Chairman of Murugappa Group

Dear Shareholders,

The year 2015-16 has been a year of growth for CUMI despite the volatile global economy and challenging Indian market conditions. The global economy remained subdued with growth in emerging and developing economies constituting about 70% of the global growth, continued to decline and the advanced economies witnessed only a very modest recovery. In North America, despite a setback in the first quarter of 2015, the underlying drivers for a gradual acceleration in the economic activity remained intact. The eurozone economy remained sluggish and revival continues to be slow. The volatility and uncertainty in the Russian economy continues to adversely impact its currency. The economic outlook for the year 2016 globally is forecasted to see a marginal improvement from the 2015 levels. Notwithstanding the depressing global economy, India's economic growth continued during the year well supported by the Government's initiatives and reorientation programmes.

CUMI, its subsidiaries and joint venture companies had a significant year 2015-16. The standalone revenue of the Company recorded 11 per cent growth driven by enhanced performances in the Abrasives and Electrominerals businesses. The consolidated revenue from operations grew marginally by 1.9 per cent largely owing to currency translation losses caused by the depreciation of the Russian Rouble as well as the winding down of operations in Thukela Refractories Isthibe, South Africa. However during the year, despite a marginal growth in revenues, the Company was able to record an impressive 48 per cent growth in its operating profits at a consolidated level signifying its resolute focus on delivering operational efficiencies. The Total Productive Maintenance practices now well imbibed within the CUMI plants and prudent cost management efforts aided in containing the manufacturing costs and optimising efficiency. During the year, the Company continued its Research and Development initiatives which included several joint projects between the various business divisions in addition to engaging with third party expertise in specific fields. Aligned with its core belief that customers and business partners play a very crucial role in its growth, the customer and dealer engagement initiatives at CUMI progressed well. In continuance of its unbroken dividend track record, a dividend of ` 1.50 per share was paid during the year which is higher than the dividend paid in the previous year. As a matter of prudence, the Board has recommended that the dividend paid during the year be treated as the final dividend by the shareholders.

Abrasives, CUMI's largest operating business recorded a good growth during the year in the backdrop of an improving domestic demand and aggressive expansion of the dealer network. The indigenous sourcing of input materials resulted in increased profitability. The operating margins improved owing to better efficiency across the value chain and strong distributor and customer partnerships. The business model in China was reviewed and it was decided to close manufacturing operations. A new toll manufacturing model has been set up in its place that will continue to deliver CUMI-quality products to our standards to address both the Chinese and International markets. The sale of the plant & machinery is in progress. CUMI's subsidiary Sterling Abrasives which manufactures specialist conventional Abrasives and its joint venture Wendt India which addresses the Super Abrasives and Grinding machines market had marginal growth in their revenues. However, the profitability of these companies came under pressure owing to various factors including higher depreciation arising from capacity expansion, change in product mix etc.

Inspite of having a difficult previous year, the Electrominerals business of CUMI made a quick turnaround and recorded an impressive growth both in terms of revenue as well as profitability. The demand for Abrasive grains increased substantially resulting in the increased volumes and the business was able to establish its special products in the market. The business in Russia continued to be good despite the currency depreciation with Volzhsky Abrasive Works launching various grits with new fractions as per industry requirements. In South Africa, regardless of the drop in volumes, the profitability of Foskor Zirconia improved with the depreciating Rand. The relocation of the Electrominerals, Refractories and Bubble Zirconia plants in South Africa to India is underway and we believe that with greater levels of skill and technical attention the plant operations can improve significantly. CUMI Europe set up last year to serve the European markets better with greater customer connect is in the process of establishing its business presence.

The Ceramics businesses had a very tough year. While on a standalone basis there was a marginal improvement, at a consolidated level the revenues declined. The Industrial Ceramics did well with an increase in Metallized and Engineering Ceramics businesses. However, the Wear Ceramics business which is predominantly projects dependent continued to struggle in view of project deferrals in certain sectors. The Lined Equipment business at CUMI Australia continued to be good. Strategic initiatives have been undertaken to turn around the business in the Americas. The marginal growth in Industrial Ceramics was off-set by lower sales in Refractories business including that of the joint venture Murugappa Morgan Thermal Ceramics. The decline in customer demand owing to projects deferment resulted in Refractories business continuing to have yet another difficult year. During the year, the legal process of amalgamation of Cellaris Refractories India, a company set up to manufacture ultra light weight Alumina Bubble Refractories for offering heat resistant products to customers of niche markets was completed and the benefits are expected to accrue shortly.

Despite being a difficult year on the operations front, the year 2016 was a year of recognition for the Industrial Ceramics division. It was recognized as one of the top 25 innovating companies in the Country by the Confederation of Indian Industry for its successful completion of the debottlenecking project in Metallized Cylinders business. The division continued to focus on Research and Development to leverage technology in providing value added products to its customers. The year 2015-16 was also a significant year with the Super Refractories division completing 50 years and the Industrial Ceramics division completing 25 years of operations.

The capital expenditure during the year increased substantially in view of the plant relocation projects which are under way as well as continued focus on improvement in quality, new products, innovation and automation at all manufacturing facilities. Capability development through structured training programmes progressed well during the year. Being socially responsible, in addition to addressing the training and development needs of its employees, the Company through its dedicated Centre for skill development – CUMI Centre for Skill Development (CCSD) caters to the needs of the society too. The Centre provides vocational training including behavioral and communication skills to youth from rural and underprivileged societies. During the year, the Company successfully replicated the CCSD model of Hosur in Edapally, Cochin thus expanding its reach in this area.

Safety at the work place continues to be a top priority and periodic awareness sessions and workshops continue to be conducted for identification and elimination of unsafe working conditions.

The Company's debt equity ratio continues to be healthy owing to prudent working capital management. This is asserted by the fact that the capital expenditure programme(s) during the year were largely financed through internal accruals. A robust risk management framework aids in timely identification, evaluation and mitigation of risks on an ongoing basis. The adequacy of the internal control mechanisms are being continuously evaluated for ensuring effectiveness. The regulatory environment in the last few years has been very dynamic and the teams have been agile in quickly adapting to the changing scenario and delivering results.

The teams at CUMI, its subsidiaries and joint ventures ably led by K Srinivasan, Managing Director and his colleagues across units and geographies have risen up to the challenges with both conviction and commitment. My sincere thanks to all colleagues who have been instrumental in ensuring that the Company is back on the growth path with enhanced profitability. The involvement of the esteemed members of the Boards in guiding and supporting the teams is indeed most commendable. The Board deliberations have always been a good mix of encouragement, challenge and caution while ensuring sound governance and strict adherence to our core values and beliefs. Iàm thankful to the Board members for their time and wise counsel.

To all our stakeholders, customers, suppliers, vendors, bankers and of course to all of you shareholders our most grateful thanks for your unstinted support to the Company in its journey towards "Making Materials Matter".

Murugappa Group Abrasives & Ceramics Manufacturers