MANAGEMENT DISCUSSION AND ANALYSIS Economic Overview 2014-15 was a challenging year for the global economy. Oil prices once trading at $115 per barrel witnessed a sharp dip to 50% levels by December 2014. The estimates indicate no mid-term threat towards rising prices. However, the low crude prices failed to enthuse confidence in the global economy owing to the various challenges across multiple economies. While the Eurozone grappled with its currency crisis, with inflation rising in Greece and Spain. The slowdown began to take shape in China, with the government deciding to ditch the “growth at all cost” strategy employed since 2008 and took initiatives to control credit flow. This started to hurt the Germans, as the orders of machines were impacted. The US started to show results on which still remains a long road to recovery. However, speculations continue to thrive on the rise of bank rates buy the Central Bank, in wake of the economic upturn. However, now with the weaker outlook on Europe and China, and the potential impact on US Dollar, the rate rise my be further delayed. Indian economy overview Year 2014-15 can be termed as a euphoric year of contrasts. The national elections of 2014 set the tone in terms of uprising of a single largest party in years. The mandate along with the bleak economic situation led people to believe that growth will be brisk and therefore various business optimism indices reflected the optimism. However, the road to recovery is always steeper han the fall. While the equity markets rose, both in terms of election results and business confidence; the reality continued to bear the brunt of heightened optimism. With the oil prices also coming down, the investment cycles from the corporates remain stagnant. Moreover, while the plans are being made and the grounds being laid to kick-start investment programs in infrastructure sector; the current scenario is demonstrating the signs of impatience. While the indigenous programs like Make in India and Swacch Bharat Abhiyaan have also been initiated; the brdictions signal a timeline of two years for the optimism to ferment into economic growth. The Government is now focused on simplifying processes and attracting more investments from the Indian diaspora outside country along with global companies. The Government also focused on removing policy bottlenecks to simplify documentation and processes to initiate business activities. The Union Budget announced measures to restart the infrastructure creation and prior to that the coal blocks allocation were completed successfully. Given the large consumer economy and favourable demographic indicators, the country is attractively poised to reignite its economic machinery. India is the second most economically confident nation due to the improved performance by the industry and services sectors, according to a recent report by global research company, Ipsos, called Ipsos Economic Pulse of the World. India needs to revitalize the investment cycle and fast-track structural reforms to speed up growth, the report says. Outlook According IMF World Economic Outlook April, 2015 India ranks seventh globally in terms of GDP at current prices and is expected to grow at 7.5 per cent in 2016. India’s economy has witnessed a significant economic growth in the recent past, growing by 7.3 per cent in 2015 as against 6.9 per cent in 2014. The size of the Indian economy is estimated to be at Rs 129.57 trillion (US$ 2.01 trillion) for the year 2015 compared to Rs 118.23 trillion (US$ 1.84 trillion) in 2014. The steps taken by the government in recent times have shown positive results as India’s gross domestic product (GDP) at factor cost at constant (2011-12) prices 2014-15 is Rs 106.4 trillion (US$ 1.596 trillion), as against Rs 99.21 trillion (US$ 1.488 trillion) in 2013-14, registering a growth rate of 7.3 per cent. The economic activities which witnessed significant growth were ‘financing, insurance, real estate and business services’ at 11.5 per cent and ‘trade, hotels, transport, communication services’ at 10.7 per cent. Industry Overview The background Indian power sector is undergoing a significant change that has redefined the industry outlook. Sustained economic growth continues to drive electricity demand in India. The Government of India’s focus on attaining ‘Power For All’ has accelerated capacity addition in the country. At the same time, the competitive intensity is increasing at both the market and supply sides (fuel, logistics, finances, and manpower). India has the fifth largest power generation capacity in the world. India’s installed capacity stood at 272.5 gigawatts (GW), as of FY15. Thermal power, the largest component, was 189.3 GW, followed by hydro 41.6 GW, renewable energy 35.8 GW and nuclear 5.8 GW. India’s total power generation capacity has increased at a Compound Annual Growth Rate (CAGR) of 9.4 per cent over FY09–15. India is the third largest producer of electricity in the world. In FY15, India generated 1,048.7 terawatt-hours (TWh) of electricity. Over FY10–15, electricity production expanded at a CAGR of 6.3 per cent.As per the 12th Five Year Plan, India is targeting a total of 88.5 GW of power capacity addition by 2017, of which, 72.3 GW constitutes thermal power, 10.8 GW hydro and 5.3 GW nuclear The financial year 2014-15 saw the highest capacity addition of 22,566 MW in a year, which is a 26.6% rise on year-onyear basis. The actual electric energy generation during the Fiscal 2015 was 1,048 BUs against the generation of 967 BUs in the brvious fiscal. For the XIII five year plan period, NITI Aayog estimates that in order to meet the projected demand requirement by 2022 at a GDP growth rate of 9%, capacity addition of 94,000 MW would be required along with matching expansion in transmission and distribution systems. Further, to maintain a sustained economic growth of 8% through to Fiscal 2032, as per the NITI Aayog, India needs to increase its electricity generation several times over for which the power generation capacity must increase to around 8,00,000 MW by Fiscal 2032. T&D The transmission and distribution system in India is a threetier structure comprising of regional grids, state grids and distribution networks. These regional grids currently, are operating as an integrated unit of national grid with an interregional transfer capacity of more than 32,000 MW, whereby surplus power from a region could be redirected to another region facing power deficits, thus allowing an optimal utilization of the national generating capacity. The inter-regional grid connectivity has lent flexibility and brought resilience to the system. The National Grid in the country is now one of the The financial year 2014-15 saw the highest capacity addition of 22,566 MW in a year, which is a 26.6% rise on year-onyear basis. The actual electric energy generation during the Fiscal 2015 was 1,048 BUs against the generation of 967 BUs in the brvious fiscal. For the XIII five year plan period, NITI Aayog estimates that in order to meet the projected demand requirement by 2022 at a GDP growth rate of 9%, capacity addition of 94,000 MW would be required along with matching expansion in transmission and distribution systems. Further, to maintain a sustained economic growth of 8% through to Fiscal 2032, as per the NITI Aayog, India needs to increase its electricity generation several times over for which the power generation capacity must increase to around 8,00,000 MW by Fiscal 2032. T&D The transmission and distribution system in India is a threetier structure comprising of regional grids, state grids and distribution networks. These regional grids currently, are operating as an integrated unit of national grid with an interregional transfer capacity of more than 32,000 MW, whereby surplus power from a region could be redirected to another region facing power deficits, thus allowing an optimal utilization of the national generating capacity. The inter-regional grid connectivity has lent flexibility and brought resilience to the system. The National Grid in the country is now one of the largest operating synchronous grids in the world. During the financial year 2014-15, a total of 22,101 cKms were added to the transmission capacity, which was around 32% higher than the transmission capacity added in the brvious fiscal. The Distribution Sector, which provides the crucial last mile connectivity and has disparate, numerous and varied consumers, is the weakest link in the power sector value chain of Generation-Transmission-Distribution. The Distribution Sector is facing problems like exorbitant losses, suboptimal internal functioning of regulatory institutions, mismatch in tariffs, etc. The Government of India has taken various measures to make the State DISCOMs/utilities viable, like Transitional Finance Mechanism (TFM), incentivization through technology interventions in R-APDRP and NEF, devising utilitywise turnaround plan and monitoring its implementation at the highest level. In 2014-15, more than 22,101 circuit kilometers (ckm) of transmission lines have been commissioned against 16,748 ckm during 2013-14. This growth of 31.96% also led to highest ever achievement in the country. The Government is hopeful of witnessing investments of nearly Rs. 3 lakh crore in the transmission and distribution sector within the next four years, mainly from the private sector. This investment will also be supported by over Rs. 1 lakh crore ($18 billion) from the Government through schemes such as the Deen Dayal Upadhyay Gram Jyoti Yojana and Integrated Power Development Scheme. The challenges are evident India has perennially remained a power deficit country. Huge potential exist for power generation and Transmission & Distribution sector in the country as country’s per capita electricity consumption at 917 kwh is much below the world average of 2933 kwh. The Indian T&D sector continues to face multiple challenges including, deficient current transmission capacity due to losses from generation to distribution; delays in future transmission capacity addition; inefficient operation and maintenance in the existing system; delays in land allocation for new substations and insufficient focus on New Technology and innovation. Input costs coupled with debrciating currency have its own set of challenges for the companies in the sector. The opportunities are unfolding The Government of India has taken active interest in its first year to help eradicate key issues in the sector. The Government has focused more on transmission and distribution sector especially in the SMART GRID and Ultra high voltage segment. On account of steps taken by the Government, in terms of expediting forest clearances and intensive monitoring of critical transmission lines, highest ever transmission lines have been commissioned during the year 2014- 15. Similarly, the overall increase in the transformation capacity has been 65,554 MVA during 2014-15. The major inter-state transmission system (ISTS) commissioned in 2014-15 strengthened the synchronous interconnection of Southern Region (SR) with rest of the country thereby facilitating reliable operation of single frequency National Grid. The huge capacity addition coupled with higher generation and improved transmission capacity has resulted in considerably reducing the electricity energy shortage from a level of 7 to 11% during the last two decades to a record low of only 3.6% during the year 2014-15. With the Stable Government at Centre and the “Make in India” mission of Government of India (GOI) the T&D sector in the country is expected to benefit immensely in the coming years. With the capital investment cycle being throttled out of its slumber, the sectors such as infrastructure, power, railways, etc. are expected to drive the need for robust T&D infrastructure. The Investments planned by PGCIL and other utilities in the Ultra High Voltage segment, SMART GRID, SMART CITY are expected to translate into bigger opportunities for companies in the T&D space. The mantra of “Make In India” is also going to tip the scales in favour of the Indian entities in the sector. GOI is very much focused on clearances for the Coal Blocks and lands for the Power plants to take off which will be a huge boost to the T & D segment. The recent support by the GOI to SEB’s will open up the expansion plans in the Transmission and Distribution networks. Electric power supply per person in India is very small, as compared to China it is only 1/3rd, and so naturally it will increase much more in the future. The power demand is growing rapidly in India. This makes the T&D sector in the country highly attractive from the long-term point of view. Over the years, the Indian government has undertaken a massive power generation and transmission capacity addition plans in the country. While India has added 50,000 mw in 11th plan (2007-12), it further plans to add 88,000 and 93,000 mw in 12th (2012-17) and 13th (2017-22) plan respectively. In addition, Power Grid Corporation of India (PGCIL), country’s central transmission utility, and single biggest customer for T&D companies, has planned to spend about Rs 1.1 tn in 12th plan towards expanding the T&D infrastructure. T&D Losses The aggregate Power Loss in the country is almost three times the amount of Power Deficit. In almost all the states, the losses are 2-3 times the amount of power deficit. At an all India level, the power deficit almost halved to 4.2% in 2013-14 from 8.7% the brvious year. Though the complete data for 2014-15 is not yet available, data up to January 2015 indicates that the power deficit has come down to 3.8%. The deficit was 8.5% in 2011-12. The steep fall in the deficit is because of the steep increase in power production while the demand has gone up only slightly. The government aims to reduce the Aggregate Technical and Commercial Losses (AT&C) up to 15% in the country and improvement in power distribution sector, Government of India has launched the Restructured-Accelerated Power Development and Reforms Programme (R-APDRP) in July 2008. The focus of R-APDRP is on actual demonstrable performance by utilities in terms of sustained AT&C loss reduction. Company overview About the Company Diamond Power infrastructure Limited is an integrated solutions provider in Power T&D space in India. Primarily established as a conductor manufacturer in 1970 by Shri S N Bhatnagar, a first generation technocrat, Diamond Power achieved greater integration post completion of is expansion projects during 2010-11. Today, it commands brsence across the value chain – Conductors, Cables (LT, HT & EHV), Transformers (Power and Distribution), Transmission Towers and EPC services. with One Manufacturing Location and Nine Stores at different places across the India; the Company also has more than 100 distributors across 16 Indian states. The Company sells its products under ‘Diatron’ brand. The company was a recipient of Make In India award for EHV Cables in 2014-15. Performance review 2014-15 too continued to be a challenging year for the company. The company started the year with the completion of the first phase of its ambitious expansion project. Shaping up to be among the most integrated power infrastructure players having the widest range of products across the value chain, the company built a strong foundation, which was tested for sure during the year under review. While the mood of the nation remained euphoric In 2014-15, the translation of the same into the business sentiment remained elusive. Multiple efforts at policy levels by the Government of India, surely contributed to the assurance of an attractive future but did little to kick start the investment cycles in the infrastructure space. The lack of orders due to a near halt in economic activities led to lower volumes in each of company’s businesses, as compared to the brvious year. Compounding the pain were a potent blend of high cost on brvious orders as well as lack of affordable funds to meet competitive bids for new orders. The working capital cycles stretched with the debtors facing the delays from respective counterparts due to economic sluggishness. The lack of funds and erosion of margins also led to elongated project timelines, thereby delaying the booking of revenue this fiscal. In addition, with heavy unexpected rains in Gujarat, the company suffered considerable loss of goods in its Vadadala factory caused by flooding. All these are well reflected in the financial performance of the company. In 2014-15, the company registered a total income on a standalone basis of Rs. 2422.76 Crore, as compared to Rs. 2674.29 Crore in 2013-14. The company’s EBIDTA stood at Rs. 24.21 crore in 2014-15 against Rs. 289.80 crore in 2013-14. The company booked a Loss of Rs. 115.74 Crore compared to a profit Rs. 103.96 Crore in 2013-14. The company’s Conductors generated revenue of Rs. 671.78 Crore as against Rs. 738.90 Crore in 2013-14. Power Cable generated total revenue of Rs. 1350.78 Crore as compared to Rs. 1485.74 Crore in 2013-14. Power Infrastructure generated total revenue of Rs. 103.83 Crore as compared to Rs. 157.87 Crore in 2013-14. Tower generated total revenue of Rs. 341.94 Crore as compared to Rs. 383.29 Crore in 2013-14. However, the company chose to do what it does best – finding solutions to challenging problems. The company ensured the orders at hand were fulfilled in minimum time despite the uncontrollable delays. The company revisited its expansion plans and processes across its verticals to control costs and implement stricter checks. The company also focused on reaching out to banks and financial institutions to navigate through fiduciary challenges. The company well understood that the pain was indeed temporary but what mattered was to continue the momentum to perform despite adversity. In its two decade-plus tenure, the company has used challenging times such as these to strengthen its core and therefore outperform in the upturns. The company’s expanded capacities have kept operating and are in an attractive spot to capitalize upon the impending upturn. The company also ventured in the global markets through its Dubai office in 2013 and this year, the company continued to spot opportunities and initiate small steps. The impact of the same will be visible in the years to come. The company also kept its brsence in exports, albeit at the smaller level as compared to brvious year. Expansion plan The Company’s expansion program has undergone delay as well as increases in the overall project cost from Rs. 753.37 Cr to Rs. 1,003.22 Cr. The Company is well positioned to take benefit of the expected improvement in the industry provided timely implementation of the expansion project by December 2015 and adequate support from our esteemed stakeholders. SWOT Analysis Strengths An integrated EPC player, having product mix covering 80 per cent of the average project cost Two decades of proven expertise and focus Access to educated and credible intellectual capital Proven expertise in product innovation, quality and customisation Evolved from a single product company to an EPC company; brsently scaling up the value chain A well-defined and scalable organisation structure lead by an experienced and qualified management team Preferred supplier to a world-renowned clientele Established reputation as a Value added products company Scalable businesses having state of the art technology and machinery Diversified product mix resulting in derisked revenue growth. Weakness Operates in capital-intensive segments Key raw materials are prone to volatility Directly prone to economic cycles Opportunities Indian economy is expected to wake up from slumber in the next two years with the current Government’s relentless focus Power sector is going to be among the first ones to see capital investments Up gradation of existing T&D network Threats Increasing competition from global players Volatility in input cost Human Resources At DPIL, employees are not only considered to be the stakeholders in the corporate growth but also are the key drivers of its performance. The Company always endeavours to provide an environment that encourages talented professionals to perform to their fullest potential. The Company owes its success to its loyal and efficient human asset. The Company believes that, by effectively managing and developing human resources, it can achieve its vision. It imparts specialized and technical training to its employees at regular intervals, which enrich their knowledge, skill and competency to perform their job effectively and efficiently. This also encourages employees to shoulder more responsibilities and take part in the growth of the Company’s business. The Human Resource strategies aim at attracting, developing and retaining talent pool in the Company. As on 31.03.2015 the number of employees was 2000+. The industrial relations were also cordial during the period under review. Internal Control System The Company has an adequate system of internal controls to safeguard and protect from loss, unauthorised use or disposition of its assets. All transactions are properly authorised, recorded and reported to the management. The Company is following all the Accounting Standards for properly maintaining the books of accounts and reporting of financial statements. The Company has an Internal Audit department and has also appointed external Internal Auditors to review various areas of the operations of the Company. The audit reports are reviewed by the management and the Audit Committee of the Board periodically. RISKS AND CONCERNS The Company is exposed to normal industry risk factors of competition, economic cycle, uncertainties in the international & domestic markets and credit risk. The Company manages these risks, by maintaining a conservative financial profile and by following prudent business and risk management practices |