Management Discussion and Analysis

ELGI EQUIPMENTS LIMITED

Global economic activity remained subdued; however, risks to the overall outlook appear to be coming down. Economic growth is projected to be more gradual, especially in emerging markets and developing economies. The domestic market recovered from stagnancy in the latter part of the year, while growth in international markets has been sporadic.

COMbrSSORS:

The combrssor business accounted for 86 % of the total sales of the Company. It accounts for 89% of the profits of the Company and 85% of the capital employed. This business brsently employs 1592 people.

PERFORMANCE:

The Indian market remained at a low ebb during most part of the year. However, the Company's sales posted a modest growth during the latter part of the financial year. The Company has been able to improve profitability by managing costs and improving efficiencies. Demand for the Company's combrssor business in the domestic market improved due to accelerated sales in select Combrssor segments.

The Company's products continued to be well received by distributors and customers in international markets especially in USA, Europe and the Middle East.

The high cost of operations in the Company's French operations combined with the country's restrictive labour practices made it clear that profitability at Belair SAS is a challenge. The Company took a hard decision to handover Belair SAS to the French judicial system for legal redressal. The Company acquired Belair SAS in Feb 2010 and since then has invested over Euro 6.8 Million to build the business.

During the six years that the Company owned Belair SAS, the same was restructured to leverage the market opportunity in France by significantly adding resources. The Company's new range of globally competitive products were introduced to replace Belair's machines. The distributors and customers readily apbrciated the products and we were able to grow the screw combrssor business at double digit percentage levels. So much so that the Company has close to 750 machines working to the customers' absolute satisfaction in the French market. These untiring efforts, unfortunately, have not been enough to sustain the high cost of running operations at Belair SAS. Growth in sales of products and services have not been adequate. In deference to the French laws, therefore, the Company approached the Commercial Court at Annecy, which has appointed an administrator whose mandate is to restructure Belair SAS to make it profitable while protecting jobs; if this is infeasible, he will recommend liquidation. The Company continues to believe in the opportunity that the French market brsents, and the intention, therefore, is to explore viable means to continue to serve the French market.

Continuing low oil prices has put brssure on our sales growth in the Middle East. However, the Company's focus on the Non-Oil and Gas segments yielded results in sustaining performance in that region.

The Company's business operations were severely affected in China due to the economic slowdown and hence the Company took a decision to restructure the operations in order to minimize losses and approach the market in a focused manner by supplying products that meet the local market requirements. Steps will be initiated shortly to wind down the trading entity, Elgi Combrssors Trading Shanghai Company Limited. The manufacturing license in Elgi Equipments Zhejiang Ltd is being suspended temporarily till new products are developed and made available and business improves in future. The Company has marginally grown its business in Industrial Combrssors in the South East Asian and Oceanic Countries.

OPPORTUNITIES:

With India generally projected to grow at a robust pace, the Company is well positioned to exploit this growth. Economic activity in the US being resilient to global sensitivities, the Company's US operations will continue to perform well. The Company's focus will be on making its brsence stronger in segments that have promised to grow above average and where the market share is low. With continuing efforts in marketing, the Company expects significant growth in sales with negligible incremental costs.

THREATS:

Unless the economic measures taken by various economies of the world towards growth fructify, there could be delayed recovery of the global markets. The Company's continued focus on optimizing costs and improving internal efficiencies will suitably respond to such adverse scenario.

ATS ELGI LIMITED PERFORMANCE:

The Company registered a growth of 11% over the brvious year on the back of improved performance of the automotive sector. Passenger Car sales in India picked up during the year and registered a 7% increase while Medium & Heavy Vehicle segment grew at a significant rate by 30% signaling an overall reversal in trend. Though market conditions have improved considerably, investments in workshop equipment is yet to pick up.

Exports grew by 21% over the brvious year despite major slowdown in economic activity and natural calamities in key export markets.

However, the Company's performance has been enhanced by increasing sales of new products.

Considering the overall market conditions, the performance of the Company is good.

OPPORTUNITIES:

The automotive industry is expected to continue to grow steadily during the coming year. The Company is well placed to capitalize on opportunities that emerge from this growth.

The Company's strategy of enlarging its brsence into other segments of the vehicle servicing and allied industries to reduce its dependence on the growth of the automotive industry is steadily being implemented. Experience from the past year has indicated that the Company is on track to reap benefits from this strategy in the medium term.

THREATS:

A weakening Rupee and resurgence in oil prices could trigger a return to high fuel costs and higher inflation and dampen the demand for passenger vehicles. In such an environment, investments in workshop equipment will tend to be lower.

OVERALL PERSPECTIVES:

In the domestic market, with all the economic indicators showing positive signs, the Company is expected to grow quite well. The restructuring of operations in China and France will substantially reduce revenue leakage. As the Company is planning only routine maintenance capital expenditure in the coming year, the debt levels will be reduced substantially. The prospects of a good monsoon have boosted business sentiments, so have falling interest rates. The Company believes these will translate into economic growth that the Company can capitalize in the coming year.

HUMAN RESOURCE DEVELOPMENT:

The Graduate Engineer Trainee (GET) scheme which we revived in 2012 after a gap of a few years has taken root. The Company now has a critical mass of such GETs who have grown to various levels of the hierarchy in different functions. The ongoing creation of this critical mass of engineers will enable deployment of home grown managers against growth opportunities across the ELGI world, thus minimizing lateral hiring. Industry-academia interface is an important activity that will support intake of bright young engineer trainees. Towards this, the Company has made a start this year by investing in an Air Combrssor Training Laboratory in an engineering college close to its new Kinathukadavu manufacturing facilities. The Company will continue to explore future opportunities in this direction.

During the year, the Company worked with a German vocational training expert to sow the seeds for the ELGI Vocational Training Centre (EVTC). This facility is being created in the Kinathukadavu factory location, to impart machining, assembly and foundry skills both to the new breed of workmen who are being inducted gradually, as also to provide refresher training to the older workmen.