MANAGEMENT DISCUSSION AND ANALYSIS REPORT MARKET OVERVIEW The year 2015-16 continued to be challenging like the brceding three years of de-growth of the market. The opportunity pipeline was driven primarily by the Central and State Utilities, while Power Generation, Industry and Infrastructure sectors continue to be plagued by low investments, slow execution of projects and poor cash flow. The market witnessed a phase of consolidation and asset sale by struggling private developers in order to avoid Non Performing assets (NPAs) with Banks & Financial Institutions. Power Grid Corporation of India Limited (PowerGrid] responsible for developing the transmission infrastructure at the national level, continues to implement its Capex as per 12th plan. Strengthening of 765kV network in the National Grid, building bulk power transmission schemes with HVDC technology, development of the Green Energy corridors for evacuation of renewable energy, strengthening of North Eastern Power system scheme and modernization of assets are the key areas that PowerGrid continues to invest. The State electricity boards / Discoms however, continue to struggle with financial losses of over Rs. 43 trillion (about US$ 60 billion) significantly affecting the entire value chain of the Power and T&D Sectors. Many of the SEBs/ Discoms are neither able to purchase needed power nor able to fully pay and thus have severely impacted the cash flow of the GENCOs and the T&D suppliers. IPPs that were unable to realize their investments are now looking for asset sale route to avoid defaulting on their loans and risking credit downgrade. Consequently, most of the State T&D network infrastructure are in poor condition leading to congestion of power flow in the States due to under investment in the T&D network over the last 10 years. Only a limited number of States are investing in the State T&D network to unblock T&D network congestion to improve power flow. Owing to the economic slowdown in the past years, the ratio of bad loans or NPAs at the Indian banks has increased exponentially forcing the Reserve bank of India to tighten the liquidity and funding norms of banks limiting their exposure to industry and infrastructure projects. Thus, the overall investment climate, in power generation, industry and infrastructure sectors remain cautious and supbrssed. All these market uncertainties impacted the sales plan and cash flow of your Company. On the positive side, the Central Government of India has initiated several reforms to unclog the power sector bottlenecks and facilitate investments in the power and T&D sectors. New initiatives like Smart Cities, Ujwal Discom Assurance Yojana (UDAY) scheme for Discoms, ramp up in Solar power generation, Integrated Power Distribution Scheme , Power System Development Fund for strengthening of transmission and sub-transmission network are moves in the right direction and expected to deliver opportunities for equipment manufacturers. One of the significant initiatives of Central Government has been the launch of UDAY to reform the poor financial health of the State Discoms. Till March 2016 about 10 States have signed up to join the UDAY scheme. Your Company is closely watching these developments and adapting its strategies. With the Central Government focused to increase private participation in the transmission sector, several tariff Based Competitive Bidding (TBCB] projects are being rolled out for strengthening the Grid infrastructure. Thus the year 2016-17 is expected to improve the market conditions based on the implementation of the reforms process. OPPORTUNITIES AND THREATS OPPORTUNITIES Indian government is keen to accelerate the growth of economy at 8 to 9%. Power generation and T&D sectors are the key levers to achieve this accelerated GDP growth. India's per capita electricity consumption is at a very low level of 1048 kwh. Ministry of Power is keen to double the consumption level over the next 5 to 6 years. This would require strong investment growth in the Power and T&D domains. Government of India's ambitious capacity ramp up in the solar sector is attracting investment from Private developpers, NTPC Limited and SECI. Several Renewable resource rich states have launched ambitious projects for Solar parks and Solar evacuation transmission network. A need for matching transmission evacuation infrastructure arises to deliver the power from renewable generation centers across Rajasthan, Gujarat, Tamil Nadu, Karnataka to demand centers across the country. This would need introduction of new technologies to deal with the challenges of renewable grid integration to ensure the efficient and reliable despatchability of clean power. The concept of Smart Cities and the first list of chosen 20 smart cities will see augmentation of the energy infrastructure and automation of Grid in these 20 cities. Further 40 cities are expected to be selected in Phase II of the Smart city program. Smart city ecosystem will demand the latest Grid efficiency and security technologies. Expansion of this additional power generation capacity of the country will create new opportunities for the Company in the form of additional T&D infrastructure in the central grid as well as in the state grid. Such initiatives are expected to be largely driven by super grid technologies like 500/800kV HVDC, FACTS/SVC and 765kV AC corridors. Power Grid is currently leading the process of developing such projects. PowerGrid is also planning to introduce new technologies such as VSC based HVDC, Dynamic Reactive Compensation, Wide Area monitoring systems (WAMS), Phase shifting transformers, Energy Storage and Renewable control and asset management solutions in the national network. The Government of India has notified the objective of "24x7 Power for All" to be achieved by 2019 to all states which are required to work in time bound manner to achieve this goal. Separation of agricultural feeders under DDUGJY, Integrated Power Distribution Scheme (IPDS) have been initiated. State Electricity Boards are being encouraged to upgrade their transmission, sub-transmission grids to cope with the additional power generation capacity . This strengthening of Inter and intra state network (66kV - 765kV) is expected to increase business opportunities for your Company. The scarcity of land is accelerating the transition of substation technology from AIS to GIS which could be built in 15% to 20% of AIS land foot print, This is expected to drive the growth of GIS technology in the country for which your Company has been the pioneer in terms of building India's first Local GIS manufacturing plant at Chennai. All these initiatives by the SEBs and Power Grid offer growth opportunities for your Company in the 12th plan period and beyond. As part of South Asean Region energy challenge, Government of India is also supporting the development of inter-regional grid with neighboring countries like Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives to develop a strong SAARC grid network. Your Company is already brsent in these markets and would be able to participate in the future growth of these grids as and when it happens. Your Company has already localized most of these advanced technologies, which are going to drive the growth of T&D in Power Grid, SEBs, Industries and Infrastructure segments. Threats Most of the companies in Indian corporate sector are highly leveraged limiting their financial capacities for new investments. Banks are also struggling with huge NPAs, mostly with the Indian corporates and are reluctant to lend more to corporates who have defaulted or are in CDR. SEB, DISCOMs are also struggling with huge accumulated losses. Very few of them are capable of investing in T&D network infrastructure. The governments both at central and state levels need to push and support the infrastructure investment and growth. While your Company believes that growth has to happen yet the pace of turnaround is still slow. Your Company is well aware of the adverse circumstances and is brpared to deal with the challenges, as it did in the last five years. BUSINESS PROJECTIONS The overall business environment is expected to remain challenging in financial year 2016-17. Pricing brssure on margins is expected to continue due to low demand, excess supply environment. Your Company has achieved a good level of order book and therefore is equipped to sustain the market brssure. SUPPORT FUNCTIONS - BUSINESS PARTNERS HUMAN RESOURCES The total employee strength of the company is 3,279 including apbrntices. Your company has made good progress in motivating and retaining its talents. The attrition percentage has been as low as 4% during this year. Acquisition of Alstom T&D India Limited by GE necessitated a culture founded on the GE beliefs, trust and teamwork. It was a foremost priority area which was enabled through customized New Employee Orientation (NEO Programs), GE Beliefs Champions Awards and spotlights on compliance and integrity through major part of the year. Spirit and Letter booklets (Ethics & Compliance) were distributed in November 2015 even in vernacular languages to maximise its reach and increase the awareness of its employees. There were 19 Human Resources Integration workstreams focused on the efforts to best integrate the various HR facets. Job Structure mapping, Benefits, Performance Management, Talent Management and Global Talent recruitment were key highlights. Finance Finance function continues to drive initiatives to deliver better performance at the optimum cost. Conscious spending in every function helped us maintaining the other expenses at the same level as last year despite difficult market conditions. During the year, the detailed methodologies of project revenue recognition have been realigned so that project milestones for bought out components are closer to the stage of performance and completion of the projects. This has resulted in lower project revenues at end of the year and also had an impact on the operating profit for the year. Working capital days of sales increased to 112 days from 73 days in March 2015, as inventory levels went up to support phasing of our projects and exports to the next year,. Borrowings were maintained at lower levels during the year compared to last year resulting in lower interest cost for the financial year. Cash collection was also consistent throughout the year despite difficult cash situation in the market. Credit Rating Agency has reaffirmed the long and short term ratings indicating a high degree of safety regarding timely servicing of financial obligations. The outlook on long term rating has been retained as 'Stable'. Overall, the employees of your Company were fully aware of the challenges of the market and did their best to collect receivables from most of our customers. INVESTOR RELATIONS Your Company enjoys Stakeholders trust as we try to execute the vision of your Company. Your Company believes in direct and unambiguous communication with its stakeholders and keeps the stakeholders informed through the quarterly earning conference calls with its investors and analysts at large and apprise them about the economic as well as Transmission and Distribution (T&D) market developments. Your Company and its top management team also takethis opportunity to share the operational and financial performance of the company on a quarterly basisi with the Investors and Analysts. Your Company is also ensuring to keep its investors fully informed of major developments by disseminating information through brss releases and stock exchange communications. All brsentations made to investors/ analysts and financial results are also hosted on the website www.alstomindiainvestorrelations.com RISK AND INTERNAL CONTROLS The Internal Control process of the Company has been robust and provides reasonable assurance on - reliability of financial information, compliances with laws and regulations in force and realisation and optimisation of operations. It ensures documentation and evaluation of unit and entity level controls through existing policies and procedures, primarily to identify any significant gaps and define key actions for improvement. The review also helps to evaluate adequacy of segregation of duties, access rights, delegation of authority, safeguarding assets, etc. The monitoring includes an annual exercise assessing in totality, how the entire internal control system addresses risks and how individual controls interface with each other to create the entire internal control environment. A formal system exists for periodic monitoring and reporting of the results of the internal control self-assessments. The Internal control processes were audited by the statutory auditors as part of Internal Financial controls over Financial reporting audit and termed these controls as adequate and operating effectively. The Audit Committee and the Board of Directors reviewed the internal controls and the progress of implementation of the recommendations of internal audits. The management actively implements the recommendations of such reviews. OUTLOOK The long term outlook is positive. The new government is committed to drive the economic growth at 8 to 9% rate. The focus on Power, T&D, Industry& Infrastructure sectors is high. 'Make in India' initiatives launched by Government of India argues well for the future of the company. A new notification, issued by the Central Electricity Authority (CEA) supports companies who have established manufacturing facilities in India. Once land issues, Bank NPAs, GST and related issues are addressed the Private Sector investment climate should improve With the various reforms initiated by the government at the centre, the company is optimistic that actions will result into reviving the economy through increase in capital expenditure in utilities, power generation, industry and infrastructure. Your Company is fully ready to address such growth opportunities in the near future. Notwithstanding, the Company's management team remains holistically focused and committed to deliver increased value for its stakeholders. CAUTIONARY STATEMENT This Management Discussion and Analysis statement contains, what could be regarded as forward-looking statements and information. These statements include forecasts and estimates as well as the assumptions on which they are based, statements related to projects, objectives and expectations concerning future operations, products and services or future performance. The readers are hereby cautioned and advised that these forward-looking statements are subject to numerous risks and uncertainties that are difficult to foresee and actual outcomes might differ significantly. For and on behalf of the Board Rathindra Nath Basu Managing Director Rakesh Nath Director Date : June 10, 2016 Place : Chennai |