MANAGEMENT DISCUSSION AND ANALYSIS

Economic Overview

Despite a marginal slowdown in the global economy during 2014-15, India witnessed a spurt in GDP growth. The general elections in 2014, which resulted in a majority government at the Centre, triggered a wave of optimism across the country. Consequently, India's GDP growth is steadily heading towards former levels posted in the first decade of the millennium. Based on the revised series (Base year: 2011-12), real

GDP growth climbed from 5.1 per cent in 2012-13 to 7.3 per cent in 2014-15 on the back of robust performance in both the manufacturing and services sector. The first two quarters of 2015-16 also delivered encouraging growth figures, with GDP increasing by 7 per cent in the Apr-June quarter and 7.4 per cent in the Jul-Sept quarter. Business confidence was given a concrete fillip by the policies that followed, including speedy clearance mechanisms coupled with the Government's 'Make in India' initiative.

Simultaneously, low international oil prices resulted in bringing down inflation, which in turn restored domestic demand and both private and public consumption. Side by side, sustained inflation control enabled the Reserve Bank of India to reduce policy rates and allow a more easy monetary approach. Towards the end of September 2015, the RBI cut its benchmark rate by 50 basis points, making that its fourth rate cut since January 2015.

Growth in industrial production, which remained subdued (at near zero levels) during the latter half of 2014-15, has picked up due to an improvement in economic activity. By August 2015, its growth touched a three-year high of 6.4 per cent y-o-y. Broadly, there has been an improvement in segments such as consumer durables, mining, manufacturing and electricity. This signals that supply-side constraints are being evened out gradually. Further, a visible improvement in capital goods, a variable which measures investment activity on the ground, suggests that the recovery is deep. All in all, the improvement in the IIP coupled with its qualitative changes reiterates that a gradual recovery is under way in the Indian economy.

Looking ahead, softer lending rates, the hikes in salaries of public sector employees, after the 7th Pay Commission, and a tangible growth in household savings on the back of lower inflation and oil prices will all contribute to a more vibrant economy. At the same time, the gradual lifting up of mining bans, an improvement in private consumption demand due to a rise in discretionary spending and faster implementation of projects  due to de-bottlenecking in clearances and an improved investment climate will all eventually translate into faster growth.

While the Government projects that GDP growth will increase by close to 8 per cent in 2015-16, international agencies like United Nations Conference on Trade and Development (UNCTAD) and the IMF peg growth at around 7.5 per cent and 7.3 per cent, respectively. These estimates are closer to the RBI's revised forecast of 7.4 per cent.

With steady and robust economic growth, the foundry industry is bound to receive a fillip through a greater demand for capital goods. The industry will also benefit from the demand for products such as automobiles, electronic goods, pump sets, etc. as its output forms the basic raw material for these goods.

Overview of the Industry

After China and the US, India has the third largest casting manufacturing industry in the world. According to a survey by the American Foundry Society - Modern Castings, the installed capacity of Indian Foundries was around 15 mmt/annum in 2012-13 and the annual production was 9.3 mmt. Of the total of approximately 5,000 foundries at that time, around 85 per cent are small units, 10 per cent are medium sized and only 5 per cent are large organised units. By 2013-14, the total production increased by 5.3 per cent to touch 9.8 mmt.

Exports of castings have played a critical role both for the industry and the economy. While these have been growing steadily since 2009-10, they witnessed a marginal dip in 2013-14 due to slack demand that resulted from a slowdown in global growth

As most Indian foundries are labour intensive, with manual handling of operations, the industry is estimated to employ about 5 lakh people directly and an additional 1.5 lakh people indirectly.

Traditionally, die-casting for the automobile industry and electronic goods formed the mainstay of the industry. However, today, it also manufactures various types of castings comprising ferrous, non-ferrous, aluminium alloys, graded cast iron, ductile iron, steel etc. The end-user industries of the casting industry include automobiles, tractors, railways, machine tools, defence, etc.

Business Overview

Alicon Group, a global consortium of companies, is one of the largest aluminium foundries in India. It is involved in design, engineering, casting, machining and assembly, painting and surface treatment of aluminium components and serves both the domestic and export markets.

2014-15 was a difficult year for OEMs. Challenges in the economic environment brvented them from reaching their targets despite planning business volumes and capacities. As a provider of key components to OEMs, Alicon was affected by OEM's performance shortfalls. Nevertheless, the Company managed to sustain its growth rates at levels above those in the industry. This performance was made possible due to infrastructural and technical capabilities, inherent efficiencies and a visionary management.

More importantly, the Company has effectively utilised the lean time to undertake consolidation of the business increments that were implemented in recent times. The Company has been focussed on better control of costs, improvement in processes and a rationalisation of manpower and energy requirements. The Company has recently executed the merger of the casting business of Atlas Castalloy Ltd with Alicon Castalloy Ltd to gain greater economies of scale and a larger consolidated client base. Alicon has also readied itself to cater to future trends through insightful efforts, some of which involve import substitution in the spirit of the incumbent government's Make in India initiative. These efforts will result in business expansion. Major amongst these are:

• Conversion Trend: The Company is earnestly working on the conversion of components to support light-weighting of vehicles. Light-weighting of vehicles is required by all new auto norms, including Euro IV and V, and therefore all OEMs are under brssure to reduce weight. Alicon is atop this trend with its ongoing conversions.

• Prototyping: With an increase in the number of OEMs and their requirements, the markets are being brsented with a wide range of input products. As a result, the lead time for development of new products has become very narrow. To access fresh prototyping, in the face of short lead development times, manufacturers typically have been looking to Europe or the US. Alicon, which has initiated prototyping at a conceptual stage, will be among the first Indian companies to provide prototyping to OEMs on Indian soil. Prototyping projects will reduce validation costs and save validation time for the OEMs.

• Nickel Silicon Carbide Coating: This coating on the bore surface of the engines enables better fuel and engine efficiency and is a process used for high end bikes and vehicles. Presently, the process is available only in Europe and the US. As bikes manufactured in Indian now have 250-300 CC engines, the need for Nickel Silicon Carbide coating has increased. To provide this facility, Alicon has signed an MoU with Athena, Italy and will initially formulate the process via this partner. As volumes increase, the Company will eventually set up a plant at a logistically advantageous location and undertake the process in-house.

Corporate action

Merger of the Casting Business of Atlas Castalloy Ltd with Alicon Castalloy Ltd

Alicon and Atlas Castalloy (Atlas), a company established in 1969 in Pune, were engaged in similar business activities, i.e. the manufacturing of Aluminium Die Casting using LPDC (Low Pressure Die Casting) and GDC (Gravity Die Casting) processes.

In a strategic move, the casting business of Atlas was merged with Alicon through a non-cash transaction. This merger will help Alicon to achieve greater economies of scale, optimal utilisation of resources, improve administration and reduce costs.

The transfer will also provide the Company access to a larger customer base which includes clients such as Greaves Cotton Limited, Royal Enfield's Motorcycle, Suzuki, Gilbarco, TATA, TAFE, MIDCO, Knorr-Bremse Germany and Atlas Copco and the additional production capacity and capabilities of Atlas. It will leverage the synergies arising both in terms of revenues as well as costs and enable the merged entity to strengthen its focus on its core competencies.

Total Income

The Company's total income for 2014-15 stood at Rs. 6,410 Million against Rs. 4,441 Million in 2013-14, recording an increase of 44.35 per cent due to merger of casting business of Atlas Castalloy.

Costs

Anticipating the tough market scenario, the Company increased its concentration on controlling/curbing operating costs, so as to shield itself from a larger impact on the bottom line. The Company also increased its emphasis on efforts towards efficiency improvement and judicious utilisation of available capacity, however, there are some increases in the costs due to merger of Atlas Castalloy casting business in brvious year, impact of same will be reflected in coming years.

The manpower cost as a percentage of total turnover increased from 11.81 per cent in 2013-14 to 12.40 per cent in 2014-15. The power and fuel costs increased by Rs. 92.72 Million in absolute terms. However, in percentage terms, it is lower than brvious year i.e. 7.15 per cent compared to 8.26 per cent The Company's finance costs witnessed an increase by 0.37 per cent of total turnover in 2014-15, over 2013-14. It increased by Rs. 69.35 Million in absolute terms.

Earnings before Interest Debrciation Tax and Amortisation (EBITDA)

EBITDA increase from Rs. 498 Million to Rs. 697 Million (increase of 40 per cent) due to merger of casting business of Atlas Castalloy.

Profit before Tax (PBT)

The Profit before Tax (PBT) increased by 35 per cent to Rs. 297 Million in 2014-15 from Rs. 220 Million in 2013-14

Profit after Tax (PAT)

The PAT for 2014-15 is recorded at Rs. 207 Million compared to Rs. 161 Million in 2013-14. The impact on PAT is due to better operational efficiencies, cost control and manpower planning and merger of Atlas Casting business.

Earnings per Share

The Earnings per Share increased from Rs. 14.67 in 2013-14 to Rs. 18.84 in 2014-15.

Net Worth

During the year, the Company's net worth increased from Rs. 1,140 Million in 2013-14 to Rs. 1,314 Million in 2014-15, bringing the book value per share to Rs. 119 from Rs. 104, during the brvious fiscal year.

Dividend

The Company declared a record dividend of 60 per cent for the current fiscal year after 50 per cent during the brvious year.

SWOT Analysis Strengths

Large industry player: The foundry industry is largely unorganised with close to 85 per cent of functional units in the small scale sector. Beyond better economies of scale and the benefits that arise from greater use of technology, being one of the largest players in the industry enables Alicon to leverage its leadership position to buck trends and enjoy the first mover advantage.

International markets: With established international markets and exports that typically constitute a third of revenue, the Company is in a position to insulate itself from domestic exigencies or international ups and downs.

Collaborations with international companies: Due to the joint ventures, technological collaborations and other tie-ups that the Company has managed to forge, it manages to amalgamate the best of European engineering, Japanese quality and Indian ingenuity to produce exceptional and innovative aluminium casting products.

Unsatiated domestic markets: India is still at a nascent stage of growth and the foundry industry meets the most basic needs of development of any nation. Accordingly, the Company can assume large demands for years to come.

Research and development centre: Keeping pace with the evolving needs of its customers, requires constant efforts to create new solutions matched by a more contemporary, synergistically-aligned product base. To this end, Alicon is continuously investing in creating a robust R&D core to develop solutions going beyond today, to meet the demands of tomorrow. Alicon's Research and Development facility has been approved and certified by the Department of Scientific and Industrial Research, Government of India.

Weaknesses

Dependence on people: Despite being one of the most mechanised companies in the industry, Alicon still depends on its employees for its performance. It apbrciates this fact and accordingly, hires suitable resources, is constantly instituting training and refresher programmes to ensure that it brings out their potential and offers them a stimulating and facilitating work environment to ensure retention.

Opportunities

(a) Automobiles

The Indian auto component industry is expected to register a turnover of US$ 66 Billion by 2016 with the likelihood of touching US$ 115 Billion by 2021. In addition, industry exports are projected to reach US$ 12 Billion by 2016 and reach US$ 30 Billion by 2021 (Source: ACMA). The 'Make in India' pitch may further boost the growth of the components industry. Global growth is expected to rise to 3.0 per cent in 2015 and average about 3.2 per cent through 2017 (Source: World Bank). The US economic growth is expected to be around 3 per cent in 2015, largely due to more robust private domestic demand, while EU growth is unlikely to cross 1 per cent, owing to high unemployment levels.

Automobile companies in US expecting increase in demand due to positive economic conditions (oil prices, low inflation) and poor fuel economy of ageing fleets are driving order placement. The Company expects the overall demand in from this segment.

2014-15 was a good year for the automobile industry too. With the exception of Commercial Vehicle, which witnessed a marginal dip in sales growth, all other segments demonstrated strong growth trends. During the current fiscal, 2015-16, Commercial Vehicle sales have picked up too, on the back of softer interest rates and cheaper fuel costs.

As per the latest figures available on Society of Indian Automobile Manufacturers (SIAM), the sale of Commercial Vehicle was up by a robust 12.07 per cent y-o-y in September, 2015 while domestic passenger car sales rose 9.48 per cent from 1,54,898 units in September 2014 to 1,69,590 units in September, 2015. The sale of two-wheelers, however, declined marginally by 1.06 per cent during the same period.

A number of government-initiated measures and other developments have resulted in growth in the sector and will continue to provide impetus. These include:

• The tractor segment will get a boost from the allocation of credit of Rs. 850,000 crore (US$ 127.6 Billion) through the Union budget (2015-16) to farmers. (Source: Automobile report - India Brand Equity Foundation (IBEF), Sept. 2015)

• Government's plans to promote eco-friendly cars - CNG-based vehicles, hybrid and electric vehicles - will bring out a whole new range of automobiles which will find their own market and demand.

• Announcements of intentions by leading international car manufacturers - General Motors, US-based car maker Chrysler, Mercedes Benz, and Germany-based luxury car maker BMW, to set up plants or expand capacities in India.

• Last but not the least, the Government's Automobile Mission Plan (AMP) for the period 2006-16 aimed at accelerating and sustaining growth in this sector has finally begun to bear fruits.

(b) Power

According to IBEF, as of July 2015, the total thermal installed capacity stood at 191.6 gigawatt (GW), while hydro, renewable and nuclear energy installed capacity totalled 41.9 GW, 36.5 GW and 5.8 GW, respectively. The report further states that around 293 global and domestic companies have committed to generating 266 GW of solar, wind, mini-hydel and biomass-based power in India over the next 5-10 years. The initiative would entail an investment of about US$ 310-350 Billion. The Government's near term target of two trillion units (kilowatt hours) of energy by 2019 will entail doubling the current production capacity. According to the Union Power Minister, Mr. Piyush Goyal, the Indian power sector has an investment potential of Rs. 15 trillion in the next 4-5 years.

These dynamics, coupled with the fact that the Government has identified power as a key sector of focus if India wishes to attain sustained industrial growth, underlines the potential of the sector.

Alicon has forayed into the power sector in India, in a small way, as a supplier of components. Now, the Group is expecting to venture into export markets for the same products. It envisages leveraging the knowledge it has acquired over the last three years to establish its products in the international arena. As the capabilities that have been established in the last three years will be fully utilised through this horizontal deployment of its product overseas, the top line and bottom line performance will improve.

(c) Healthcare

The healthcare sector is growing at a scorching pace on the back of its strengthening coverage, services and the increase in Government focus as well interest from private players. Further, the Ministry of Health has targeted the development of 50 technologies in 2016 for the treatment of diseases like Cancer and TB. According to IBEF, during 2008-20, the market is expected to record a CAGR of 17 per cent and the total industry size is expected to touch US$ 160 Billion by 2017 and US$ 280 Billion by 2020. This renewed focus on the healthcare sector by the Government makes it attractively poised for growth.

At the same time, there is considerable interest evinced by private players, especially international companies, in setting up manufacturing facilities for medical equipment in the country. A global syndicate of 270 entrebrneurs and technology veterans from 30 countries, Silicon Gigs, is considering bringing in $60 Million from its members to set up electronic units in India that can support medical equipment, amongst other products.

All these developments will have an upbeat impact on Alicon's business in the sector. However, due to the gestation period between announcement of policies and their fruition, Alicon's growth through opportunities in the healthcare sector will materialise in the medium term.

Threats & Concerns

• Industrial slowdown and Sluggish Business environment

A sluggish economic environment or an industrial slowdown can dampen the industry's growth prospects, which in turn could result into cutbacks in investment towards the industry.

De-risking has been an integral part of Alicon's business strategy. In a two-pronged approach, the Company has been continuously expanding its client base (no single customer account exceeds 20 per cent of total revenues) and at the same time diversifying its markets by ensuring steady growth in exports to distant markets (the Company aims to accrue one third of its revenue from export earnings).

• Raw material costs

The price of metals and fuel form a bulk of the input costs, which could become volatile over a period of time. This could hamper growth or result in an erosion of cost efficiencies. In addition, any increase in import duties on inputs could lead to losses for the industry.

Alicon is putting into process the standardisation of an alloy, i.e. reducing the number of alloy variants. This will enable consolidation of raw material purchase with minimal number of alloys which are brsently at 20 odd and thus bringing with it a sizeable amount of inventory level. standardisation of alloy will help to bring down the inventory level, which will lead to cost benefit thereby, positively impacting bottom line, it will also helps in standardising the manufacturing process.

• Shift in raw material components

Currently, with the thrust on stringent emission norms and fuel economy in the global automotive industry, there is a visible shift towards the use of aluminium in all types of vehicles. Looking ahead, aluminium could be replaced by magnesium as it is lighter in weight and finds several applications within the same industries that are currently served by aluminium.

• Competition from international OEM manufacturers

Indian foundries are prone to stiff competition from other international competitors like China, which offer faster delivery and work on lower cost models. A casual approach towards R&D, may lead to dependence on technology from abroad, which could eventually affect competitiveness levels. The price-benefit gap of the Indian foundries can be reduced drastically, on account of effective pricing measures adopted by some European foundries. This is a concern for exports.

Alicon is constantly innovating through R&D and finding ways spot trends before they emerge. Towards this end it is working on conversion of components, lightweighting and other processes that enable it to keep up with the specifications of international clientele.

Business Outlook

The business and consumer confidence that has gripped the nation for the better part of a year and a half has just begun to translate into concrete increases in consumption and demand. Consequently, during the brvious fiscal and until demand picks up considerably, Alicon has been testing the waters with new initiatives. The Group is looking at providing ready-to-use components which conform to standard specifications rather than customised requirements. This will ensure that total quality control can be exercised and defected parts per million (ppm) levels can be brought down. In fact, once this concept progresses from its current nascent stage, Alicon looks forward to reducing the defect rate to below 3.4 defects ppm levels.

The Company is also working on horizontal deployment of suppliers. This entails offering that same type of product across the Group to harness cost benefits. While Alicon has initiated this process, and it has started delivering results in the year under review, these will become more pronounced only towards the end of the coming year.

At another level, the Company is considering consolidating its suppliers as currently, different companies in the Group have their own individual  sets of suppliers. This too will result in finer rates and enhanced service.

In India, the Group specialises in component manufacturing for the two-wheeler and four-wheeler industry. Its major products in the automotive sector include cylinder heads and manifolds. It has now approached the global market with supplies of these products. The larger universe of automotive OEMs in the overseas markets provides the Company with greater opportunities to be tapped. The Group is looking at capturing these opportunities in the next two to three years by using their base capabilities and leveraging relationships with existing customers.

The Group is currently one of the major manufactures of base plates for AMT (Automated Manual Transmission) vehicles for OEMs in India. Huge opportunities exist globally for the same. Alicon is considering building direct/indirect connections with overseas OEMs to tap the international opportunity.

Lastly, envisaging an immense opportunity in the Aeronautical sector in India, which is opening up on the back of the Make in India initiative, the Group is considering providing components to this sector. Catering to this sector will form a part of the Group's 2020 Vision.

Human Resource Management

Alicon has always seen its employees as its true strength. Choosing a 'One Path, One Goal' approach, it encourages holistic engagement from its employees. Some of the innovative initiatives it has conceived to bring synergies between the organisation and its employees include:

Challenging the Now with People support:

This people-oriented mission acknowledges that it is people who take on challenges, innovate, deliver perceptible efficiencies, improve productivity, reduce wastage and undertake Kaizen-based improvements in the work processes. Alicon applauds their outstanding contributions towards making the Company's mission to 'Challenge the Now' a resounding success.

The 'North Star' Philosophy:

Just as the North Star (NS) is the brightest star in the night sky and a guiding star, the Company aims to achieve the highest levels of performance and thus, set a shining example in its universe. The message behind the NS philosophy is: We are proud to be Indians and we work to make India proud.

At the ground level, the Company intends to implement this philosophy, by inculcating a sense of firm commitment towards the nation within each of its employees in the organisation. The manifestation of this commitment at the workplace will be apparent through the Company's support to the Government's Make in India initiative, in the form of a focus on production of the highest quality products as well as a work environment replete with peace, trust and faith in each other.

To inculcate the NS philosophy, small pocket cards which have the NSP Vision, Mission, DNA, rationale, pledge, etc. have been distributed. These messages have also been put up on boards everywhere - in the plant, training hall, etc. Alicon has also been conducting workshops and training sessions to communicate to employees the direction in which it wants to move.

Other HR Policies: In keeping with the Government's Make in India initiative, Alicon has been deliberately evolving to ensuring that the quality of its workforce is enhanced, through training and skill upgradation, and at the same time, the work environment is made more conducive. Some of its activities towards these ends include:

• Promoting home-grown leadership - The Company has adopted the strategy of building leaders from the grass-root level.

• Technical training and internships - It has organised educational tie-ups with National Institute of Secondary Steel Technology  (NISST) and National Institute for Foundry, Pune. It is in discussions with these institutions towards attracting students to work as interns or work on projects. Further, students from Management and Engineering Institutes have also been invited to work as interns or on projects.

• Tie-up with Industrial Training Institutions (ITIs) - These institutes have been engaged to develop a module, which will enable the Company to train people in different areas of the foundry and for the casting business. The module goes into the detail of every operational process. Being a structured training programme, it awards a certification after every stage of training, which could entail 3, 6 or 12 months. The training for Levels 1 & 2 require 3 months and Level 3 & 4 progress for 6 months. At the end of Level 4, the trainees are able to operate one shift independently. During the 12-month course, the last six months are used to provide behavioural training.

• Quality control through constant training of employees - The

Company institutes capability building exercises at all levels and provides technical training at regular intervals so that quality does not suffer.

• Focus on safety of employees - Safety of employees is a major focus at Alicon. Towards this end, there are safety monitoring systems at all shop levels and mechanisms to ensure that safety is practised by all.

Internal Control Systems

The Alicon Group has adequate internal control systems in place to safeguard all assets and ensure efficient productivity at all levels. The Company is committed to ensuring that its operations are carried out within the purview of a well-defined internal control framework. Good governance, well-defined systems & processes, a vigilant finance function and independent internal reviews form the basis of internal control systems. The internal audit function independently scrutinises critical audit areas, based on audit plans that are generally approved by the Audit Committee. Plans are formulated on the basis of a risk evaluation exercise, to focus on the assessment of the relatively riskier areas. Significant audit findings are brsented to the Audit Committee, which meets regularly to review findings and status of the corrective actions taken by the management. Timely reviews are carried out to ensure that all transactions are correctly authorised and reported. Whenever deemed necessary, internal control systems are reassessed and corrective action is also initiated.