Notice Board and the Company’s website.

DIRECTORS AND KEY MANAGERIAL PERSONNEL

On the recommendation of the Compensation / Nomination and Remuneration Committee, Mr. Rajesh John (DIN 05161087) was reappointed by the Board as Whole-time Director for a period of five years with effect from 16th January, 2017, subject to the approval of the Members at the ensuing Annual General Meeting vide Item 6 of the Notice dated 30th May, 2016 convening the ensuing Annual General Meeting. None of the Company’s Directors have any family relationship with him, save and except that Mr. Thomas John and Mr. Rajesh John are related as father and son.

Mr. Thomas John (DIN 00435035), Vice Chairman, retires by rotation at the ensuing Annual General Meeting and being eligible, offers himself for reappointment.

Mr. V.A. George (DIN 01493737), retires by rotation at the ensuing Annual General Meeting and being eligible, offers himself for reappointment.

A brief resume of these Directors together with related information is given in the Notice convening the ensuing Annual General Meeting. The Board recommends their appointment / re-appointment as Directors of the Company.

The Company has received declarations from all the Independent Directors of the Company, confirming that they meet the criteria of independence as prescribed under Section 149(6) of the Companies Act, 2013.

None of the Independent Directors will retire by rotation at the ensuing Annual General Meeting.

BOARD EVALUATION

A formal annual evaluation is required to be made by the Board of its own performance and that of its Committees and individual Directors. Schedule IV of the Companies Act, 2013 states that the performance evaluation of the Independent Directors is to be done by the Board of Directors, excluding the Director being evaluated.

Accordingly, the performance evaluation was done by the Board of Directors during the year under review. Similarly, the performance of the Non-Independent Directors and of the Board as a whole was evaluated by the Independent Directors at a separate Meeting held by them. The evaluation of all the Directors made was on the basis of the criteria and framework adopted by the Compensation / Nomination and Remuneration Committee.

PERSONNEL

In terms of the provisions of Section 197(12) of the Companies Act, 2013 read with Rules 5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a statement showing the names and other particulars of the employees drawing remuneration in excess of the limits set out in the said Rules is attached as Annexure 7a to the Board’s Report.

Disclosures pertaining to the remuneration and other details as required under Section 197(12) of the Act read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are attached as Annexure 7b to the Board’s Report.

CORPORATE GOVERNANCE

Your Company has voluntarily complied with the requirements of Corporate Governance to the maximum extent possible. A report on Corporate Governance is attached as Annexure 8 to the Board’s Report.

GENERAL

Your Directors state that there were no transactions in respect of the following items during the year under review requiring disclosure or reporting:

1. Deposits covered under Chapter V of the Companies Act, 2013.

2. Issue of equity shares with differential rights as to dividend, voting or otherwise.

3. Issue of shares (including sweat equity shares) to the employees of the Company under any scheme.

4. Receipt of remuneration or commission by the Managing Director or the Whole-time Directors of the Company from any of its subsidiaries.

5. Significant or material orders passed by the Regulators or Courts or Tribunals which impact the going concern status and Company’s operations in future.

Your Directors further state that during the year under review, there was no case filed pursuant to the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

ACKNOWLEDGEMENT

The Directors wish to thank the Company’s Bankers for their continued support. The Directors also wish to thank the Company’s customers and stakeholders for their patronage.

Your Directors place on record their appreciation of the good work done by the employees of the Company at all levels.

For and on behalf of the Board
K J JOSEPH THOMAS JOHN V.A. GEORGE
Place : Chennai Chairman Vice Chairman Managing Director
Date : 30th May, 2016 DIN 00434410 DIN 00435035 DIN 01493737