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Directors Report of Kirloskar Oil Engines Ltd.

Mar 31, 2013

To, The Members of KIRLOSKAR OIL ENGINES LTD.,

The Directors are pleased to present the Fourth Annual Report together with the Audited Statement of Accounts for the year ended 31 March 2013.

Financial Highlights

A. Statement of Profit & Loss

(Rs. in Crores)

Particulars 2012-13 2011-12

Total Revenue 2396.48 2362.54

Profit before exceptional and extraordinary items and tax 289.93 233.00

Exceptional Items (19.08) 47.71

Profit before tax 270.85 280.71

Tax Expense (Current & Deferred Tax) 72.01 88.91

Profit for the Period 198.84 191.80

B. Appropriations

The Directors propose to appropriate the available surplus as follows:

(Rs. in Crores)

Particulars 2012-13 2011-12

Proposed Dividend 72.31 58.25

Corporate Tax on Dividend 12.29 9.45

Transfer to General Reserve 19.88 19.18

Closing Balance of Statement of Profit & Loss 367.91 273.25

C. Borrowings and Capex

(Rs. in Crores)

Particulars 2012-13 2011-12

Total borrowings NIL 168.96

Cash and cash equivalents 24.78 27.39

Capital expenditure 121.53 106.46

D. Financial Ratios

Financial Ratios 2012-13 2011-12

Return on capital employed (%) 23.7 24.7

Book value per share (Rs.) 80 71

Diluted earnings per share (Rs.) 13.7 13.2

Dividend payout ratio (%) 42.54 35.3

Financial Performance

In an increasingly challenging environment and continuing material cost inflation, while sales increased marginally from Rs. 2,276 crores to Rs. 2,319 crores, the profit from operations (excluding exceptional items) rose from Rs. 233 crores to Rs. 290 crores, registering a good increase of 24%. This was made possible through a combination of rigorous cost restructuring and efficiency improvement programs that yielded good results and helped the Company maintain profitable growth in an otherwise difficult economic scenario.

Dividend

For the year under review, the Directors have recommend a dividend of 250% (Rs. 5 per share) for the year. (PY 200%, Rs. 4 per share). Total dividend payout for the year is Rs. 84.60 crores, including payment of Rs. 12.29 crores, as dividend distribution tax.

Buyback of Equity Shares

The Board of Directors, in their meeting held on 25 January 2012, had approved a buyback of fully paid equity shares of the Company by open market purchases through the stock exchange route at a maximum price of Rs. 170 per equity share, with the aggregate buyback amount not exceeding Rs. 73.625 crores. This represents 10% of the total paid up capital and free reserves as per the latest audited balance sheet on 31 March 2011.

The Company has closed the buyback on 24 January 2013, after buying back 10,15,424 equity shares for a total consideration of Rs. 15.67 Crs (exclusive of transaction and other related costs), at an average price of Rs. 154.34 per Equity Share.

Directors

R. R. Deshpande, Rahul C. Kirloskar and D. R. Swar retire by rotation at the ensuing Annual General Meeting and being eligible, offer themselves for re-appointment.

The brief resumes and other details relating to the Directors who are proposed to be re-appointed, as required to be disclosed under Clause 49 of the Listing Agreement, form part of the Report on Corporate Governance.

Corporate Governance

Pursuant to Clause 49 of the Listing Agreement, the Management Discussion and Analysis and the Corporate Governance Report together with the Auditors Certificate on compliance with the conditions of Corporate Governance as laid down, forms part of this report.

Awards, Recognitions and Certifications

The manufacturing operations of the Company have always been recognized for its quality delivery and operational excellence. In recognition,

- The Engineering Export Promotion Council (EEPC) conferred the "Star Performer Award" to the Company for the fourth consecutive time. The award was presented by Hon''ble Chief Minister of Goa, Shri Manohar Parrikar in October 2012.

- The Company''s Digvijay Quality Circle (Kagal Plant) won the Three Star award while the Lakshya and Utkarsh Quality Circles (Nashik plant) won the Two Star awards, conferred at an international level competition organized by the Malaysian Productivity Corporation, in Kula Lumpur.

- The Vijayshree Quality circle Team (Pune Plant) bagged the 2nd runner up prize at the INDIZEN -2013. INDIZEN- 2013 was the 4th National convention on operational excellence, which was organized by the Indian Business unit of the Kaizen institute, who are the global leader in operational excellence.

Auditors

a. Statutory Auditors

The Statutory Auditors M/s. P. G. Bhagwat, Chartered Accountants, Pune (Firm Registration Number 101118W) hold office till the conclusion of the ensuing Annual General Meeting. It is proposed to re-appoint them as Statutory Auditors for the Company for the FY 2013-14. The members are requested to consider their re-appointment and authorize the Board of Directors to fix their remuneration. The Company has received a letter from them, stating that their appointment if made would be in conformity to section224(1B) of the Companies Act, 1956.

b. Cost Auditors

Pursuant to the directives of the Ministry of Corporate affairs, your Company has appointed M/s.Parkhi Limaye & Co. as Cost Auditors of the Company under section 233B of the Companies Act, 1956.

c. Internal Auditors

The Internal Auditors M/s. Ernst and Young have conducted internal audits periodically and submitted their reports to the management and the Audit Committee. Their reports have been reviewed and addressed by the management and the Audit Committee.

Directors'' Responsibility Statement

Pursuant to Section 217 (2AA) of the Companies Act, 1956, the Directors, based on the representations received from the Operating Management, confirm that:

i. In preparation of the annual accounts, the applicable accounting standards have been followed and that there are no material departures;

ii. they have in the selection of the accounting policies, consulted the Statutory Auditors and have applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at 31 March, 2013 and of the profit of the Company for the year ended on that date;

iii. they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding assets of the Company and for preventing and detecting fraud and other irregularities; and

iv. they have prepared the annual accounts on a going concern basis.

Listing Fees

The annual listing fees for the year under review have been paid to the BSE Limited, Mumbai and to the National Stock Exchange of India Limited, Mumbai where the Company''s shares are listed.

Statutory Disclosures

Information relating to conservation of energy, technology absorption and foreign exchange earnings and outgo as required under section 217(1) (e) of the Companies Act, 1956 read with the rules there under is presented in Annexure A to this report.

As required under section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, a statement giving required information relating to the employees covered there under is given in Annexure B to this report. As per the provisions of section 219 (1) (b) (IV) of the said Act, these particulars will be made available to shareholders on request.

Cautionary Statement

Statements in this report, particularly those which relate to Management Discussion and Analysis, describing the Company''s objectives, projections, estimates and expectations may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ materially from those either expressed or implied.

Acknowledgments

The Directors would like to place on record their appreciation of the contribution made and support provided to the Company by the shareholders, employees, bankers, suppliers and customers. For and on behalf of the Board of Directors

ATUL C. KIRLOSKAR

Executive Chairman

Date : 26 April 2013

Place : Pune


Mar 31, 2012

The Directors have the privilege of presenting the Third Annual Report of the Company for the year ended March 31, 2012. Financial Performance

A. Statement of Profit & Loss

(Rs In Crores)

Particulars 2011-12 2010-11

Total Revenue 2362.16 2435.38

Profit before exceptional and extraordinary items and tax 233.27 247.46

Exceptional Items 47.71 (3.73)

Profit before tax 280.98 243.73

Tax Expense (Current & Deferred Tax) 89.18 70.00

Profit for the Period 191.80 173.73

B. Appropriations

The Directors propose to appropriate the available surplus as follows:

(Rs In Crores)

Particulars 2011-12 2010-11

Proposed Dividend 58.25 58.25

Corporate Tax on Dividend 9.45 9.45

Transfer to General Reserve 19.18 17.38

Closing Balance of Statement of Profit & Loss 273.25 168.33

C. Borrowings and Capex

(Rs in Crores)

Particulars 2011-12 2010-11

Total borrowings 168.96 248.99

Cash and cash equivalents 27.39 22.93

Capital expenditure 106.46 107.42

D. Financial Ratios

Financial Ratios 2011-12 2010-11

Return on capital employed (%) 24.7 23.2

Book value per share (Rs) 71 61

Diluted earnings per share (Rs) 13.2 11.9

Dividend payout ratio (%) 35.3 39.0

E. Divesture of the Bearing Business Division

On September 30, 2011, the Company divested its Bearings Business division to KSPG Automotive India Private Limited, for a purchase consideration of Rs 87 crores resulting in a profit of Rs 47.71 crores (shown under exceptional items).

Dividend

The Directors recommend a dividend of 200% (Rs 4/- per share) for the year. (PY 200%, Rs 4 per share)

Total dividend payout for the year is Rs 67.70 crores, including payment of Rs 9.45 crores, as dividend distribution tax.

Buyback of Equity Shares

The Board of Directors, in its meeting held on January 25, 2012, had approved a buyback of fully paid equity shares of the Company by open market purchases through the stock exchange route at a maximum price of Rs 170 per equity share, with the buyback amount not exceeding Rs 73.625 crores. This represents 10% of the total paid up capital and free reserves as per the latest audited balance sheet on March 31, 2011.

The Company had issued a Public Announcement in compliance with the SEBI (Buyback of Securities) Regulations, 1998, (as amended) on February 17, 2012 and corrigendum to the Public Announcement on March 2, 2012, pursuant to the letter issued by SEBI.

The buyback commenced on March 5, 2012 and will remain open till January 24, 2013 or any earlier date on which the buyback to the extent of Rs 73.625 crores is completed. However, in case Minimum Offer Shares (10,82,721 nos.) are purchased under the buyback, the Board at its discretion may close the buyback by giving appropriate notice in this regard.

As on April 25, 2012, the Company had not bought back any equity shares.

Directors

Independent Non Executive Directors U. V. Rao, R. Srinivasan and M. Lakshminarayan retire by rotation at the ensuing Annual General Meeting and being eligible, offer themselves for re-appointment.

Atul C. Kirloskar has resigned as the Managing Director of the Company with effect from the close of working hours of January 25, 2012. The Board of Directors of the Company, in its meeting held on January 25, 2012, appointed him as the Executive Chairman for a period of 5 years beginning January 26, 2012. A proposal for his appointment as the Executive Chairman and remuneration payable to him is being placed before the Members of the Company for their approval at the Annual General Meeting.

Gautam A. Kulkarni has resigned as the Joint Managing Director of the Company with effect from the close of working hours of January 25, 2012. The Board of Directors of the Company, in its meeting held on January 25, 2012, appointed him as the Executive Vice Chairman for a period of 5 years beginning January 26, 2012. A proposal for his appointment as the Executive Vice Chairman and remuneration payable to him is being placed before the Members of the Company for their approval at the Annual General Meeting.

The Board of Directors of the Company, in its meeting held on January 25, 2012, appointed Nihal G. Kulkarni as the Managing Director of the Company for a period of 5 years beginning January 26, 2012. A proposal for his appointment as the Managing Director and remuneration payable to him is being placed before the Members of the Company for their approval at the Annual General Meeting.

The brief resumes and other details relating to the Directors who are proposed to be appointed/re-appointed, as required to be disclosed under Clause 49 of the Listing Agreement, form part of the Report on Corporate Governance.

Directors' Responsibility Statement

Pursuant to Section 217 (2AA) of the Companies Act, 1956 the Board of Directors state that:

- In preparation of the annual accounts, applicable accounting standards have been followed along with proper explanations relating to material departures;

- The Directors have selected such accounting policies, applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs and of the profit of the Company at the end of the financial year;

- The Directors have taken appropriate care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding assets of the Company and for preventing and detecting fraud and other irregularities; and

- The Directors have prepared the annual accounts on a going concern basis.

Listing Fees

The annual listing fees for the year under review have been paid to the BSE Limited, Mumbai and to the National Stock Exchange of India Limited, Mumbai where the Company's shares are listed.

Corporate Governance

A report on Corporate Governance along with the certificate of compliance from the Auditors forms part of this report.

Internal Audit, Internal Controls & their Adequacy

The Company's internal audit is carried out by a renowned auditing firm as per the plan approved by the Audit Committee. The Internal Audit Plan covers extensive review of the Company's operations. Periodically, the Company's management reviews internal audit observations and major findings in the Audit Committee meeting.

The Company has established a strong internal controls framework for key business processes across business units which are tested and validated during the internal audit. Significant findings and action plans are presented to the Audit Committee for their review.

Auditors

You are requested to appoint Auditors for the current year. The retiring Auditors M/s. P. G. Bhagwat, Chartered Accountants, Pune (Firm Registration Number 101118W) are eligible for re-appointment.

Statutory Disclosures

Information relating to conservation of energy, technology absorption and foreign exchange earnings and outgo as required under section 217(1) (e) of the Companies Act, 1956 read with the rules there under is presented in Annexure A to this report.

As required under section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, a statement giving required information relating to the employees covered there under is given in Annexure B to this report. As per the provisions of section 219 (1) (b) (IV) of the said Act, these particulars will be made available to shareholders on request.

Corporate Social Responsibility (CSR)

The Company conducts yearly Community Perception Surveys (CPS) to assess its perception as a Corporate Citizen among communities in the vicinities of its operations. The CPS rating in Financial Year 2011-12 showed a significant improvement over the previous year. The Company has, as a policy, chosen health and education as primary areas of focus for its CSR initiatives.

In addition to CSR highlights mentioned in last year's report, the following new initiatives were employed during Financial Year 2011-12:

- Health awareness programmes on adolescent health and hygiene

- Provision of school material to primary school children

- Workshop for teachers and students on team building, career guidance

- Waste Management workshop

- "Hasat Khelat Paryavaran" events in Pune and Kagal to develop environmental awareness

- Livelihood generation training for self-help groups

- Life skills training programmes

- Vocational training programmes for the youth

- Support to the Kirloskar Foundation for their programmes Awards, Recognitions & Certifications

During the Financial Year 2011-12, the Company received the following awards, recognition and certifications:

- The Commendation Certificate for Strong Commitment to Excel from CII. This award is a testament to the efforts and commitment of the Company to attain world class standards of performance.

- For the second consecutive year, the Engineering Export Promotion Council (EEPC) conferred its award to the Company. This award is sponsored by Ministry of Commerce & Industry, Government of India.

- Participated in the national convention on Quality Concept 2011 organized by the Quality Circle Forum of India. The Pune plant received the Par Excellence Award.

- The Pune and Kagal plants received the prestigious '12th National Award for Excellence in Energy Management 2011' from the Confederation of Indian Industries (CII).

- KAIZEN on DV Cylinder Head won 1st prize at the national level in "INDIZEN 2012" contest.

- QCFI, Pune Chapter Trophy for the Financial Year 2010-11 for spreading Quality Circle activities across the organization

- The Pune and Nashik Plants received the MEDA ENCON award

- "Gurukul" (the Company's training centre) at the Kagal Plant received 'Best Prax Benchmark 2011 Award' in the manufacturing category.

Concerns and Threats

India's off highway engines market slowed down to 14% in Financial Year 2011-12. The market demand was adversely affected by factors such as poor availability of funds, which in turn hampered growth in the housing segments, delayed closure of highways projects by NHDP, scams related to the mining sector etc.

Apart from the overall slowdown in the market, during Financial Year 2011-12, a major customer of the Company commenced in-house manufacture of diesel engines. To compensate for this loss, the Company has aggressively begun expanding its customer base and applications portfolio. The Company successfully stabilized manufacture and supply of BS-III engines to over 55 applications during the first quarter of the last fiscal.

The off highway market continues to be bearish and is likely to regain its buoyancy towards the beginning of the third quarter of the current fiscal. The Company anticipates the inflationary trend to pick-up in the coming months. The Company is gearing up to effectively address the cost pressures and enhance its operational efficiency.

The Company's engines and pump sets for the agriculture segment have shown a better performance and low total cost of ownership. This is in comparison to the products of its competitors. Also, the Company's products are priced at an average premium of 35% - 40%.

However, the Company faces stiff competition from low cost Chinese imports and from unorganized Indian players. Availability of Government subsidies for diesel pump sets in most of the agriculture market plays a vital role in generating a demand for our agriculture pump sets.

India's peak power demand continues to grow at approximately 8% annually, the associated power shortage during high peak will raise demand for diesel gensets in the near future. Import of low cost diesel generators has resulted in increased competition from global players in the lower kVA range.

The Company's business plans in the telecom business were not realized on account of low level of buying by telecom operators. Non telecom market movement was lower in the first two quarters, however the Company responded to market needs and achieved growth in the third and fourth quarters.

On the regulatory front, the Government of India is considering revision of emission norms by June 2013. All engine manufacturers will have to upgrade the design of engines to conform to the new emission standards. The Company is confident that its products will meet the required emission norms.

Increased competition in the higher kVA product range from international players venturing into the Indian genset market is expected. The Company is currently in the process of developing engines for higher kVA DG sets and is confident that these will meet customer requirements and will feature enhanced operational and performance parameters.

The stationary power plant segment of the large engine business group was adversely affected by high furnace oil prices in Financial Year 2011-12. Generation of power at those prices became uneconomical for the customers. This situation continues to be an area of concern.

Prospects for the Current Year

For the current financial year, the Company has a cautious outlook on the economy, considering the anticipated rise in crude oil prices and inflationary pressures in the economy, especially in Coke and Steel.

The Government of India continues to put great emphasis on infrastructure, especially the urban infrastructure and national highways. The Union Budget 2012-13 envisages 8,800 kms of road constructions with a total outlay of Rs 25,000 crores.

In the power generation segment, the estimated demand and supply gap of around 8%, together with continuing improvement in lifestyles will sustain the business growth. Growth in service and manufacturing sectors is also expected to trigger the demand for generator sets. Besides conventional power generation, the Government of India has announced setting up of new nuclear power plants. The Company has already taken a lead in this area by winning orders worth Rs 396 crores to supply gensets to the Nuclear Power Corporation of India over the next 3 years. The demand for DV series engines is rising and this product segment is expected to perform better in the current financial year.

Cautionary Statement

Statements in this report, particularly those which relate to Management Discussion and Analysis, describing the Company's objectives, projections, estimates and expectations may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ materially from those either expressed or implied.

Acknowledgements

The Directors would like to place on record their appreciation of the contribution made and support provided to the Company by the shareholders, employees, bankers, suppliers and customers.

For and on behalf of the Board of Directors

ATUL C. KIRLOSKAR

Executive Chairman

Date: 26 April 2012

Place: Pune


Mar 31, 2011

The Directors have the privilege of presenting the Second Annual Report of the Company for the year ended 31 March 2011.

LISTING OF COMPANYS SHARES POST DEMERGER

After the scheme of arrangement for Demerger became effective on 31 March 2011, the Company filed an application with Bombay Stock Exchange Limited (BSE), Mumbai and National Stock Exchange of India Limited, (NSE) Mumbai for listing of 145,629,285 equity shares of Rs. 2/- each on 15 June 2010. After completing the necessary formalities, equity shares of the Company were permitted for listing and trading on BSE and NSE with effect from 24 December 2010.

Pursuant to the said Scheme, the fractional entitlements arising out of the issue of shares under the said Scheme were consolidated into 5,915 equity shares of Rs. 2 each. These shares were sold in the open market at an average price of Rs. 147.19. The Company is in the process of distributing the net sale proceeds (after deduction of the expenses incurred) to the members respectively entitled to the same in proportion to their fractional entitlements, as far as practicable along with the final dividend received on the said consolidated equity shares, for the period ended 31 March 2010.

FINANCIAL PERFORMANCE

(Rupees in 000s) 2010-11 2009-10

Total Income 24,353,735 22,691,722

Total Expenditure 21,877,039 20,057,176

Profit before exceptional items & taxation 2,476,696 2,634,546

Exceptional (Income) / Expenses 37,253 Nil

Profit before taxation 2,439,443 2,634,546

Provision for tax (including Deferred Tax) 702,141 994,419

Net Profit 1,737,302 1,640,127

Surplus (After other adjustments) 2,534,148 1,640,127

Appropriations

Your Directors propose to appropriate the available surplus as follows:

(Rupees in 000s)

Particulars 2010-11 2009-10

Proposed Dividend 582,519 582,519

Corporate Tax on dividend 94,499 96,749

Transfer to General Reserve 173,800 164,013

Balance carried to Balance Sheet 1,683,330 796,846

Dividend

The Directors recommend a dividend of 200% (Rs.4/- per share) for the year.

WORLD ECONOMY

RBI has projected growth of global economy of 4.4% for the calendar year 2011 and 4.5% for 2012. The rising commodity prices and inflationary pressures would be the cause of concern for emerging and developing economies. It has also projected more than 30% rise in global crude oil prices during the calendar year 2011. This is a key downside risk to the growth of the global economy. Sovereign balance sheet risks in the Euro zone and dormant real estate markets have also been cited as downside risks to growth in advanced economies.

INDIAN ECONOMY

The Indian Economy continued to outperform most emerging markets during the year under review, retaining its position as the second fastest growing economy, after China, amongst the G-20 countries. The real GDP growth rate is estimated at 8.6%. The main impetus to the growth came from agriculture (growth of 5.7% as against 0.2% for the previous financial year) which benefitted from a normal monsoon, while industry (growth of 8.7% as against 6.4% for the previous financial year) and services (growth of 9.3% against 9.5% for the previous financial year) registered mild deceleration. The focus of the Indian Government during the current financial year will be towards infrastructure development as reflected in increased allocation of 48.5% of total plan allocation as against 23.3% for previous year. The Government also proposes to boost the share of manufacturing in economy from 16% to 25% over the next 10 years.

MANAGEMENT DISCUSSION & ANALYSIS

The operations of the Company comprise of Engines and Bearings business and operational performance review is carried out separately for these segments.

Industry Overview

While global economies are still recovering, Indian economy has comparatively shown a faster recovery. In the year under review, the Indian export sector has shown a growth of approx 50% in volume terms and 37% in value terms over the previous financial year. The engineering sector has significantly contributed to the growth in exports.

Growth of investment in agriculture and industries such as retail, hospitality, hospitals, IT, banking and infrastructure is evident in the current financial year. This generated a good demand for our engines, pump sets and generating sets. However due to continual increase in prices of crude oil, customers could also prefer alternate fuels for engines.

The growth of telecom Industry in India peaked in 2008-09. This was followed by a period during which the telecom companies separated the activity of telecom towers management into a separate business. The previous financial year saw consolidation of the tower management businesses. As a result of the consolidation, saturation of telecom density in the urban areas and less than expected growth in the rural areas, the demand for generating sets went down considerably. Other than the telecom industry, demand for generating sets for power generation has shown a steady growth. The competition for generating sets below 30kVA range has further intensified during the year under review.

Company Performance

During the year under review, your Company achieved sales of Rs. 2,363 Crs. (Previous Year Rs. 2,219 Crs.) resulting in increase in sales by 6.5 % over previous year.

The profit before tax is at Rs. 244 Crs. (Previous Year Rs. 263 Crs.) after providing for depreciation of Rs. 85 Crs. (Previous Year Rs. 84 Crs.)

Business wise analysis is presented below:

BUSINESS WISE OPERATIONAL PERFORMANCE

Your Company caters to the diverse needs of the customers from all the three sectors of economy namely Agriculture, Industrial and Services.

A. ENGINE BUSINESS

1. Agriculture & Off Highway Engine Business

While agriculture sector grew by 5.4% due to progressive governmental policies during the year under review, the Indian agriculture market for engines below 20HP shrunk by 15% in numbers, due to the delay in onset of monsoon and monsoon continuing through the sowing period. The market share was enhanced in the agriculture segment from 17% to 21% despite the drop in total market volume. A total of more than 76,000 engines were sold in the Agricultural market, out of which 30,000 were portable pump sets which were launched in the year 2008, despite facing competition from cheaper Indian and Chinese alternatives. High head portable pump sets were introduced for the agriculture market.

The growth of Indias construction equipment industry is directly linked to the growth of the countrys economy, since it is driven by increased investments in the infrastructure and related sectors. Construction equipment industry (primarily comprising of backhoe, crane and excavators etc., used in the Off Highway segment) has shown a growth of 20% during the year under review. In the Off Highway Market, the Company grew by 21% driven by robust domestic demand. Besides this, bulk supplies were started to new customers acquired in the previous financial year. Such supplies accounted for 10% of the total supply to the Off Highway Markets. The proactive measures resulted in enhancing its market share in the domestic market.

Your Company successfully geared up for the BS-III emission norms now applicable for Construction Equipment Vehicles [CEV], by migrating over 55 applications from BS-II to BS-III.

Overseas agriculture & Off Highway market also experienced revival in demand; especially in the West Asia & African markets. During the year under review, acquisition of a major OEM customer in South African mining market strengthened our market position. Internationally, Agriculture & Off Highway markets recovered during the year under review. The marketing strategy will address the demand in the focus markets and will also enable the Company and its business partners to tap the potential business in this market.

2. Power Generation Engine Business

The power generation business of the Company addresses the telecom and other industrial segments such as retail, banking, IT and telecom markets. During the year under review the domestic power generation market, except the telecom segment, experienced a revival in demand. Overall market, other than the telecom segment, grew by around 15%.

Your Company continuously innovates to bring down the life cycle cost of the products thereby providing value for money to our customers. The newly designed DV series of engines in the range of 320 kVA to 625 kVA were successfully launched in the domestic market. Our Research & Development is working on extending the range to 750 kVA

New products were developed in the range of up to 160 kVA, which run on alternate energy sources like natural gas and bio gas.

The global economic meltdown seems to be easing up in the overseas markets served by the Company. Increased efforts in the overseas markets in the industrial segments resulted in acquisition of new customers, in Africa, Middle-East & South East Asia and the Indian sub continent. Company has increased its presence in key geographical locations in countries such as UAE, Nigeria, South Africa & Kenya.

3. Customer Support Business

Your Company has a widespread network of trained service dealers and well equipped service outlets all over India. The network enables us to respond to customer calls upto 50 km range within 4 hours and beyond 50 km range within 8 hours.

Growth was achieved in Agriculture Spares segment by increasing the number of parts distributors and increasing focus on availability of parts.

New initiatives and constant up-gradation of systems and procedures helped the Company in securing customer confidence and also gaining over 21% growth in spare parts sale over the previous year and also additional revenue generation through annual maintenance contracts with cellular operators as well as domestic customers.

4. Large Engine Business

During the year under review, engines were supplied for main propulsion application and for stationary power plant application. In the stationary power plant market segment, high fuel oil prices adversely affected new orders as well as operations of existing engines installed with the customers.

Commissioning of previously supplied engines on the naval vessel frigates built at Mazagaon docks was successful. Four generating sets, each of 3.6 MW rating, are successfully installed at the Kalpakkam Nuclear Power Plant, which are awaiting final commissioning.

5. Kagal Plant

During the year under review, in the fourth year of operation, the production of engines increased by 53% and production of generating sets increased by 15% over the previous year.

Generating sets of 400 kVA and 500 kVA using the new DV series engines were successfully manufactured.

15 Nos. of 500 kVA generating sets were supplied by our OEMs for powering the opening and closing ceremonies of the Common Wealth games at New Delhi.

Company successfully added 46 engine application codes to fulfill the needs of the Customers in Off Highway and Power Generation businesses.

2600 rpm portable pump sets were successfully manufactured within the existing set up.

Productivity improvements and measures for increasing flexibility in manufacturing processes were introduced to meet the fluctuating market demands.

6. Pune Plant

During the year under review, your Company has renovated and upgraded its manufacturing facilities. The plant renovation activity was completed successfully without affecting deliveries to customers. Due to this renovation, improvement is expected in labour and plant productivity.

The plant undertook proto, pilot and production batch proving of DV series of Engines. The Pune plant provided 106 new application codes including proto and pilot of BS-III compliant R1040, 4R810, 6R1080 and HA medium Engines. SL90 Engines with FM & UL certification were successfully handed over for commercial production.

During the year under review, 12 innovative low cost automation projects were completed and the plant achieved more than 8500 nos. of Kaizens.

The Quality circle from Pune plant was selected for excellent category in Quality Circle Contest at National level. It also bagged Silver trophy at international Quality Circle contest.

7. Rajkot Plant

During the year under review, the manufacturing capacity for engines was increased to 10,000 engines/ month.

The plant achieved BIS certification for 5HP to 8HP engines with N-series pumps

B. BEARINGS BUSINESS

The automobile industry continued to be buoyant and provided opportunities for growth in the business. During the year under review, the automobile sector grew at an average of 9%. The sales of the bearings division for the year under review amounted to Rs. 123 Crores, an increase of 15% over the previous year.

Market share increased to 36% of the OEM market and to 41% in the aftermarket. The after-market segment has grown significantly due to increase in vehicle population.

The Company has made adequate investment in technology, infrastructure and quality, which will enhance customer satisfaction.

C. RESEARCH AND ENGINEERING

1. New Products and Product Development

Your Company strives to fill the product gaps by continuously developing new products and upgrading existing products. The solutions are being constantly optimized to minimize inputs and maximize outputs.

The Company has successfully launched K-1080 engine covering 140 to 160 kVA.

Two models of DV range are successfully handed over for commercial production to cover product ranges from 320 kVA to 625 kVA. Variants with speed of 1800 rpm are also under development.

New variant of portable pump set at 2600 rpm handed over to production to meet higher head requirements.

New applications have been developed for R-810 series engines which have been introduced in production.

An investment of more than Rs. 20 Crores was made in upgrading Research and Development facilities in view of upcoming stringent emission norms.

2. Emission

BS-III norms for construction equipment are effective from 1st April 2011. The company has developed cost effective and user-friendly solution and all the engines have been certified for these norms and proto samples were supplied to customers.

3. Alternate Fuels

During the year under review, the Company has developed CNG Generating sets up to 160kVA which have been successfully installed at different sites.

Company is actively pursuing the development of engines with bio-fuels like bio-gas and straight vegetable oils (SVO) in the range below 20HP.

D. INDUSTRIAL RELATIONS

The Company continues to maintain and improve its healthy and harmonious Industrial Relations.

Kirloskar Oil Engines Limited was selected jointly by Maratha Chamber of Commerce, Industries and Agriculture (MCCIA) and Rotary Club of Poona West, for their newly introduced "BEST EMPLOYEES RESPONSE AWARD " in large industry category, Pune.

Your Companys achievement of signing the 6th consecutive wage settlement in time and without losing even a single production man day in last 50 years (Considering Pre and Post Demerger period) was recognized by a major publication. This is a unique achievement for any manufacturing company in India.

Our Employees health is of prime importance to the Company. Medical check-up of employees is carried out regularly. Company regularly conducts lectures on health, fitness, common ailments and diseases and life style improvement with a view to enhance employee awareness.

Development of employees is an important focus area for the company. Employees are encouraged to participate in programmes such as Out-Bound Training, team building, and also various sporting and cultural activities within and outside the Company.

E. ENVIRONMENT, OCCUPATIONAL HEALTH & SAFETY (EHS)

Environment

The Company continues to be recognized for its commitment towards the environment.

- Pune plant is certified for EMS, ISO 14001: 2004 (Environmental Management System), an international certification standard, since 1999.

- Pune plant is certified for OHSAS-18001:2007 (Occupational Health & Safety Management System), an international certification standard, since 2009.

- Kagal plant is certified for EMS, ISO 14001:2004 (Environmental) & OHSAS-18001:2007 (Occupational Health & Safety Management System) Integrated Management System, since 2009.

- At Kagal 2033 trees have been planted to protect the environment

- Nashik Plant is certified for EMS, ISO 14001:2004 (Environmental) & OHSAS-18001:2007 (Occupational Health & Safety Management System) Integrated Management System in Jan, 2010.

- ANagar Plant is certified for EMS, ISO 14001:2004 (Environmental) & OHSAS-18001:2007 (Occupational Health & Safety Management System) Integrated Management System in Jun, 2010.

- Implementation of Environmental (EMS) & OHSAS (Occupational Health & Safety Management System) is in process at Rajkot Plant.

EHS Improvements

Your Companys maiden Corporate Sustainability report for the year 2009-10, was released in the public domain on 7th March 2011. Kirloskar Oil Engines Limited is the first engine manufacturing company in India, to release this report and receive highest level check certification of A+ from Global Reporting Initiative (GRI), Netherlands. This rating testifies your Companys position as an environmentally conscious company, integrating business principles with sustainable development.

Kirloskar Oil Engines Limited has been honored with Parivartan Leadership Award for Sustainability-2011 in automotive sector. This award, organized by India Carbon Outlook, seeks to recognize Indian companies who have embraced sustainability in their business operations and supply chain. These companies have shown leadership by taking initiatives for making their products, processes and facilities sustainable.

In the year under review, following EHS improvement measures were implemented.

- Upgradation of paint booth in Pune plant to eliminate air and land pollution due to paint dust

- Systematic disposal of waste Glass wool (2.9 MT) & used Asbestos sheets (190 MT)

- Installation of transparent roof sheets for enhanced illumination level & use of natural day light in R-HA Machine shop & Tech Center.

- Installation of turbo vents for improved ventilation in Pune Plant.

- Initiated detailed study on Carbon foot print for all the plants

Based on the finding of Electrical Safety Audits conducted by National Safety Council (NSC) at Pune, Kagal, Nashik & Rajkot plants, detailed action plan is under implementation.

Following measures were taken to increase awareness amongst employees on EHS:

a) Various competitions were conducted

b) Experts lectures and seminars arranged on Energy Conservation (ENCON), EHS at all locations

c) Environment Day celebration (No Vehicle Day)

F. HUMAN RESOURCES

During the year, a number of initiatives were taken in the area of human resource development.

The Company conducts Employee Engagement Survey through Gallup India every year. The Gallup Survey for the year 2011 was conducted in January 2011. The findings of the survey are used to develop the concrete action plan for increasing employee engagement.

The Performance Management System for managers was reframed and implemented. Job Evaluation exercise was initiated to create a role based level matrix in senior management grades. With a view to develop future leadership pool, 20 managers were nominated for Leadership Development Programme, jointly developed with leading management institute. Similarly, Middle Management Development Programme was initiated in collaboration with Kirloskar Institute of Advanced Management Studies.

As a part of the Companys effort to improve skill and competency levels of managers, specially designed need based training programmes were conducted in various functional areas.

G. CORPORATE SOCIAL RESPONSIBILITY (CSR)

Your Company firmly believes in contributing to the well being of society through its CSR initiatives in the surrounding communities with a clear focus on Health, Education, Environment and Livelihood at all plant locations.

- Sponsored education of children from Akanksha Foundation

- Computer Literacy Program for children

- Career Guidance Workshops for students

- Health Awareness Program like De-Addiction, HIV/Aids Awareness, Healthy Diet

- Celebrated "Joy of Giving" Week

- Free Health Check up Camps

- Tree Plantation

- PUC Check up camps

- Environment Fair at Community

- ENCON Initiatives

- Workshops on income Generation for Self Help Groups

- Livelihood Advanced Business School Training programmes through CII YI group & Dr.Reddys Foundation

H. COST CONTROL

Cost control and cost reduction measures continued to be focus area. This has helped the Company in partly offsetting Inflationary pressures. Value Engineering, Value Analysis and Process Re-engineering were the major initiatives undertaken. Effective control on the costs across the supply chain has helped the Company to optimize the material cost.

I. QUALITY ASSURANCE

Several key processes were strengthened and also undertaken several initiatives like "Six sigma programs which are being pursued as a part of continuous improvement process were undertaken. The Company has 139 Green belt holders and 50 certified Black belt holders in the year under review.

Supplier Quality improvement is a focus area for the Company. Towards this end, the concept of Quality Capacity was emphasized throughout the Companys supply base and also during the Annual Supplier Conference.

The Company provides training to suppliers on quality tools like "Six Sigma" through six sigma black belt internal trainers certified by CII. The Initiatives like Supplier Quality Task Force were implemented. As a result of the efforts put in, the trend for supplier quality performance, measured in terms of defective parts per million (PPM) is showing continuous improvements.

For the last few years Supplier Quality Contest has been conducted. This provides recognition for the efforts put in by suppliers in continuous improvement activities as well as in sharing best practices among supplier partners. The number of customer complaints has reduced by more than 20% for almost the entire product range.

J. BUSINESS EXCELLENCE

For the second consecutive time, your Company has received the Commendation Certificate from CII EXIM for Strong Commitment to Excel. In the pursuit of organisation excellence, this award is a testament to the efforts & commitment of our employees to attain world class performance.

CONCERNS & THREATS

With the growth momentum in the domestic market, India is an attractive market for most of the Global players in generating sets business. Entry of low cost manufacturers in the lower end of the market has led to a fierce price competition and entry of global players in the higher range has generated intense competition in that segment. This is likely to put pressure on the margins of the products in the short and medium term.

The demand for generating sets from the telecom markets is expected to remain sluggish during the current financial year.

In order to overcome market challenges Company is focusing on expanding the business in overseas markets and in new product segments like alternate fuel engines, defense, marine auxiliary generating sets etc.

The pump-sets manufactured by your Company have a better performance and lower cost of ownership than the competition. Availability of Government subsidies for diesel pump-sets in some of the Indian Agricultural Markets is critical and can impact the demand for these products. The competitive pressures in the Agricultural Market are on the rise and as a result, margins for these products will be under pressure. Company continues to work towards mitigating this threat through several cost control measures.

The inflationary trend which started in the last quarter of the year under review, especially in the Metals Market, is showing no signs of softening. Further due to tightening of the credit policy by RBI, money flow in the retail market is getting restricted. As a result, the demand for the Off Highway equipments is anticipated to taper down in the short term. We will continue to monitor the emerging scenario, pick-up the early warning signals and update business plans.

Several Global Players in the Off Highway markets have set up their operations in India. Thus the competitive landscape in the Equipment Market is rapidly changing, as the new entrants are attempting to maximize their share of Indian Market.

Your Company has acquired New Customers and developed new applications for its products during the year under review and will continue to design appropriate market strategies.

Effective from 1 April 2011, the emission norms applicable for Commercial Equipment Vehicles [CEV] have changed from BS-II to BS-III. If the component industry is unable to ramp up its supplies commensurate with demand, Company may lose market opportunities in the short term.

Auto Majors will continue to aggressively book the plant capacity of Suppliers. As such, Company will proactively work towards enhancing Supplier capacities and capabilities.

PROSPECTS FOR THE CURRENT YEAR

For the current financial year 2011-12, your Company has a cautious outlook on the economy, considering the anticipated rise in crude oil prices, inflationary pressures in the economy and the rising interest rates.

Government of India continues to put great emphasis on infrastructure especially the urban infrastructure as well as national highways, by enhancing budgetary allocation as well as setting up of lending mechanism.

Several necessary steps to meet the requirements of regulatory change from BS II to BS III emission norms in the off highway sector have been taken.

In the Power Generation segment, the demand and supply gap for power and improvement in lifestyle will continue to drive the business. The power deficit will continue to drive the demand. The deficit is expected to be around 10% during the current financial year. This deficit, along with the growth in service and manufacturing sector is expected to trigger growth for generating sets business during the current financial year. Besides conventional power generation, Government of India has announced setting up of new Nuclear Power Plants. Your Company has already taken lead by successfully supplying large Gensets to Kalpakkam Nuclear Power Plant. Sale of newly introduced DV range of generating sets has picked up and is expected to do better. With the projected 8-9% GDP growth, the Company expects to achieve growth of turnover in the range of 15% to 20%.

CAUTIONARY STATEMENT

Statements in this Report, particularly those which relate to Management Discussion and Analysis, describing the Companys objectives, projections, estimates and expectations may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied.

INTERNAL CONTROLS SYSTEMS AND THEIR ADEQUACY

Internal Audit across the organization is carried out by a renowned auditing firm as per the plan approved by the Audit Committee. Senior Management of the Company reviews the internal audit reports regularly and the major findings of the audit report along with the action plan are discussed with the Audit Committee. Internal Controls related to key business processes are validated during the course of audit. During the year, ERP implementation review in respect of various business processes was also carried out.

LISTING FEES

The annual listing fees for the year under review have been paid to Bombay Stock Exchange Limited, Mumbai and National Stock Exchange of India Limited, Mumbai where your Companys shares are listed.

DIRECTORS

Pratap G. Pawar, Dr. Naushad D. Forbes, Anil A. Alawani and Nihal G. Kulkarni retire by rotation at the ensuing Annual General Meeting and being eligible, offer themselves for re-appointment.

Pursuant to Section 260 of the Companies Act, 1956, read with Article 160 of the Articles of Association of the Company, the Board of Directors, in its meeting held on 11 March 2011, co-opted Dattatraya R. Swar as an Additional Director on the Board of the Company. He holds office of Director up to date of ensuing the Annual General Meeting of the Company. He is eligible for appointment.

The Board of Directors has re-appointed Rahul C. Kirloskar as the Whole-time Director of the Company on 13 May 2011, for a period of 5 years with effect from 5 June 2011. A proposal for his appointment as the Whole-time Director and remuneration payable to him is being placed before the Members of the Company for their approval at the Annual General Meeting.

The brief resumes and other details relating to the Directors who are proposed to be appointed/re-appointed, as required to be disclosed under Clause 49 of the Listing Agreement, form part of the Report on Corporate Governance.

DIRECTORS RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies Act, 1956 the Board of Directors state:

- That in the preparation of the annual accounts, the applicable accounting standards have been followed along with the proper explanation relating to material departures;

- That the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period;

- That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and

- That the Directors have prepared the annual accounts on a going concern basis.

CORPORATE GOVERNANCE

A report of the Corporate Governance, along with the certificate of compliance from the Auditors, forms part of this report.

AUDITORS

The Statutory Audit of the accounts of the Company is currently carried out by M/s. Dalal & Shah, Chartered Accounts, Mumbai (Firm Registration No. 102021W).

You are requested to appoint M/s. P. G. Bhagwat, Chartered Accountants, Pune (Firm Registration Number 101118W) in respect of whom the Company has received a Special Notice pursuant to Section 190 and 225 of the Companies Act, 1956, to hold office as such from the conclusion of this Annual General Meeting until the conclusion of the next Annual General Meeting.

The requisite certificate pursuant to Section 224 (1-B) of the Companies Act, 1956 has been received from M/s. P. G. Bhagwat, Chartered Accountants, Pune.

STATUTORY DISCLOSURES

The information relating to conservation of energy, technology absorption and foreign exchange earnings and outgo as required under section 217(1)(e) of the Companies Act, 1956 read with the rules there under is given in Annexure A forming part of this report.

As required under section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, a statement giving the required information relating to the employees covered there under is given in Annexure to this report. As per the provisions of section 219(1) (b) (IV) of the said Act, these particulars will be made available to any shareholders on request.

ACKNOWLEDGEMENTS

Your Directors would like to place on record their appreciation of the contribution made and support provided to the company by the shareholders, employees, bankers, suppliers and customers during the period under report.



For and on behalf of the Board of Directors

ATUL C. KIRLOSKAR Chairman and Managing Director

Date : 13 May 2011 Place : Pune


Mar 31, 2010

The Directors have the privilege of presenting the First Annual Report of your Company for the period ended on 31 March 2010.

IMPLEMENTATION OF SCHEME OF ARRANGEMENT

A. TRANSFER OF DEMERGED UNDERTAKING

During the year under review, the Honble High Court of Judicature at Bombay approved the Scheme of Arrangement between the Company and Kirloskar Oil Engines Limited (now known as Kirloskar Industries Limited (KIL) with effect from 31 March 2010) vide its order dated 31 July 2009 read with its order dated 19 March 2010 (the "Scheme"). The Appointed Date of the Scheme of Arrangement is 1 April 2009. The Balance Sheet and Profit and Loss Account and related financial statements have accordingly been made, as per the provisions of the said Scheme.

In terms of the Scheme, the Engines and Auto-components business of KIL was transferred to the Company with effect from 31 March 2010, and vested in Company with effect from the Appointed Date, i.e. 1 April 2009. KIL carried on the business in trust on behalf of the Company for the period from 1 April 2009 to 31 March 2010. The first financial year of the Company is from 12 January 2009 (date of incorporation) to 31 March 2010.

B. NAME CHANGE OF THE COMPANY

As per clause 18 of the Scheme, upon the Scheme becoming effective, the Resulting Company shall be renamed as Kirloskar Oil Engines Limited. Accordingly, the Company has applied to the Registrar of Companies, Pune, for change in name of the Company. The said application is pending before the competent authorities.

C. ALLOTMENTOFSHARES

Pursuant to the Scheme, the Committee of the Board of Directors of the Company on 30 April 2010, issued and allotted 14,56,29,750 fully paid-up equity shares of Rs. 21- each to those shareholders of Kirloskar Industries Limited (KIL) whose names appear in the Register of Members as on the Record Date i.e. 22 April 2010, in the ratio of three (3) equity shares of Rs. 2/-each for every four (4) equity shares held in KIL.

D. LISTING ON STOCK EXCHANGES

After the allotment of shares, the Company has initiated the process of making an application for listing of the new shares, on the Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Ltd. (NSE).

FINANCIAL PERFORMANCE:

(Rupees in 000s)

2009-2010

Total Income 22,691,722

Total Expenditure 20,057,176

Profit before exceptional items & taxation 2,634,546

Profit before taxation 2,634,546

Provision fortax (including Deferred Tax) 994,419

Net Profit 1,640,127

Surplus (After other adjustments) 1,640,127

Appropriations

Your Directors propose to appropriate the available surplus as follows:

(Rupees in 000s)

Proposed Dividend 582,519

Interim Dividend NIL

Corporate Tax on dividend 96,749

Transferto General Reserve 164,013

Balance carried to Balance Sheet 796,846

Dividend:

The Directors recommend a dividend of 200 % (Rs. 4 per share) for the year.

MANAGEMENT DISCUSSION & ANALYSIS:

The operations of Company comprise of Engines and Bearings business. This business segmentation forms the basis for review of operational performance.

The growth rate stated in this report relating to the operations of the Company is with reference to the same business that was carried on by KIL in the previous year.

Industry Overview

During the financial year 2009-10, the Indian Economy experienced a cautious and yet a firm revival across its three sectors i.e. Agriculture, Industry & Services.

The fiscal stimulus packages announced by Government of India played a critical role in getting the Indian Economy back on its track. Besides creating a positive impact on several other stakeholders, the stimulus packages helped in boosting the investor confidence.

In the revival process, Services Sector revived first, followed by Industry and Agriculture. You would recall that during the first quarter of the year under review, market players were extremely cautious. The turnaround started happening during the second quarter when both sectors i.e. Services & Industry experienced a robust growth, resulting in overall economic growth of 7.9% during second quarter. This is despite slight drop in agriculture output (-0.2%) due to sub normal monsoons. Due to withdrawal of fiscal stimulus package in the Fiscal Budget for 2010-11, there was a slight decline in Industrial production during March 2010, (from 15.1% during Feb 2010 it dropped to 13.5% for March 2010).

During the year under review, Agricultural Sector declined by 0.2%, the Industrial Sector grew by 10.4% from a low of 2.8% during the previous fiscal, while the Services Sector grew by 8.7%. As a result, during the year under review, Indian Economy experienced a robust growth of approx 7.2% at 2004-05 factor prices.

Company Performance:

During the year under review Company achieved sales of Rs. 2,219 crores.

The profit before tax is at Rs. 263 crores after providing for depreciation of Rs. 84 crores.

Business wise analysis is presented below.

BUSINESS WISE OPERATIONAL PERFORMANCE

The Company caters to the needs of Customers spread over all the three sectors of the Economy i.e. Agriculture, Industry & Services.

A. ENGINE BUSINESS

1. Agriculture & Off Highway Engines Business

During the year under review, the Company succeeded in enhancing its market share in the Agri segment from 8% to 17%. This has been possible due to several proactive measures implemented during the year under review e.g. pruning down the product basket, improving product availability in the market place, restructuring of supply channel and aggressive launch of new product viz.; Varsha Pumpset. During the first year of its commercial launch, Company could successfully sell over 30,000 Varsha Pumpsets in a competitive Portable Pumpset Segment.

As we entered the year under review, Major Players in the Off Highway Segment continued to remain anxious about the ensuing demand. However, unlike the other major economies, the Indian economy recovered quickly and firmly; largely driven by the domestic demand and Company geared up to fulfill the rising demand. The proactive measures adopted by Company resulted in strengthening of its market share to 54% from 52% in the domestic market.

Overseas Agri & Off Highway Market did not experience revival of demand. During the year under review Company evolved a strategy to map the potential of focus markets, position people close to the market, besides creating regional service set-ups. During the ensuing year these initiatives will help us to comprehensively address the demand in the focus market and will also enable the Company and OEM Customers using Companys engines to tap the potential business in the focus markets.

2. Power Generation Engines Business:

The financial year 2009-10 saw revival of the domestic Power Generation Market, except Telecom Segment. Overall market grew by 10%. The Telecom Segment has stagnated, as the Tele-density has peaked in Urban India and Telecom Companies continue to share the Infrastructure.

During the year, the Company has launched DV series engines with in-house 4 Valve High Pressure Central Injection (HPCI) technology. The engines are fuel efficient and environment friendly. In addition to DV series, the company has also launched Gas Gen-sets in the range of 15-140 KVA.

The Global economic meltdown continued in the Overseas Markets served by the Company, leading to lower export growth. However, during the second half of the financial year; beginning Oct-09, Company experienced cautious revival in some part of Mid-east Market.

The Company has worked out plans to selectively target the Overseas Markets of Africa & Mid-east, through creation of Sales & Distribution Channels. Company has also moved people to actively support the Channel Partners at key geographical locations in countries such as UAE, Nigeria, South Africa & Kenya. Successful user trial of the Companys products for telecom segment is paving the way for developing business with Telecom Customers in the overseas markets.

3. Customer Support Business:

After-market, Market network of the Company continues to expand every year; with twin objectives viz.; to remain close to the customer and to provide proactive service. The network now encompasses 95 Service Dealers and 290 Service outlets to support Customers in Off Highway & Power Generation Markets.

During the year under review spare parts sell of the Company grew by 20%.

4. Large Engines Business:

During the year under review, the Company manufactured and supplied 8 marine engines, for propelling Indian Naval ships.

The Company, also successfully executed the first order for supply of four Gensets each rated to 3.6 MW, for the Nuclear Power Plant at Kalpakkam. These Gensets successfully passed several stringent Product Quality Tests.

5. Kagal Plant:

On 5th March 2010 Kagal Plant was formally inaugurated at the hands of honorable Chief Minister of Maharashtra Shri. Ashokraoji Chavan.

During the year under review, Kagal Engine Plant produced 49,263 engines, up by 58%. Kagal Genset Plant produced 7,663 Genset, up by 70%.

Company progressively established the facility to assemble and test over 100,000 Varsha Pumpsets annually.

During the year under review, Company successfully piloted 96 engine models and 12 engine components to fulfill the needs of discerning Customers in Off Highway and Power Generation businesses.

6. Khadki Plant:

As an integral part of range extension in Power Generation as well as Off Highway Markets, Company has developed a new engine family named DV. The DV engine family will extend the current Genset Range up to 600 kVA. It will also enable the Company to address the needs of Customers in Off Highway Markets on equipments such as Water-well Rigs, Locomotives, Fire Pumps, Motor Graders, Dumpers in the 355-hp to 600-hp range.

As a result Company decided to establish a modern manufacturing facility at Khadki Plant. The DV Plant deploys several lean manufacturing concepts.

7. Rajkot Plant:

During the year under review, Rajkot Plant expanded its supplier and assembly capacity by over 60%.

The Company also successfully launched new range of Pumpsets for the Agri market and sold over 5,000 Pumpsets during the year under review.

B. Bearings Business:

The financial year 2009-10 witnessed end of recessionary period for Indian Automobile Industry. As the year progressed it experienced robust growth cutting across segments in the domestic demand for automobiles. This resulted in a healthy order board throughout the year, for Company.

During the year, Companys market share in the OEM as well as After-market Segments has increased from 37% to 41%.

The Company undertook various initiatives to develop material technologies capable of addressing emerging needs of automobile manufacturers.

C. Research and Engineering:

Company strives to fill the product gaps by developing new products and extending existing products.

i. New Products and Product Developments:

During the year under review, Company has successfully developed a smaller foot-print product K1080 series engine for filling the product gap from 125kVAto 160kVA.

Two models of DV8 and DV12 from DV series are under productionization to cover product ranges from 320 to 625 kVA.

Company is developing new variants of Varsha Pumpset to meet higher head requirement of specific region which have lower ground water levels. These variants will make Varsha Pumpset a pan India Product.

During the year under review, the Company has developed CNG, Natural Gas Genset up to 160kVA.

In Off Highway Market, Company successfully developed and supplied over 50 Prototype Engines for several equipments to support the New Customer Acquisition Plan.

ii. Technology:

The emission upgrade of Off Highway engines to fulfill the ensuing 2011 BS-III emission norms has progressed as planned.

Company has successfully developed engines running on bio-fuels like bio-gas and straight vegetable oils (SVO).

Company is committed to adopt Green Technology and make prudent investments in such technologies on a continual basis.

D. Industrial Relations:

The Company continued to maintain and improve its healthy and harmonious industrial relations. The Union at Khadki plant has recently reconstituted its Apex, Industrial Relations and Grievance Handling Committees.

For the sixth consecutive time, the Union and Company have executed the wage agreement at Khadki plant, on 31 March 2010, prior to the expiry of the previous agreement.

Employees health is of prime importance to Company. Medical checkup of employees is carried out regularly. Company regularly conducts lectures on health, fitness, common ailments and deceases and life style improvement with a view to enhance employee awareness.

Development of employees is an important focus area for the Company. Employees are encouraged to participate in programmes such as, out- bound training, team building, and also various participative activities within and outside the Company.

A well maintained sports ground is provided and employees avail this facilities after working hours. Yoga classes are conducted for the employees thrice a week.

E. Environment, Energy Conservation, Employee Health & Safety: Environment

During the year under review, Kagal Plant brought 25,000 sq. mtrs. under Green Initiative by planting over 2,000 trees.

Khadki plant is certified under EMS, IS014001:2004 (Environmental Management System), and OHSAS 18001:2007 Use of alternate fuel, SVO (Straight Vegetable Oil) in lieu of high speed diesel.

Conducted feasibility study for using environment friendly alternative fuel (Bio-LDO) in HT Furnaces.

Energy Conservation & Process Enhancements

Company undertook energy conservation drive by improving power factor, engine testing with regenerative load bank etc, at its Kagal Plant, which resulted in total energy saving of 10% by value at the plant.

EHS Improvements:

During the year under review, Company implemented the following Health & Safety improvement measures:

* Asbestos roof replacement program initiated at Khadki, Nashik and Ahmednagar plants.

* Electrical Safety Audits through National Safety Council (NSC) at Khadki, Kagal, Nasik & Rajkot plants.

* Kagal Plant also introduced in-house Medical Center and Ambulance facility for regular health checkups and to meet any emergency situation.

* To increase Environmental, Occupational Health & Safety awareness of employees, different competitions were conducted on Energy Conservation (ENCON), Occupational Health & Safety at ail locations along with Environment Day celebration.

Certification and Awards

During the year under review, Company secured certifications such as ISO 9001 : 2008 (during May 2009) and EMS 14000 & OHSAS18001 (during December 2009).

Company secured certification under EMS, ISO 14001:2004 & OHSAS-18001:2007 for its Large Engines Plant at Nasik.

Implementation of EMS & OHSAS is in process at Ahmednagar & Rajkot Plants.

F. Human Resources

During the year under review, Company undertook further structural changes in the Power Generation Business Group, to bring target markets under sharp focus. On similar lines, roles in Manufacturing Area were realigned to enhance operational efficiency. And Projects and Manufacturing Engineering functions were made Corporate Functions to serve as a common resource for all Manufacturing Plants.

Company reframed Managerial Performance Management System and implemented the same across the Organisation. With a view to develop future Leadership Pool, the Company has tied up with a leading Management Institute and organised Leadership Development Programme for a batch of senior managers, who were awarded post graduate diploma certificate by the Institute. Besides this, a batch of middle level managers underwent a modular Middle Management Training Programme with Kirloskar Institute of Advanced Management Studies.

Company tied up with Gallup India and conducted Employee Engagement Survey. Results of this survey were shared with all managers and specific activities were undertaken to enhance employee engagement levels.

The total number of employees of the company as on 31 March 2010 is 3,488.

G. Corporate Social Responsibility:

"The Company is a Responsible Corporate Citizen contributing to the well-being of the society."

The Company undertakes various societal initiatives with a sense of responsibility. It also inculcates this value in its employees by giving them opportunities to participate in these activities.

The Companys Social activities are organized across all its manufacturing locations, viz. Pune (Khadki), Ahmednagar, Nasik, Kagal and Rajkot in the areas of Education, Health, Environment and Livelihood Generation.

* Sponsored education of children from Akanksha Foundation.

* Career Guidance Workshop, for students of the nearby communities.

* Organized awareness program for women on the topics like HIV, Adolescent stage, Diet and Nutrition.

* Environment Awareness Program for women, children and youth population.

* Promoting ENCON activities by conducting Essay, Slogan and Poster competitions for school students.

* Organized income generation workshop for community population on preparation of paper bags, Entrepreneurship development, Management and Marketing.

* Livelihood Advanced Business School (LABS) training program was organized for youths in the age group of 18 to 25 years, on subjects like IT, personality development and spoken English.

H. Cost Control:

During the year under review, cost control and cost reduction activities continued to be the thrust area for Company. Effective monitoring of cost across the Demand & Supply Chain enabled Company seek better margins.

I. Quality Assurance:

Company has strengthened several key processes, with a view to enhance process effectiveness as well as predictability measures. Proto Engine Planning, Manufacturing & Supply Process is one such example. Customers accepted almost 100% of the Prototype engines "Right First Time Protos".

Company undertook several initiatives such as 6 Sigma, 4S, Quality Circle and Mr. Customer to improve Zero-hour Availability. Kagal Plant now has 6 certified Black Belts and over 27 Green Belts are undergoing training.

Company improved several key processes at its Kagal plant to enhance Product Quality as well as Availability.

J. Business Excellence:

The Company for the first time participated in CI IEXIM Bank Award for Business Excellence 2009 and has received the "Commendation Certificate for Strong Commitment to Excel".

CONCERNS & THREATS

The current year holds a lot of hope and confidence for the Indian Industry. Though Government of India has announced gradual withdrawal of the stimulus package. Monetary measures to control inflation and soak up excess liquidity generated through stimulus packages are also likely to put pressure on the interest rate scenario thereby increasing the cost of capital. The recent Euro zone crisis may further slow down the recovery of Global Economy. The Company will continue to closely monitor the developments in the Indian and Global economy and strive to protect and enhance value for its stakeholders through appropriate business initiatives and responses.

The inflationary trend is likely to soften during the second quarter of the current fiscal and demand is likely to pick up again during the festive season in the third quarter. However, if the inflationary trend does not soften as expected, it is likely to adversely affect the demand.

Several Global Players in the Automotive, Power Generation as well as Off Highway markets are in the process of setting up their operations in India. Thus the competitive landscape in the Equipment Market is poised for a change, since the new entrants will attempt to maximise their share of Indian Market. Company has acquired New Customers and developed new applications for its products during the year under review and will continue to design appropriate market strategies to address the competitive landscape in India.

Auto Majors are aggressively booking the plant capacity of Suppliers which can create pressure on Company to obtain quality components.

Keeping in view the above scenario, Major Players may explore consolidation of their businesses. Though it is difficult to assess the impact of such consolidation now, Company will continue to watch such market movements and prepare an appropriate response.

PROSPECTS FOR THE CURRENTYEAR

Unlike several economies of the developed as well as developing world, the Indian Economy got back on its feet, rather quickly, thus demonstrating its intrinsic strengths, largely driven by domestic demand.

During the current financial year 2010-11, Company anticipates overall economic growth of around 8% to 9%; the Services Sector of economy will be the major driver. However in the near term, the economy is most likely to heat up due to spiraling inflation which is likely to soften the demand during the second quarter, before picking up again during the festive third quarter.

Government of India has laid heavy emphasis on Infrastructure especially the Urban Infrastructure as well as National Highways by enhancing budgetary allocation as well as setting up lending mechanism through IIFCL. In Agriculture sector, Government has stepped up credit flow to farmers by over Rs. 50,000 Crores.

In the Power Generation segment, Power Deficit will continue to drive the demand. Company does not expect the deficit to go below 10% during the current financial year. Besides this, Company expects two other drivers to come into play viz.; changing life style of Target Customers and increasing per capita power consumption which is expected to rise by 30% to 1,000 units of energy. Besides conventional Power Generation, Government of India has announced setting up of new Nuclear Power Plants. Company has already taken lead by successfully supplying large Gensets to Kalpakkam Nuclear Power Plant.

The rapid growth is likely to continue in the automotive segment during the current financial year.

Keeping in view the overall positive business environment, Company plans to grow by 20% in value terms during the current financial year.

CAUTIONARY STATEMENT

Statements in this Report, particularly those which relate to Management Discussion and Analysis, describing the Companys objectives, projections, estimates and expectations may constitute "forward looking statements" within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied.

INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY

Renowned auditing firm conducts the Internal Audits of all the business units of the Company. The internal audit program is designed to ensure extensive review of the business operations of the Company and is not restricted only to a review of finance and accounting functions. The internal auditors also check, validate and report on the internal controls in place in the areas covered during the audit.

DIRECTORS

Mr. Atul C. Kirloskar, Mr. Gautam A. Kulkarni and R.R. Deshpande were the first directors of the Company. They will be appointed as directors of the Company at the ensuing Annual General Meeting.

Pursuant to Section 260 of the Companies Act, 1956, read with Article 160 of the Articles of Association of the Company, the Board of Directors, in its meeting held on 30 March 2010, co-opted Mr. R.Srininvasan, Mr. U.V Rao, Mr. H M Kothari, Mr. Nihal Kulkarni, Mr. Rahul C. Kirloskar, Mr. M Lakshminarayan, Mr. PG. Pawar, Dr. Naushad Forbes and Mr. A.N. Alawani as Additional Directors on the Board of the Company. They hold office of Director up to date of the ensuing Annual General Meeting of the Company and being eligible, offer themselves for appointment.

Mr. Atul C. Kirloskar was appointed as Managing Director of the Company by the Board in its meeting held on 30 March 2010, with effect from 31 March 2010 for a period of 5 years.

Pursuant to the Scheme of Arrangement between Kirloskar Oil Engines Limited (Demerged Company - now known as Kriloskar Industries Limited) and Kirloskar Engines India Limited (Resulting Company) the services of Mr. Gautam A. Kulkarni as Joint Managing Director, Mr. Rahul Kirloskar as Whole Time Director and Mr. R.R. Deshpande as Executive Director of the Company, for a period upto 19 August 2013,4 June 2011 and 28 April 2010, respectively, with effect from 31 March 2010 have been transferred from Demerged Company to Resulting Company.

The services of Mr. R.R. Deshpande have been transferred on a continuous basis from the Demerged Company to the Company, with effect from 31 March 2010 for the balance period of his term, i.e. up to 28 April 2010, pursuant to the Scheme of Arrangement. Mr. R.R. Deshpande was re-appointed as the Executive Director for a further period of five years with effect from 29 April 2010.

The brief resumes and other details relating to the Directors who are proposed to be appointed/re-appointed, as required to be disclosed under Clause 49 of the Listing Agreement, form part of the Report on Corporate Governance.

DIRECTORS RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies Act, 1956, the Board of Directors state:

* That in the preparation of the annual accounts, the applicable accounting standards have been followed along with the proper explanation relating to material departures;

* That the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period;

* That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and

* That the Directors have prepared the annual accounts on a going concern basis.

CORPORATE GOVERNANCE

A report of the Corporate Governance, along with the certificate of compliance from the Auditors, forms part of this report.

AUDITORS

You are requested to appoint Auditors for the current year. The retiring auditors M/s Dalai & Shah, Chartered Accountants, (Firm Registration No. 102021W) are eligible for re-appointment.

STATUTORY DISCLOSURES

The information relating to conservation of energy, technology absorption and foreign exchange earnings and outgo as required under section 217(1 )(e) of the Companies Act, 1956 read with the rules there under is given in Annexure A forming part of this report.

As required under section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, a statement giving the required information relating to the employees covered there under is given in the Annexure to this Report. As per the provisions of section 219(1 )(b)(iv) of the said Act, these particulars will be made available to any shareholder on request.

ACKNOWLEDGMENTS

Your Directors would like to place on record their appreciation of the contribution made and support provided to the Company by the shareholders, employees, bankers, suppliers and customers during the period under report.

For and on behalf of the Board of Directors

ATUL C.KIRLOSKAR Chairman and Managing Director

Date: 14 May 2010 Place: Pune

 
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