NELCO

Dear Shareholders,
 
 This statement is being issued in view of the disappointing financial
 performance of the Company for the extended financial year 2003-2004
 and in the circumstances in which your Company is placed.
 
 Over the last decade, the Automation and Controls Lines of businesses
 (LoB), which are handled by the Industrial Systems Division (ISD),
 faced externally, a very difficult period in terms of demand for their
 equipment, products and services from the served industries. These
 difficulties were further aggravated due to intense competition from
 well-established large multinationals, which impacted the Company's
 order bookings, sales, and margins. Till recently, the Management also
 faced difficulties to develop and implement growth initiatives in
 adjacent areas in view of the high entry barriers created by the
 well-entrenched players and that too, in an economic down turn. These
 factors led to inconsistent and generally under-performance of the
 Automation and Control LoBs.
 
 During the last three years, the Company did achieve a break-through as
 a satisfactory supplier to the Ministry of Defence, which have
 demanding requirements of quality and performance, and overcame, to a
 certain extent, the high entry barrier of the Defence business. The
 Company successfully set up Strategic Electronics as a focused LoB.
 Prior to the financial year under review, this LoB contributed
 significantly to the Company's Income in the last 2 years. It should
 however, be recognized that the LoB does face some risks of long cycles
 between Enquiry, Order and Revenue.
 
 Shrink in other LoBs of ISD over the last several years and changes in
 the mix required a significant reduction in total man-power, mainly in
 the shop floor work-force. During this period, the Company strength was
 reduced from 1296 to current 400 plus. The Company was complelled to
 carry out several voluntary retirement schemes, which incurred large
 costs.
 
 In the past, due to factors both external and internal, it carried high
 levels of inventory and debtors because of which the Working Capital
 requirements remained very large and that too when the borrowing rates
 were at their peak levels. In addition the VRS schemes also required
 large quantum of funds, which when added to the Working Capital funds,
 caused huge borrowing costs for the Company. Large scale provisions and
 write-offs had to be also made for unusable Inventory and unrecoverable
 Receivables. It is these costs i.e. VRS and interest, and provisions
 and write-offs which have hugely impacted your Company's overall
 profitability in the past and also for the year under review.
 
 For FY 03-04, the Company's performance heavily depended on obtaining
 and delivering a repeat Ministry of Defence (MoD) order of Unattended
 Ground Sensors (UGS). Unfortunately, with the recent change in the
 Government, and other bureaucratic delays, the contract did not get
 concluded before the year-end and its revenue could not be achieved.
 The large loss for the current extended year ending is both due to
 inadequate Revenue and other items such as Interest, VRS and Write-offs
 amounting to a total of Rs. 32 crores.
 
 The Management recognizes its responsibility to cope up with such
 issues through positive leadership and action. The Board has directed
 the Management to focus on those LoBs which have good potential and
 exit those which have been making losses. Every effort is being made to
 expand the Strategic LoB through widening of applications, product and
 service portfolio and establishing of alliances with successful
 organisations world-wide. Actions are being carried out to reduce debt
 and the consequent high interest burden and strengthening controls and
 business processes.  Through reduction of work-force the operating
 costs are also being reduced considerably. Where required, the
 Management team is being strengthened. Other strategies for de-risking
 the Strategic Electronics LoB are also being undertaken.
 
 These are valid strategies for ISD and the challenge before your
 Management is to execute them with far greater urgency and efficiency.
 On the other hand such changes and actions do not happen over night.
 Hence there will be some rough times ahead. However, with understanding
 from our Shareholders, the Management and Employees are committed to
 perform to their utmost capacity and competence in turning around your
 Company.
 
 November 19, 2004                                             Chairman