MANAGEMENT DISCUSSION & ANALYSIS

Global Economy

According to the World Bank, global economic growth is currently estimated at 2.4 percent in 2015. The overall trend, according to both the IMF and the World Bank is towards further weakening of the global economy for the coming year. In fact, since the beginning of the year(January 2016) when the first estimates for the year were made, those forecasts have undergone a significant downward revision. Faltering growth in the advanced economies and the continuing slump in commodity prices are two major reasons behind it. Other reasons include political uncertainties, doubts about the future of monetary stimulus in advanced economies and structural problems in Emerging economies. These headwinds are likely to continue and the projection for 2016, is pegged between 2.4% (World Bank estimate) and 3.2%(IMF estimate). Interaction of these factors will determine the scope of the world economic growth.

Three key transitions that continue to influence the global outlook, according to the IMF are, : (1) the gradual slowdown and rebalancing of economic activity in China away from investment and manufacturing toward consumption and services, (2) lower prices for energy and other commodities, and (3) a gradual tightening in monetary policy in the United States in the context of a resilient U.S. recovery while central banks of other major developed economies continue to ease monetary policy

The nature of global economic growth is at brsent different from those of brvious years. While growth in emerging and developing markets will contribute to the lion's share of world economic growth, they will play a proportionally less important role than brviously as they are plagued by a host of problems. China is in the middle of rebalancing its economy from an export oriented one, to one that is focused on domestic consumption. Its economy is also reeling from a massive debt overheads, slump in manufacturing and faltering exports. Russia and Brazil, both big commodity producers, are suffering from the prolonged commodity slump. the continuation of these trends has led to a cut in projected growth for them. The emerging markets estimated to have grown at 3.4% in 2015 and are expected to grow at 3.5% in 2016.

The developed economies are expected to grow by 1.7 per cent, weaker than the January projection. Rising public debt, faltering productivity levels and weak investment activity means that these economies will stabilize on a weak growth trajectory. The United States of America is expected to follow a policy of monetary accommodation, while Japan and the EU will follow a policy of monetary expansion. Interest at zero or near zero rates may however lessen the effectiveness of future monetary stimulus

Indian Economy

The Indian economy expanded by 7.6 per cent in 2015-16, as compared to 7.2 per cent in the brvious year, to log the fastest growth among larger countries, outpacing China. The Indian economy is now officially the fastest growing major economy in the world and expected to be one of the growth engines of the global economy. In the last quarter of the fiscal year under review, in fact, the expansion in India's gross domestic product (GDP) at constant prices - which factors for inflation - was 7.9 per cent, and distinctly higher than most brdictions. The real per capita income also rose 6.2 per cent to Rs 77,435.

As per data on national income released by the Central Statistical Office, the country's GDP in absolute numbers and in real terms was Rs 113.50 lakh crore in 2015-16, against Rs 105.52 lakh crore in the year before.While Gross Value Added (GVA) at 7.3 per cent this year was better than the 7.1 per cent of brvious years, a key economic number on the demand side was weaker than last year. The growth in final consumption expenditure is estimated to be at 6.9% in 2015-2016, while in 2014-15 it was at 7.2%. Gross Capital Formation(GCF) however increased from 4.9 per cent in 2014-15 to 5.3 per cent in 2015-16. The brvailing sluggishness in the global economy took a toll on exports, while the weak energy and other commodity prices reduced the import burden. Overall Exports and imports of goods and non-factor services declined (at constant prices) by 6.3 per cent each in 2015-16.

The average headline inflation measured in terms of Wholesale Price Index (WPI) declined from 6.0 per cent in 2013-14 to 2.0 per cent in 2014-15 and further to -3.0 per cent in 2015-16 (Apr-Dec Inflation measured in terms of Consumer Food Price Index (CFPI) declined to 4.6 percent in 2015-16 (Apr-Dec) from 6.4 per cent in 2014-15 and is currently placed at 6.4 per cent in December 2015.

Among major concerns, Gross Non-Performing Assets (NPAs), as of March 2016, of 38 listed Indian Banks stood at Rs.5.7 trillion (about USD 85 billion); up 89% from Rs.3.02 trillion (about USD 45 billion) a year back. Profitability will be a big challenge for public sector lenders due to the increased provisioning requirements. However, the central government along RBI has taken the matter head on and is dealing with the issue with seriousness that it deserves

Key Forecasts FY16-17

The forecasts for Indian economy for upcoming years vary from Institution to Institution. The World Bank expects that the expansion of the Indian economy to continue but decelerate somewhat in the next three years. The Bank recently revised down its brdictions for India's economic growth for this fiscal year to 7.6% and the next two financial years to 7.7%. In January, the bank had forecasted growth of 7.8% for this fiscal and 7.9% each for next two financial years. The Bank bases its forecast on the fact that India faces headwinds such as a slowdown in rural consumption and sluggish lending to the corporate sector. The Bank also believed that Weaker-than-expected growth in advanced economies will weigh on exports. This is in line with 2015-2016, when India's exports fell 16% to $261 billion in the past financial year.

The Reserve Bank of India on other hand sees an improving situation. In its June 2016 survey, it states that national output growth is likely to gradually improve in 2016 and further in 2017. The RBI has indicated that an improvement in the overall business situation is imminent, driven by better capacity utilisation and domestic and external order books among Indian companies. These developments have improved the expectation of business conditions in the first half of 2016-17. Public investment, especially in roads and railways, is gaining strength, though the continuing weakness in private investment is of concern. Demand conditions are likely to improve going forward; consumer confidence is seen as rising on improving expectations of employment and spending, with rural demand aided by a stronger monsoon. Rising capacity utilisation should prompt private investment.

CMIE's (Centre For Monitoring Indian Economy Private Ltd) data on stalled projects also shows that there has been a sharp decline in the number of such projects due to lack of environmental and non-environmental clearances. According to the CMIE database, the cumulative impact of projects stalling on account of the lack of environmental and non- environmental clearance, and raw material supply problems came down from 56 per cent in 2012-13 to less than 10 per cent in 2015-16. Some say that as and when the demand comes back, the removal of bottlenecks will lead to faster investment.

Indian Infrastructure Sector

The infrastructure sector is wide-ranging and includes electricity, roads, airports, railways, water systems, public utilities, coal mining and telecommunications, the development of which raises the country's economic productivity. Highways, ports, airports, roads, and rail are all necessary conduits for commerce, making their construction, improvement, and expansion all the more vital.

Infrastructure is a key driver for the Indian economy. Increased spending in this sector has a multiplier effect on overall economic growth as it necessitates industrial growth and manufacturing. This in turn boosts aggregate demand by improving living conditions. For these reasons, the Indian government has promoted investing in infrastructure, providing benefits such as the easing of tax restrictions and multiple financing alternatives. Such a focus on investment to boost GDP is a clear departure from brvious consumption-led growth strategies. This is reflected in the total budgetary allocation - US$ 20.32 billion (Rs. 137,333 crore) or almost 30 percent of the Union Budget. While direct investments into infrastructure certainly forms one part of the government's new strategies, the budget also includes some important measures aimed at improving the environment for private infrastructure investment as well. The following financing initiatives are supported by the government:

The National Infrastructure and Investment Fund (NIIF), whose objective is to maximize economic impact through investments in commercially viable projects, both greenfield and brownfield, while also kick-starting stalled projects.

Public Private Partnerships (PPPs) are encouraged in the infrastructure sector, which is officially defined as a partnership between a public sector entity and a private sector firm, where majority share/equity belongs to the private entity.

Merger and acquisition deals are also encouraged, with the elimination of those considered unsound sponsors.

The Securities & Exchange Board of India enacted regulations in September 2014 allowing the creation of Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT). Their purpose is to provide much needed liquidity for real estate and infrastructure players, giving investors an opportunity to invest in Indian stabilized assets through a listed platform.

Equity capital (especially foreign) is the brferred form of funding rather than debt. Several Indian industries are already overleveraged, having borrowed more debt than they can sustain, leading their assets to be blacklisted as non-performing assets (NPAs). Yet, debt financing from foreign institutions is also discouraged as it increases currency risk.

Funds will now be allocated from the federal government directly to local bodies. This eliminates the state governments as inefficient intermediaries and the unnecessary extension of credit lines.

Sovereign wealth funds (SWFs) and pension funds are allowed to invest in infrastructure projects. They are given longer time horizons as they are not required to make immediate profits unlike private equity firms looking to quickly and profitably turnover target infrastructure projects.

Legislation, Funding Opportunities, and Sector-Specific Advances

Greater State Autonomy: Pertaining to the design of projects and programs, this follows from the recommendations of the 14th Finance Commission. Ultra-local initiatives in urban infrastructure, electricity distribution, and sewage treatment are expected to have a direct noticeable impact.

Sagarmala Port Initiative: 90 percent of India's trade by volume and 70 percent by value are moved through ports, thus playing a key role in facilitating external trade. The government focus is now on improving port infrastructure, increasing the capacity and draught at ports, as well as establishing inland waterways. Two new ports are to be developed at Dugarajapatnam in Andhra Pradesh and Sagar Island in West Bengal to enhance trade with India's neighbors and the ASIAN countries.

South Asia Regional Connectivity: The Asian Development Bank (ADB) is keen to support India's proposal to develop various infrastructure projects worth US$ 5 billion in South Asia to improve regional connectivity in the region. Two priority road corridors are being constructed at brsent - the first connects India with Bangladesh, Nepal, and Bhutan through North Bengal, and the second will establish India-Myanmar connectivity.

Power Sector: India is involved in developing power grids and transmission lines with surrounding countries such as Bangladesh. The 1,320 MW Maitree Thermal Power Project, a joint venture of NTPC (National Thermal Power Corporation) and Bangladesh Power Development Board, is awaiting development.

Real Estate Industry: Infrastructure developers who are part of a consortium will now be taxed as separate units in a move by the Central Board of Direct Taxes (CBDT). Normally, consortiums are formed to implement large-scale infrastructure or turnkey projects where multiple firms are engaged in engineering, procurement, and construction.

Smart Cities Mission: This is an urban renewal and retrofitting program by the Government of India that aims to develop the infrastructure of 100 cities, making them citizen friendly and sustainable. A total of US$ 15 billion (Rs 980 billion) has been approved by the Union Cabinet, with the remaining funding to emerge from PPPs and municipal bonds. Each participating city will establish a special purpose vehicle (SPV) to implement its Smart City plan. An SPV is a limited company incorporated at the city-level, in which the state and the urban local body are promoters, though private entities may hold up to a 50 percent equity stake. The largest sectors targeted for PPPs are in areas such as water supply, waste management, and transportation.

Infrastructure - Key Forecasts

2016 holds promising for infrastructure as the central government pushes reforms aimed at faster approvals to stalled projects, easy access to funds and attracting overseas investors. Few key expected trends during 2016-17 are:

a. Medium and large infrastructure companies are likely to focus on engineering, procurement and construction (EPC) orders from the government instead of build, operate and transfer (BOT) projects that require heavy investment.

b. More financial buyers, especially global pension funds, will try to partner with large infra-focused companies in India to create their own asset portfolios

c. Road project awards will rise in 2016 as the government puts infrastructure creation at the top of its agenda. The transport ministry already has a target of awarding 10,000km of projects in FY16 as against 8,000km in FY15. The National Highways Authority of India plans to award 20,000km of projects over the next two years, involving an investment of Rs. 2.3 trillion.

d. There will be more focus on the railways, especially since the announcement of Japan's bullet train project in India, which will be a 505km corridor linking Mumbai with Ahmedabad. Japan will provide $12 billion of soft funding to build India's first bullet train. If the concept is replicated in major metros of India, it could transform the country's public transportation and cut down travel time by a third. The government plans to attract more investments in railways.

e. Some action is likely in the privatization of distribution in the power sector in 2016. Private companies could take over distribution in certain cities to reduce leakage. A number of projects in distribution are likely to be awarded in 2016.

Infrastructure - Key Challenges

a) The infra sector continues to grapple with the high concentration of poorly performing assets resulting in not only fragile coverage metrics, but also lower than expected equity returns to the sponsors. In the toll roads sector, the negative outlook reflects the absence of a strong widesbrad traffic recovery, toll rates contraction and stressed sponsors' credit profile. "The sector's inflection point will continue to be consistent traffic.

b) In the thermal power sector, the utilities continue to delay the call for long term offtake bids and continue to rely on short term buying to manage demand-supply mismatches. Despite policy interventions and improved fuel supply position, the tepid demand curtailed Plant Load Factors and many plants are operating at sub-optimal levels.

c) Sharp fall in prices of commodities, may defer the private sector investments in segments such as oil & gas steel, and mining.

d) Many construction companies are facing stretched liquidity and limited resources to expedite execution resulting in weaker revenue growth.

Opportunities and Strengths

• The Company has a well diversified business portfolio sbrad across ten business verticals viz., Buildings & Housing, Roads, Water & Environment, Electrical, Irrigation, Metals, Power, International, Mining and Railways.

• The Company has more than three decades of experience in construction sector and is recognized as one of the key construction players in the country.

• It has carried out variety of projects across the country and also in international geographies.

• The Company's clientele consists of several reputed public and private sector organizations.

• The Company is recognized for timely completion of projects within budgets.

• Our core strength is our people who carry several years of industry experience in various domains including engineering, design, construction, procurement, planning, etc

RISKS AND CONCERNS

The Company has Enterprise Risk Management process in place, which is a holistic, integrated and structured approach to manage risks with the objective of maximizing shareholders' value.

The risk management process at NCC broadly consists of identification, assessment, mitigation, prioritization and monitoring of risks. The ERM process allows NCC to:

• Enhance confidence in achieving its desired goals and objectives

• Effectively restrain threats to acceptable levels

• Take informed decisions about exploiting opportunities

Owing to the nature of the industry the Company operates in, it is exposed to a variety of risk factors which are broadly categorized into financial, technical, construction, policy and political, market and legal.

A tight risk process is carried out from br-bid to project completion stage to manage, mitigate and monitor these risks by adopting specific risk mitigation measures.

During the year, the Board has reviewed the process and the Risks that have already been identified for the business. Some of these key risks that the Company faces along with their mitigation strategies adopted are listed below

INTERNAL CONTROL SYSTEM

The Company has adequate system of Internal Financial Controls to help Management review the effectiveness of the Financial and Operating Controls and assurance about adherence to Company’s laid down Systems and Procedures. As per the provisions of the Companies Act, 2013, internal controls and documentation are in place for all the activities. Both Internal Auditors and Statutory Auditors have verified, Internal Financial Controls (IFC) at entity level and operations level and satisfied about control effectiveness.

The controls are reviewed at regular intervals to ensure that transactions are properly authorized and correctly reported and assets are safeguarded. The Audit Committee periodically reviews the findings and recommendations of the Auditors and takes necessary corrective actions as deemed necessary.

Enterprise Resource Planning Software is in implementation for most of the Projects, Head Office, Divisions and Regional Offices that would further strengthen the internal control mechanism.

Financial Performance (NCCL Stand alone)

1) Share capital: During the year no change in share capital.

2) Reserves and surplus: The Reserves and surplus of the Company has gone up from Rs. 30.93 billion to Rs. 32.98 billion in 2015-16 and the increase is on account of profits made in 2015-16.

3) Net worth: The Company’s net worth increased from Rs. 32.04 billion to Rs. 34.09 billion on account of internal generation of profits.

4) Borrowings (Long-Term & Short-Term): There was a decrease in loans from Rs. 19.95 billion to Rs. 18.84 billion.

5) Assets :

a) Fixed assets: The Company’s fixed assets (gross block and Capital WIP) increased by Rs. 0.66 billion in 2015-16 from Rs. 12.10 billion to Rs. 12.76 billion. However the net block including Capital WIP has come down from Rs. 6.40 billion to Rs. 6.27 billion during the year 2015-16.

b) Investments: The investments decreased by Rs. 1.26 billion, from Rs. 11.57 billion to Rs. 10.31 billion during the year 2015-16

c) Inventories: The Company’s inventories stand at Rs. 16.57 billion as against Rs. 18.03 billion of brvious year

d) Trade Receivables: The company’s Trade Receivables decreased by Rs. 0.39 billion in 2015-16 from Rs. 13.63 billion to Rs. 13.24 billion.

e) Loans and advances (Long-Term & Short-Term): Loans and advances decreased from Rs. 28.95 billion to Rs. 28.47 billion during the year under review. The decrease rebrsents amounts received against the advances made to subsidiaries & Suppliers.

f) Other Current & Non-Current Assets: Other Current & Non-Current Assets increased from Rs. 14.62 billion to Rs. 17.20 billion during the year under review mainly due to increase in retention money.

Operational Performance

a) Revenue from Operations: The company has reported a Revenue from Operations of Rs. 83.25 billion during the year 2015-16 as against Rs. 82.97 billion in the brvious year.

b) Other Income: The other income of the company for the year Rs. 1.96 billion as against Rs. 1.95 billion last year. Other income comprises of Interest on advances, interest on bank deposits and miscellaneous income.

c) Direct cost: The direct cost for the year under review works out to 84.99% of the turnover as against 86.13 % last year.

d) Overheads: Overheads, comprising salaries and administrative expenses, work out to Rs. 5.12 billion for the year under review as against Rs. 5.01 billion in the brvious year. The overheads as % of revenue 6.15% as against 6.04%.

e) Interest cost: The Interest cost during the year as a % of revenue has decreased from 6.91% to 6.10%. Finance Cost decreased to Rs. 5.08 billion from Rs. 5.74 billion, which was on account of decrease in loans and decrease in average interest cost of borrowings.

f) Debrciation: The Company’s debrciation for the year has decreased from Rs. 1.12 billion to Rs. 1.10 billion.

g) Tax Expense: The tax expense of the company for the year 2015-16 is Rs. 0.73 billion as against Rs. 0.47 billion of brvious year.

h) Net profit: There has been significant growth by 99% in the Net Profit of the company from Rs. 1.12 billion to Rs. 2.23 billion.

i) Dividend: The Board of Directors have recommended a dividend of Rs. 0.60 per share (30%) and the total payout works out to Rs. 0.33 billion as against Rs. 0.22 billion in the brvious year.

Human Resources & Industrial Relations

The human resource (HR) strategy at NCC is focused on creating a performance-driven atmosphere in the Company, where innovation is encouraged, performance is recognised and employees are motivated, to realize their potential. Company’s HR department co-creates all HR strategies along with senior management and BOD so as to influence change, attract talent and build capabilities. HR department is fully specialized to respond to varied human resource needs of NCC’s business units to enable each division to maintain the human strategic advantage.

Talent Development and employee engagement

Key components of talent development at NCC is initiating various skill and leadership development programmes as well as creating a culture of continued employee engagement. During the year the company organized 47 training programs with a total attendance of 835 participants. Safety, Personality & Leadership Development and statutory procedures were some of the key topics covered during these programmes.

Talent Diversity

NCC has a healthy talent diversity. The company’s human capital comprises of 4821 employees across its business divisions at various locations. 42% of the company’s human resource is below 34 years. Company is able to maintain an average employee tenure of 5 years and 7 months and the annual attrition rate has been lowered from 20.51% in FY13 to 13.79% in FY16. About 60% of the company’s work force comprises of technically qualified as well as engineers such as M Tech, B Tech, DCE, DME & ITI.