Atlanta Electricals Ltd Management Discussions

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with the Restated Consolidated Financial Information. The Restated Consolidated Financial Information has been prepared by our management as required under the SEBI ICDR Regulations read with the ICAI Guidance Note. For more information, see "Risk Factors Significant differences exist between Ind AS and other accounting principles, such as Indian GAAP, IFRS and U.S. GAAP, which may be material to investors assessment of our financial condition." on page 54.

This Draft Red Herring Prospectus also contains forward-looking statements that involve risks, assumptions, estimates and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including but not limited to the considerations described below. For details, see "Forward-Looking Statements" beginning on page 16.

Unless otherwise indicated or the context otherwise requires, the financial information for the six-month period ended September 30, 2024 and financial years ended March 31, 2024, 2023 and 2022, included herein is derived from the Restated Consolidated Financial Information included in this Draft Red Herring Prospectus.

Certain non-GAAP financial measures and certain other statistical information relating to our operations and financial performance have been included in this section and elsewhere in this Draft Red Herring Prospectus. Such non-GAAP financial measures should be read together with the nearest GAAP measure. See "Risk Factors Certain Non-GAAP financial measures and other statistical information relating to our operations and financial performance have been included in this Draft Red Herring Prospectus. These Non-GAAP financial measures are not measures of operating performance or liquidity defined by Ind AS and may not be comparable with those presented by other companies" on page 48.

The industry-related information contained in this section is derived from the industry report titled ‘Strategic assessment of Transformer market dated January 28, 2025 prepared by CRISIL (the "CRISIL Report"). We have exclusively commissioned and paid for the CRISIL Report for the purposes of confirming our understanding of the industry exclusively in connection with the Offer. We officially engaged CRISIL Limited in connection with the preparation of the CRISIL Report pursuant to an engagement letter dated October 15, 2024. A copy of the CRISIL Report shall be available on the website of our Company at https://aetrafo.com/industry-report.aspx from the date of the Red Herring Prospectus until the Bid/Offer Closing Date. Unless otherwise indicated, the industry-related information contained in this section is derived from the CRISIL Report (extracts of which have been appropriately incorporated as part of "Industry Overview" beginning on page 136).

Overview

We are one of the leading manufacturers of power, auto and inverter duty transformers in India, terms of production volume as of Fiscal 2024 (Source: CRISIL Report). We are also one of the few companies in India, manufacturing transformers up to and including 200 Mega Volt-Amp ("MVA") capacity and with 220 kilovolts ("kV") voltage (Source: CRISIL Report). Over a short period, we have witnessed significant growth in terms of revenue from 6,256.62 million to 8,675.53 million from Fiscal 2022 to Fiscal 2024 at a CAGR of 38.66%.

The Indian power sector is poised for significant growth, driven by strong demand from high-growth end markets such as data centres and EV charging networks (Source: CRISIL Report). As these industries expand, they will place additional pressure on grid capacity and resiliency, necessitating the deployment of new, modern transformers (Source: CRISIL Report). Furthermore, the Indian Railways shift towards high-speed trains has created a surge in demand for transformers operating between 66 kV and 132 kV voltage levels. (Source: CRISIL Report)

Indias renewable energy sector is experiencing unprecedented growth, driven by the governments commitment to reducing carbon emissions and increasing the share of clean energy in the power mix (Source: CRISIL Report). The target of achieving 500 GW of non-fossil fuel-based capacity by 2030 has catalyzed large-scale investments in solar, wind, and hybrid energy projects. As renewable energy adoption expands to remote and challenging terrains, there is also growing demand for compact, lightweight, and robust transformer solutions (Source: CRISIL Report). In alignment with Indias renewable energy goals, we recently embraced the green energy transition in 2021 by securing a major order for the supply of eight 80 MVA, 220/33 kV power transformers for Ultra Mega Solar Park in Andhra Pradesh. We successfully conducted a dynamic short circuit test on our 14/17 MVA, 33/4*0.8 kV aluminium foil wound inverter duty transformer, specifically designed for solar power generation applications on February 17, 2022.

With a pan India presence and operations spanning over 30 years in the transformer manufacturing industry, we supply a wide range of transformers starting from 5 MVA/11 kV up to 200 MVA/220 kV. Set forth below is our product portfolio, as on the date of this Draft Red Herring Prospectus:

Principal Factors Affecting Our Financial Condition and Results of Operations

Our business, results of operations and financial condition are affected by a number of factors, including:

A. Macro-economic conditions, and the factors affecting the electric equipment-manufacturing and power generation sectors, in India

Our performance is significantly affected by the economic environment, particularly trends in the electric-equipment manufacturing and power generation sectors in India. These industries are influenced by economic growth, regulatory frameworks, government investment, and environmental policies, all of which directly impact demand for power infrastructure projects. A large part of the demand for transformers in India are dependent on the power industry. The demand for power in India is closely linked to economic growth in the country, and to Government policies in the power sector. As the economy

B. Reliance on our top 10 suppliers

Our principal raw materials, which are integral to the assembly of our systems, include copper, electrical steel, transformer oil, and other custom-made components designed to meet our customers specific technical and design requirements. The volatile pricing of key raw materials and components, such as copper, lamination, MS tanks, radiators, oil, bushings, insulation, and MS frames, coupled with the absence of long-term supply agreements, could significantly affect our cost structure and overall profitability.

D. Working capital requirements and access to capital resources

Our ability to grow depends largely on cost effective avenues of funding. Our business requires significant amount of working capital for day-to-day operations, procurement of raw materials and production as there is considerable time interval between purchase of raw materials and realisation from sale of our finished goods and our inability to meet our working capital requirements may adversely affect our cash flow cycle. In addition, our projects and contracts may require us to incur substantial working capital costs before milestone payments are made to cover these costs for the purpose of ensuring that such projects and contracts are delivered and completed on a timely manner. Further, our working capital requirements also tend to increase if contractual or sales terms do not include advance payments or if under such contractual arrangements, payment is stipulated at the time of delivery of the final product to our customer or post installation and commissioning. In particular, our sales to power utilities require us to incur significant amounts of working capital on account of contractual terms stipulating payments to be made after delivery, which may further be delayed due to their weak financial health. Certain purchase orders may require a considerable increase in materials and production costs particularly in connection with new systems and plants. Set forth below are the details of our net working capital during the six-month period ended September 30, 2024 and in Fiscal 2024, Fiscal 2023, and Fiscal 2022.

F. Customer relationships

The identity and corresponding expenses and revenues from our top suppliers and customers may vary across financial reporting periods or years, depending on the nature, duration, and timing of ongoing contracts or procurement requirements for specific projects. Our reliance on a concentrated group of suppliers and customers exposes us to potential risks in case of disruptions, pricing changes, or other adverse developments in these relationships. We derived more than 60% of our total revenue from operations from the sale of products to our top 10 customers in six month period ended September 30, 2024, Fiscal 2024, Fiscal 2023, and Fiscal 2022. The table below sets forth the revenue derived from our top 10 customers, for the periods indicated:

Key Performance Indicators and Certain Non-GAAP Measures

The following table sets forth certain financial and operational information for the years indicated:

Significant Accounting Policies

The significant accounting policies adopted in the preparation of our Financial Statements are set forth below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of Preparation

The Restated Consolidated Financial Information relates to the Company and has been specifically prepared for inclusion in the document to be filed by the Company with the Securities and Exchange Board of India ("SEBI") in connection with the proposed Initial Public Offer (‘IPO) of equity shares of the Group (referred to as the "Offer"). The Restated Consolidated

Financial Information comprise of the Restated Consolidated Balance Sheet as at 30th September, 2024, March 31st, 2024, March 31st, 2023 and March 31st, 2022, the Restated Consolidated Statement of Profit and Loss (including Other Comprehensive Income), the Restated Consolidated Cash Flow Statement, the Restated Consolidated Statement of Changes in Equity and Statement of Material Accounting Policies and other explanatory information for the Period ended 30th September, 2024 and Years ended March 31st, 2024, March 31st, 2023 and March 31st, 2022 (hereinafter collectively referred to as

"Restated Consolidated Financial Information").

The Restated Consolidated Financial Information has been prepared to comply in all material respects with the requirements of

Section 26 of Part I of Chapter III of the Companies Act, 2013, as amended (the "Act") read with the Securities and Exchange

Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended from time to time, in pursuance of provisions of Securities and Exchange Board of India Act, 1992 ("ICDR Regulations")

The Restated Consolidated Financial Information:

(a) have been prepared after incorporating adjustments for the changes in accounting policies, material errors and regrouping/ reclassifications retrospectively in the financial years ended March 31, 2022, 2023 and 2024 to reflect the same accounting treatment as per the accounting policies and grouping/classifications followed as at and for the period ended September 30, 2024.

(b) do not require any adjustment for modification as there is no modification in the underlying audit reports.

All assets and liabilities have been classified as current and non-current as per the Groups normal operating cycle and other criteria set out in the Schedule III of the Act and Ind AS 1, Presentation of Financial Statements.

The restated consolidated financial information do not reflect the effects of events that occurred subsequent to the respective dates of board meeting for adoption of the consolidated financial statements and consolidated special purpose financial information.

Consolidation procedure:

Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries. For this purpose, income and expenses of the subsidiary are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date.

Offset (eliminate) the carrying amount of the parents investment in each subsidiary and the parents portion of equity of each subsidiary

Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and property, plant and equipment, are eliminated in full).

Intangible Asset and Amortisation

Intangible assets are recognized only if it is probable that future economic benefits that are attributable to the assets will flow to the Group and the cost of assets can be measured reliably. The intangible assets are recorded at cost and are carried at cost less accumulated amortization and accumulated impairment losses, if any. Intangible assets are amortized over the period of five years.

(iii) Short term Lease:

Short term lease is that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease. If the Group elected to apply short term lease, the lessee shall recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis.

Company as a lessor

Leases for which the Group is a lessor is classified as finance or operating lease. Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income.

Impairment

At the end of each reporting period, the Group assesses, whether there is any indication that an asset may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Recoverable amount is the higher of fair value less costs of disposal and value in use.

When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash generating units, or otherwise they are allocated to the smallest Company of cash-generating units for which a reasonable and consistent allocation basis can be identified.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used.

Derecognition of financial liabilities

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire.

Reclassification of financial assets

The group determines classification of financial assets and liabilities on initial recognition. After initial recognition, no reclassification is made for financial assets which are equity instruments and financial liabilities. For financial assets which are debt instruments, a reclassification is made only if there is a change in the business model for managing those assets. Changes to the business model are expected to be infrequent. The groups senior management determines change in the business model as a result of external or internal changes which are significant to the companys operations. Such changes are evident to external parties. A change in the business model occurs when the group either begins or ceases to perform an activity that is significant to its operations. If the group reclassifies financial assets, it applies the reclassification prospectively from the reclassification date which is the first day of the immediately next reporting period following the change in business model. The group does not restate any previously recognized gains, losses (including impairment gains or losses) or interest.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Defined benefit plans

The groups net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets.

The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements.

Other employee benefits

The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognised during the period when the employee renders the service. These benefits include compensated absences such as paid annual leave, overseas social security contributions and performance incentives.

Compensated absences which are not expected to occur within twelve months after the end of the period in which the employee renders the related services are recognised as an actuarially determined liability at the present value of the defined benefit obligation at the balance sheet date.

Revenue recognition

Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled inexchange for those goods or services. The Company collects GST on behalf of the government and, therefore, it is not an economic benefit flowing to the Group. Hence, it is excluded from revenue.

Revenue from the sale of goods is recognized at the point in time when control of the asset is transferred to the customer, generally on the delivery of the goods and there are no unfulfilled obligations.

Inventories

Inventories are measured at the lower of Cost and Net Realizable Value. The cost of inventories is based on the first in first-out formula, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their present location and condition. In the case of manufactured inventories and work in progress, costs include an appropriate share of fixed production overheads based on normal operating capacity.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The Net realisable value of work in progress is determined with reference to the selling prices of related finished products.

Total income

Our total income comprises revenue from operations and other income. We generate majority of our revenue from the sale of transformers and allied products.

Revenue from operations

Our revenue from operations primarily includes revenue from the sale of transformers and allied products, sale of services including erection and commissioning, repair job work, revenue towards incidental services, and testing fees, and from other operating revenues such as scrap sales.

Other income

Our other income primarily includes (i) interest income on deposit, (ii) interest income of financial assets carried at costs, (iii) other interest income, (iii) dividend income, (iv) profit on sale of property, plant and equipment, (v) net gain on foreign currency translation, (vi) reversal of excess expected credit loss, (vii) insurance claimed income, (viii) interest on income tax refund, (ix) miscellaneous receipt, (x) recoveries against bad debt written off, and (xi) sundry balances written back.

Expenses

Our total expenses include the below mentioned expenses:

Cost of material consumed

Fiscal 2024 Compared to Fiscal 2023

Total revenue

Our total revenue decreased marginally by 0.53% to 8,720.49 million for Fiscal 2024 from 8,766.56 million for Fiscal 2023, on account of the factors discussed below.

Revenue from operations

Our revenue from operations decreased marginally by 0.72% to 8,675.53 million for Fiscal 2024 from 8,738.83 million for

Fiscal 2023, primarily due to non-availability of the bank guarantee limits due to the delay in the enhancement of our existing working capital limits. During the year, our Company enhanced the capacity of cranes and related structures at Anand Unit-I along with setting up of new oven and civil work at the Bangalore Unit.

Other income

Our other income increased by 62.15% to 44.96 million for Fiscal 2024 from 27.73 million for Fiscal 2023, primarily due to increase in interest on fixed deposit receipts to 34.79 million for Fiscal 2024 from 25.22 million for Fiscal 2023. This was on account of increase in the interest rate ranging from 6.75% to 6.90% for Fiscal 2024 from 5.10 % to 6.70% for Fiscal 2023, increase in the income tax refund to 4.47 million for Fiscal 2024 from Nil for Fiscal 2023.

Expenses

Our total expenses increased by 2.42% to 7,847.83 million for Fiscal 2024 from 7,662.09 million for Fiscal 2023, on account of the factors discussed below.

Cost of Material Consumed including change in Inventories of Finished Goods, Stock in Trade and Work in Progress

Consumption of major raw material such as copper, decreased to 2,375.30 million for Fiscal 2024 from 2,377.39 million for Fiscal 2023 and lamination to 1,738.40 million for Fiscal 2024 from 2,064.65 million for Fiscal 2023. Further, cost of material consumed including change in inventory of finished goods, stock in trade and work in progress decreased by 0.50% to

6,352.27 million for Fiscal 2024 from 6,384.05 million for Fiscal 2023 due to decrease in the revenue from operations by 0.72% to 8,675.53 million for Fiscal 2024 from 8,738.83 million for Fiscal 2023.

Employee Benefits Expense

Our employee benefits expense increased by 27.78% to 216.04 million for Fiscal 2024 from 169.07 million for Fiscal 2023, primarily due to increase in salaries, wages and bonus to 192.55 million for Fiscal 2024 from 146.75 million for Fiscal 2023. This was on account of increments provided during the year at average increment rate of 17.00% and increase in the number of employees to 284 for Fiscal 2024 from 220 for Fiscal 2023.