MANAGEMENT DISCUSSION AND ANALYSIS REPORT

1 Industry Structure and Developments / Opportunities and Threats

Your Company is engaged in providing innovative wear resistant solutions across diverse sectors like transportation, earthworks, energy, infrastructure and aerospace. Kennametal solutions are built around industry-essential technology platforms, including brcision-engineered metalworking tools and components, surface technologies and earth cutting tools that are mission-critical to customer operations battling extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for material and industrial technology excellence, as well as expertise and innovation in development of custom solutions and services, contributes to its leading position in its primary industrial and infrastructure markets. End users of the Company's products include manufacturers, metalworking suppliers, machinery operators and processors engaged in a diverse array of industries.

Our product offering includes a wide selection of standard and customized technologies for metalworking, such as sophisticated metal cutting tools, tooling systems and services, as well as advanced, high-performance materials, such as cemented tungsten carbide products, super alloys, coatings and investment castings to address customer demands. The Company offers these products through a variety of channels to meet customer-specified needs.

Your Company specializes in developing and manufacturing metalworking tools and wear-resistant engineered components and coatings using a specialized type of powder metallurgy. Metalworking tools are made of cemented tungsten carbides, ceramics, cermets and super-hard materials. Your Company also manufactures and markets a complete line of tool holders, tool-holding systems and rotary-cutting tools by machining and fabricating steel bars and other metal alloys. In addition, your Company produces specialized compacts and metallurgical powders, as well as products made from tungsten carbide or other hard materials that are used for custom-engineered and challenging applications, including mining and highway construction, among others.

The Indian Economy continues to be challenging though various visible steps have been taken by the Central Government in order to improve the economic conditions in the country.The GDP grew at 7.3% in 2014-15 and was marginally better than the prior year growth of 6.9%. The IIP (Index for Industrial production) which is barometer for manufacturing activity in the country made a steady but limited recovery at around 2.8%. At this stage, visible policy changes to drive up Manufacturing and Infrastructure sectors does give hope for growth in these sectors in coming years. Almost all industries ranging from Manufacturing, Mining, Electricity & basic goods grew marginally over prior year.

One of the industries which was badly affected in the prior year was the automobile industry, with which your Company is very closely associated.This industry again had limited growth in 2014-15 with passenger cars growing at 5% (2014-15) and commercial vehicles growing at 6.3% (during October 14-March 15). Leading indicators such as the HSBC PMI however showed some positive sentiment with the same being above 50 levels for a large part of the financial year. One sector which did see a significant decline is the tractor industry which had a YOY (Year On Year) negative growth of 18 to 19% in 2014-15.Your Company also has a large dependence on Medium and Heavy commercial vehicles sector and has been benefited by its limited recovery though the tractor industry did impact on the negative side.The unfriendly tax regime continues and the mood and direction at higher levels of the Government is yet to translate into ground reality. Net Fll inflows during the 2014-15 fiscal year improved from $34.4 Billion to $45.7 Billion and this improvement shows positive investor sentiments. As a result, the Rupee (Rs.) was a little less volatile in FY 15 but has thereafter weakened again to 65-67 levels.

While the Indian economy continues to be optimistic, there is a need to be realistic in terms of the Government's ability to quickly turnaround the economy. Key bills on GST and Land reforms struggle to get cleared through the upper house. The intent of the Government is clearly in the right direction with initiatives such as Make in India, agricultural and mining reforms, focus on power, railways and roads, though it will take another 12-14 months for a visible impact at the ground level.

As conveyed to the shareholders in our last annual report, your Company remained focused around specific initiatives to improve the financial performance and the same has resulted in delivery of good results during FY 15. This approach of focusing around specific initiatives to improve the financial performance would continue in the Financial Year 2015-16 as we do not expect any significant support from the economy, especially in the sectors which are key to your Company's growth. In our view it will take at least another 12-14 months before the initiatives around manufacturing, infrastructure, roads, railways etc. start showing their beneficial impact at the ground level. Your Company continues to engage in moving up the value chain in the infrastructure side of the business by focusingon more value added products and phasing out commodity products with lower profitability. There has also been a strategic shift during the financial year to focus more on Exports to deliver the double benefit of natural currency hedge and business growth. Your Company will be making the required investments in this direction in coming years. 

2. Operations  Your Company continues to consolidate and deliver better financial performance year over year despite the challenging economic scenario. Sales grew by 4.6% YOY and the operating profit (excluding Corporate Social Responsibility expenses and exceptional items) grew by 37% To achieve this result your Company focused around initiatives to improve both the top line and the bottom line. Transportation and Aerospace sectors contributed to the growth of Hard metals business while the Machine Tools business focused around reduction of raw material costs besides improving the product mix. Your Company put in place a dual brand strategy (i.e Kennametal & WIDIA) in the cutting tool market a couple of years back and we continue to leverage the same strategy. We now have two strong brands competing in the market and gaining share. There was a significant amount of work around improving the distributor network and address the white space for gaining additional business. While we focus around retaining the existing market share we intend to deploy additional resources around, growing and newer markets such as energy, aerospace and auto components. Your Company continues to leverage the initiatives started during FY 14 such as NOVO, Productivity optimization and component specific solutions. To retain consistency and gain expertise we consolidated these strategies further in FY 15 to deliver productivity to customers. The Conforma Clad product portfolio had the best year so far delivering a top line of more than Rs. 1000 Lakhs, which is a YOY growth of more than 15%. The Stellaram product portfolio bridged the product gap in turbine blade machining applications and helped us to penetrate through to some of the big energy segment customers. 

During the year your Company launched a few more initiatives in addition to the ones launched in the prior year to be competitive and consolidate in the market place. A few of them are worth noting:  Focus around Asia markets (Hard Metals):  Kennametal intends to leverage the low cost base of Bengaluru manufacturing to export to other countries across Asia.This initiative not only helps the Company to address the markets outside India but helps us in currency risk mitigation. Your Company has committed resources in FY 15 and intends to invest further in coming years aggressively. Kennametal India believes that the export market can grow at a much faster pace with support from the strong network of group companies across the world. 

Leverage EcoGrind: 

Ecogrind sales made a significant contribution to the Machine Tools business during FY 15. The Ecogrind tool grinding machine is a CNC 5axisTool and cutter grinding machine used for manufacturing and re-sharpening of tools such as Drills, End mills and Cutters. It is highly specialized machine capable of producing complex profiles of cutting tools.The machine can grind both Carbide and HSS tools. Your Company would leverage this product line further both within India and outside India. 

Tool Boss Services: 

Tool Boss is a tool vending machine and helps customers in secured storage of tools and supplies These storage units can be used alone or together and offer secure inventory control, accountability of tools usage and flexibility in storage options. During FY 15 theTool Boss scheme gained significant traction and improved commitment from existing customers. This initiative is a shared reward program where the Tool Boss is provided to customers free upon commitment of certain volumes. The Company has so far installed 19 such "Tool Bosses" across India and the same has helped the Company in retention as well as gain share at these customers. 

After Market Services in MachineTools: 

Services business has been one of the focus areas for your Company in FY 15 in the Machine Tool segment. This initiative focusses around: 

- Annual maintenance contracts with our key customers, 

- Machine adaptations for new model / changes at customer end 

- Services on machines supplied 

- Spare parts sale 

Branding continues to be an area of focus for Kennametal. Your Company participated in the IMTEX which is the largest machine tool exhibition in India during January 2015.The Company displayed all three brands i.e Kennametal. WIDIA and WIDMA and received a favorable response from the customers for all its range of new products and services exhibited.Our ECOGRINDVX5 received the FIE award for being the most innovative indigenously designed and manufactured machine in India.

New products and innovations continue to be the DNA of the Company. During January, 2015, your Company launched a range of new products called "INNOVATIONS" for the Kennametal brand and "ADVANCES" for the WIDIA brand.The sales from new products introduced in the last 5 years continue to be greater than 40% in FY 15 as well.

During the year, capacity utilization improved across the product lines.Wear products and MachineTools operated at full capacity while the metal cutting product line did have some capacity to be utilized. Capital investments remained subdued in FY 15 as well. The Company continues to do critical evaluation of new investments to ensure best returns in the most profitable segments/ products. With the economic scenario looking up in the future, the need for investing into new capacities might arise in the near future.

3. Segment-wise performance / reporting

Your Company's business has been categorized into two broad segments in line with Accounting Standard 17-Segment Reporting The primary segments and secondary segments have been categorized based on the nature of the products and services offered by the Company and the business risks associated with the above products / services in markets served.

The primary segments for financial reporting continue to be:

(i) Hard Metal Products

(ii) MachineTools / Machining Solution Group(MSG)

Apart from the primary business segments, the secondary segmental reporting is on the basis of the geographical locations of the customers viz. domestic and international. Common allocable costs are allotted to each segment to the extent of services utilized and activities involved.

4. Company's Outlook

For fiscal year 2015-16, the Company's outlook reflects ongoing market uncertainties as well as the limited visibility related to customer demand trends. We do not expect demand to grow beyond single digit levels in the coming year. Considering the fact that there is not much leverage from the economy, the management continues to focus around customer specific initiatives to drive growth. As in FY 15, profitability improvement will be the key focus area for FY 16 as well. In this direction your Company will continue to take decisions around products, markets and customers which will improve the mix to enable us to grow the profitability. However, your Company could also see some brssure on profitability on account of wage increases in the upcoming periodic wage settlement with the unionized workforce.

At this stage, the time frame for buoyancy in the economy is uncertain and any improvement would only help the Company to better its performance in future.

5. Internal control systems and their adequacy

Elaborate and Clear processes have been put in place to ensure that your Company has appropriate and sufficient controls for efficient and effective conduct of business.The approach is broadly around three phases:

1. Identify and review the process universe

2. Assess each process's inherent risks

3. Define the frequency of evaluation and audit, keeping in view past findings and risks identified in step 2. While deriving the frequency the high risk processes are covered every year and every process at least once in three years.

The Companies Act, 2013 brings in an additional responsibility on the Board with respect to establishment of appropriate control systems in the Company. Section 134 of the Companies Act, 2013 requires the Board/Audit Committee to certify the design and operating effectiveness of the Internal Financial Control mechanism in the Company applicable w.e.f. FYI5.Your Company did an exhaustive exercise with support from the Internal Auditors to understand the design and effectiveness of the controls in place during May, 2015. In total, 713 controls were identified across various processes and tested for their effectiveness.These results were brsented to the Audit Committee of the Board for their inputs and review. The Management is happy to report that your Company's design and effectiveness of the controls has been of a high order with minimal gaps for which also a mitigation plan is in place.

6. Risks and Concerns

Your Company has put in place an elaborate Enterprise Risk Management process wherein the risks faced by the Company are identified under four categories i.e Strategic Risks, Operating Risks, Reporting Risks and Compliance Risks.The risks and the actions to mitigate these risks are brsented to the Risk Committee of the Board for its review and guidance twice in a year.

7. Financial performance

Your Company has delivered a sale of Rs. 57025 Lakhs in FY 15 which is YOY growth of 4.6%. Both the segments i.e Hard Metals and Machine Tools delivered single digit growth rates of 5.4% and I % respectively.The Key highlight for FY 15 has been the significant improvement of the profitability.Your Company delivered an Operating Profit (Earnings before Interest and Taxes before exceptional items) ofRs. 3994 Lakhs which is a growth of 34% compared to FY 14. The sales growth has largely been driven by transportation and aerospace segments while the profitability has been achieved through the following actions:

1. Efficient sourcing of raw materials

2. Reduction in power cost through efficient usage of grid power (saving of Rs. 400 Lakhs)

3. Improvement in product Mix in Machine tools business.The Fixtures business did much better than the Special Purpose Machines (SPMs) and the service income more than doubled to Rs. 500 Lakhs. Fixtures generally have lower content of raw material costs compared to special purpose machines.

4. Efficient cost control efforts during the year in areas like freight,travel etc.

Gross Margins have improved in the range of 100-200 bps in most of the businesses in the Hard Metals segment. However the margin improvements in Hard Metals segment has been offset partially by the IMTEX exhibition expenses which happens every alternate year. Your Company continues to aggressively pursue localization efforts not only to leverage the Indian market but other markets across the world.

During the year the Machine Tool business sales growth has been flat and it is largely on account of low capital spend by various customers. The Two wheeler industry which has a significant contribution to the Machine Tool Business top line was flat after 5-6 years of growth. Your Company will continue to further consolidate the strategy put in place for the MachineTools business to sustain the profitability improvement delivered in FY 15.

As always your Company continues to maintain optimized working capital deployment into the business.The primary working capital as a % to sales came down significantly from 21% in FY 14 to 17% in FY 15.This has been largely possible due to excellent collections, very good control on inventory and improvement in payment terms with the vendors. DSO (Days of Sales Outstanding) has come down from 63 days in the prior year to 58 days in FY 15. Inventory reduced by 2% YOY despite an increase in the topline by 4.6%. Your Company continues to have clean receivables and the provision for doubtful debts is minimal at I % to the total value of receivables.

Return on Capital Employed (without cash and bank balances) has bounced back to 15% levels and has been on a improvement trajectory from the lows of FY 13. Because of the significant reduction in primary working capital coupled with better profitability, the cash flow has been outstanding during the year. Net cash flow generated during the year was Rs. 3920 Lakhs (after dividend) compared to Rs.290Lakhs in FY 14. As a result of this significant improvement in the cash flows, your Company has been able to reward the shareowners with a dividend of 20% and remain a debt free Company in FY 15 as well. Your Company will strive to continue the prudence in financial management in forth coming years as well.

8. Material Developments in Human Resources and Industrial Relations

Our ability to "Deliver the Promise" to our customers is highly dependent on the Competency and Motivation of our employees. Obviously, our employees are our most valued assets. All the Human Resource Processes are focused towards attracting, developing, and retaining talent so as to drive high levels of employee engagement and ensuring a Performance driven culture.

Highlights for FY 15:

• We continued with our Focus on acquiring the right talent at the right time in the right position. Our hiring strategy has been to ensure a Talent Pipeline which is available as and when we are in a need to hire fresh Talent. Also, ensuring that we have a robust Internal Job Posting process and working with very few external consultants, we have ensured that the Lead time to hire is well within the accepted time limits. This, with the end in mind of ensuring business continuity and customer satisfaction.

• The focus on driving a Performance Culture through the Performance Management System was enhanced and this was ensured through the Performance Planning & Management Process.

• Building a Strong Knowledge abled Sales force is part of our Growth Strategy. This includes the training and development of Kennametal as well as Distributor Engineers. On the Technical Training front, there were 32 events which were conducted throughout the year at various locations, including Onsite events at Ford & IMTMA. Apart from our Kennametal Sales Engineers, our Technical Training programs were attended by 718 participants from customer teams and about 122 Engineers were nominated by our Distributor teams.

• In addition to the Technical Programs, we also conducted Programs to strengthen the Leadership Capability among Kennametal mid and front line teams through the Supervisor Development Program and the Transforming Leaders Program. These programs are aimed at developing the innate ability of our employees to develop themselves better as an individual and as a professional, thereby enabling them to drive a performance driven culture in the Organization.

• Industrial Relations at Kennametal has been very peaceful through the year. A unique outbound workshop on Union Leadership Development was conducted during the year to signify the role of Union Leadership in a fast changing Business environment. Through the year, Management has ensured that the Union is well apprised of the Business through Monthly and Quarterly communication meetings.

• The Current Wage Agreement has expired on June 30, 2015. Both the Management and the Union are actively engaged in the negotiation process. The Negotiation process has been progressing at good pace with co-operation from all the teams.

• We continued our Focus on action plans on theVoice of Employee (VOE). During the year, your Company organized OnYour Mind (OYM) sessions with various teams across locations to connect with the employees as well capture employee thoughts and ideas.

• The total number of persons employed in your Company as on June 30,2015 was 815.

Cautionary Statement

The information and opinion in this section consists of certain forward-looking statements, which the management believes to be true to the best of its knowledge at the time of its brsentation based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The Company shall not be liable for any loss, which may arise as

a result of any action taken on the basis of the information contained herein.The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements on the basis of any subsequent developments, information or events.

The information contained herein may not be disclosed, reproduced, or used in whole or in part for any purpose or furnished to any other person(s) without the exbrss prior written permission of the Company.