Elgi Equipments Ltd Management Discussions

Our Management and Governance Model

In FY?24, we defined our Management and Governance Model, which guides our decision-making across our "Tension Triangle" of balancing Profit, Purpose, and Risk for our stakeholders.

• ELGi?s Profit aspiration is our CK2 aspiration for sales, EBITDA, and ROCE.

• ELGi?s Purpose is being a good company that is fair in its engagement with and treatment of its stakeholders. Our Purpose will follow the golden rule, which is to treat others as we would like to be treated. We partnered with an agency to define our purpose statement as "Conscience in Action"

Our stakeholders include:

1. Customers

2. Employees

3. Investors

4. Suppliers

5. Society

• As ELGi pursues its Purpose and Profit goals, we must appropriately evaluate the risks of our decisions.

• We refreshed our values to define behaviour to support our Purpose and Profit. Our 7 values include:

a. Collaborate

b. Be sensitive

c. Trust stakeholders

d. Keep raising the bar

e. Respond quickly

f. Be thorough

g. Own outcomes

• Our Management and Governance Model

Management and Governance Model - Tension Triangle

Introduction

In FY?24, Revenue and EBITDA grew by 6% and 12%, respectively, backed by strong growth in India, though partially offset by headwinds faced in our North America Business. However, we are well placed to achieve the committed results set forth in our five-year Strategic Business Plan (SBP). As a note, the ABP refers to the goals in the immediate year of discussion, while the SBP refers to the goals in the five-year forecasted period (FY 2021-22 to FY 2025-26). For more detail on the SBP, refer to the MDA from the annual report of FY?20 in the "Investors" section of our website: https://www.elgi.com/in/financials/. Based on our FY?24 performance, we are committing to the following targets in FY?25-26:

1. Revenue - 37,500 Mn.

2. EBITDA - 16%

3. ROCE - 30%

We will discuss our performance by regions and relevant functions. We will list our strategic priorities and review our FY?24 performance. Please note that the notes under the "Review" section will include highlights other than our strategic priorities and potential areas for improvement.

India

Our India business delivered strong growth and profitability. We held market share in our core industrial segment and grew share in our oil free, construction and mining, railways, and water well segments. We expect strong growth in FY?25 from economic growth and strategic initiatives to gain market share.

• Industrial Oil Lubricated

• Strategic Priorities

• Grow market share by gaining new customers.

• Maintain profitability with value based pricing and strong aftermarket capture.

• FY24 Review

• Increased our market share with large corporates.

• Gained volumes from existing and New OEMs through feature value mapping.

• Our LD Series direct drive reciprocating compressor helped drive growth in the reciprocating compressor segment.

• Launched Project Everest, a go-to-market refresh project to gain market share.

• Oil Free

• Strategic Priorities

• Grow market share by building awareness, expanding product range, improving product performance, and offering best-in-class aftermarket service.

• Focus on increasing awareness by 30%.

• FY24 Review

• FY?24 represented our best year for oil free sales and we?re entering FY?25 with a strong order book and healthy repeat customers.

• Construction and Mining

• Strategic Priorities

• Maintain market share and drive profitability.

• FY24 Review

• We maintained our dominant market share and drove margins with strategic price positioning and the launch of new products.

• Water well

• Strategic Priorities

• Recover dominant share position.

• Be first to market with new products.

• FY24 Review

• Recovering dominant share position in the segment with PG1250.

• Railways

• Strategic Priorities

• Maintain core segment market share.

• Increase share in multiple unit segments and maximise Private OEM opportunities.

• FY24 Review

• Achieved break through order in the private locomotive segment via Siemens.

• Penetrated metro segment through Medha- DAKO for Kolkata Metro.

• Retained our share in the Electric Loco segment.

Africa and the Middle East

Our direct to market approach continued to drive market share growth across the regions within the middle east. We?ve increased manpower coverage across our direct and channel teams in anticipation of strong economic growth in the Middle East. We expect strong growth in FY?25.

North America

North America fell short of FY?23 owing to a challenging market and operational challenges. The compressor market contracted in FY?24 owing to high interest rates and soft demand from economic uncertainty. Internally, we faced a challenging ERP implementation. We implemented Infor LN Cloudsuite across our five businesses in April 2023 to coincide with the new fiscal year. We faced challenges with data migration, new processes, and general system challenges, which impeded our ability to deliver our H1 targets. Despite market and operational challenges, we remain bullish about our ability to win in the North American market. We revised our organization structure and processes to reduce our cost base and strengthen our foundations for profitable growth. Changes included centralized procurement, warehousing, demand planning, and production. We onboarded Brian Pahl as President of ELGi North America. Brian brings go- to-market and operational transformation experience from the vacuum industry. With low market share across our businesses, competitive products, a strong team, and clear strategy, we remain confident and committed to our long-term goals.

• ELGi Industrial Compressors

• Engaged in the supply and support of ELGi compressors and parts to nearly 100 distributors across the USA and Canada.

• Strategic Priorities

• Establish quality distribution partnerships in the top 40 markets.

• Drive long term profitability by building the aftermarket organization.

• FY24 Review

• Weak demand dampened sales.

• Improved warehousing and production processes.

• ELGi Portable Compressors

• Engaged in the supply and support of ELGi?s (formerly Rotair) range of portable air compressors to distributors and rental outlets across the USA and Canada.

• Strategic Priorities

• Establish distribution in the top 20 markets.

• FY24 Review

• Weak demand dampened sales.

• Reduced fixed costs by consolidating operations under ELGi Industrial.

• ELGi Distribution Operations

• ELGi North America?s distribution brands (Michigan Air Solutions [MAS], and Pattons) engaged in the supply, service, and support of ELGi products, parts, and general compressed air solutions to end customers in North Carolina, South Carolina, Michigan, Georgia, Alabama, and Virginia.

• Strategic Priorities

• Drive sales of ELGi equipment in top-served markets.

• Increase service business in largest markets.

• FY24 Review

• Worst impacted business owing to complications in implementing the ERP service module.

• Reduced employee and fixed costs to improve future profitability.

• Pattons Medical

• Engaged in the design, manufacture, supply, and support of medical air and gas systems in the USA.

• Strategic Priorities

• Improve win rate in existing markets.

• Expand into strategic markets such as California.

• FY24 Review

• Improved margins with strategic sourcing.

• Won seismic test approval to distribute products in California.

Europe

The Region grew 13% compared to prior year despite u ncertainties in the market cau sed by several major events. Record inflation and high interest rates decreased confidence and, thus, demand across most sectors. High energy costs resulted in halted production across industries. Disruptions hampering the safe passage of vessels through the Suez Canal caused delays and added costs for inbound freight which had a negative impact on the Region?s 4^th quarter. Rotair delivered on plans despite weak demand from the USA. Innovative products catering to the dry ice and fibre-laying sectors drove growth.

• ELGi Industrial Compressors (Oil Lubricated and Oil Free)

• Engaged in the supply and support of ELGi compressors, parts and accessories to channel partners (distributors) in Italy, France, Iberia, UK and Ireland, Nordics, Benelux, and Eastern Europe.

• Strategic Priorities

• Establish quality distribution within focus regions.

• Increase share of business with existing channel partners.

• Establish foundations for future profitability.

• FY24 Review

• Lowered employee and fixed costs to drive profitability.

• Re-allocated resources to France, Italy, UK, and Iberia.

• Improved cash flow by reducing inventory and receivables.

• Rotair

• Engaged in the design, manufacturing, and supply of Rotair?s range of diesel and gasoline-powered portable air compressors, hydraulic breakers, and Rampicar.

• Strategic Priorities

• Improve product profitability.

• Expand product range.

• Diversify into new segments.

• FY24 Review

• Maintained margins with price increases and cost control.

• Launched more profitable products in the high- pressure segment.

Australia and Southeast Asia

In Australia, we grew our sales and profitability relative to FY?23 but fell short of our annual plan. Thailand met its plan, but we didn?t make much progress in other key Southeast Asia markets.

• Oil Lubricated and Oil Free Compressors in Australia

• Strategic Priorities

• Expand independent distribution.

• Grow equipment and service market share at Pulford.

• Grow oil free market share.

• FY24 Review

• Expanded distribution.

• Grew aftermarket and service revenue at ELGi Australia and Pulford.

• Added key customers and installations for oil free compressors.

• Southeast Asia

• Strategic Priorities

• Build and execute go-to-market strategies for business growth in Vietnam, Malaysia, Thailand, and Indonesia.

• FY24 Review

• Established Malaysia subsidiary.

• Drove growth in Thailand across our product categories.

• Insufficient growth in Malaysia, Philippines, and Vietnam.

Brazil

We grew 24% compared to prior year.

ATS

ATS grew across all product verticals. New business verticals such as vehicle fitness centres and vehicle scrapping centres generated revenue. We improved our market share in the two-wheeler and tyre shop segments and strengthened our product range to address opportunities in the electric vehicle segment.

ELGiSauer

In FY?24 ELGi Sauer commenced operations in its new premises. We grew significantly, and our new facility will expand our capacity for new opportunities. Navy projects comprise the bulk of our revenue, but we?re expanding into new segments such as renewable energy, hydropower, and biomethane.

Strategic Enablers

Our strategy?s success hinges on the health of our enablers or supporting activities and functions. In this section, we will highlight progress in our enablers, which will support our aspirations in FY?24 and beyond.

• Leadership and Collaboration

• Onboarded Brian Pahl to lead ELGi North America.

• Onboarded Bhavesh Karia to lead ELGi ISAAME and SEA (India, South Asia, Middle East, Africa, and Southeast Asia).

• Onboarded Mark Hollingsworth to lead ELGi Australia.

• Onboarded Indranil Sen as CFO.

• Launched Project Elevate, our global finance transformation, to establish a global finance structure and operating model.

• Talent Management

• Number of employees on roll: 2172.

• Individual Development Plan (IDP) finalised for 220 employees in India.

• Conducted talent review sessions for succession readiness for identified key positions.

• Launched leadership program, "Building People Managerial Capability" for key managers.

• Launched Global Employee Engagement survey "My Voice" for continuous improvement in culture.

• Operations and Supply Chain

• Reduced finished goods and raw material inventory globally.

• Institutionalised Project Cosmos, a continuous cost savings initiative, and enjoyed significant costs savings in FY?24.

• Finalized MK2 master plan, the project to consolidate manufacturing at the Kinathukadavu Air Center Plant (ACP), which will result in significant logistics efficiency and reduced cost via manufacturing automation.

• Established manufacturing lines for ELGi dryers and permanent magnet motors.

• Products and Technology

• Strategic Priorities

• Ensure continuous improvement of current products across range expansion, performance, energy consumption, reliability, and cost.

• Launch new products as per market feedback, customer feedback, competitor portfolio, revenue potential, and profit potential for strategic regions.

• Develop and launch new products promptly in alignment with our strategic business plans.

• Long-term product development based on stated and unstated customer needs.

• FY24 Review

• Performance Improvement

• Refreshed Oil Free 90-160kW with enhanced performance, value-added options, and footprint reduction towards improving Total Cost of Ownership for customers.

• Refreshed AB, water injected oil free, range with higher turndown and equipped with ELGi Motors in 11-45kW range.

• Upgraded AB 55-75kW with improved Total Cost of Ownership and reduced footprint.

• Range Expansion

• Launched the ultra-efficient Permanent Magnet Synchronous Motor (PMSM) in the 11-45 kW range.

• Launched two-stage advanced air end technology in the EG Series 90-100 kW range for best-in-class energy efficiency.

• Introduced integrated Heat Recovery Solution in a select range with an attractive return on investment.

• Launched energy-efficient refrigeration dryers for energy-conscious customers.

• In the railways segment ELGi continued India market dominance.

• Launched electrical wipers for Electrical Multiple Unit (EMU).

• Introduced oil lubricated piston compressor for Metros.

• Introduced screw compressors for private locomotive OEMs.

• Digital Transformation

• Strategic Priorities

• Enhance the overall Digital Quotient (DQ) of the organisation.

• Drive digitisation of business processes.

• Create a digital eco-system.

• FY24 Review

• Completed various Robotic Process Automation (RPA) Projects towards automating business processes.

• Accomplished various Virtual Reality, 3D, and Augmented Reality projects for enabling sales and service teams.

• Established: (a) Digital Innovation ecosystem spread across 3 research institutes; (b) Collaboration with CII, NASSCOM, Plugin Alliance, Agile Network India, and other industry bodies.

• Details of significant changes in key financial ratios forms part of the Annual Report.

• Brand

• Strategic Priorities

• Drive awareness, consideration, and conversion in target markets.

• Manage our stakeholders? experience (customers, employees, investors, suppliers, and society) with our brand.

• FY24 Review

• Significant growth in awareness and leads generated from our digital and social media platforms.

• Continued growth in our public relations presence globally.

• Increased participation at end-customer events to generate "pull" for the ELGi brand.

• Environmental, Social, and Governance (ESG)

• Strategic Priorities

• Environment: Focus on energy efficiency, lower emissions, and resource-neutral operations.

• Social: Employee centricity and access to quality education.

• Governance: Inclusive ESG governance.

• FY24 Review

• Reduced carbon emissions from 795 Kg Co2/Mn of sale to 406 Kg Co2/Mn of sales by increasing the renewable energy share from 12% to 44%.

• Initiated 1 MW Windmill CGP to increase the renewable energy share to 66% in FY2025.

• Reduced freshwater consumption from 2.10 KL/Mn of sales to 1.94 KL/Mn of Sales.

• Reduced 350 KVA at the foundry by modifying the heating cycles.

• Internal Control Systems and their Adequacy

The Company has adequate internal control systems to monitor business processes, financial reporting and compliance with applicable regulations. The systems are periodically reviewed for identification of control deficiencies and formulation of time bound action plans to improve efficiency at all the levels. The Audit Committee of the Board constantly reviews internal control systems and their adequacy, significant risk areas, observations made by the internal auditors on control mechanism and the operations of the Company and recommendations made for corrective action through the internal audit reports. The Committee reviews the statutory auditors? report, key issues, significant processes and accounting policies. The Directors confirm that the Internal Financial Controls are adequate with respect to the operations of the Company. A report of Auditors pursuant to Section 143(3) (i) of the Act certifying the adequacy of Internal Financial Controls is annexed with the Auditors Report.

Please refer Note No. 53 to the Standalone Financial Statements in Page 234 for the Key Ratios and Group Performance Ratios in Page 140.