MANAGEMENT DISCUSSION AND ANALYSIS The following management's discussion and analysis ("MDA") focuses on significant factors that affected SRM Energy and its subsidiary SRM Energy Tamilnadu Private Limited ("SRM" or the "Company") during the relevant period and to the date of this report. It contains a review and analysis of the financial results for the relevant.period, .identifies business risks that the Company faces and comments on the financial resources required for the development of its business. 1. INDUSTRY STRUCTURE AND DEVELOPMENTS 1.1 Market Structure India has different models for sale and purchase of bulk power - integrated utility [State Electricity Board (SEB)], single buyer (MoU based/regulated generation), competitive bidding, captive power generation and sale to captive users. At the consumer end, India has models such as monopoly where the incumbent state distribution company is the sole provider of electricity, franchisee model, retail competition, etc. Migration to a more mature market structure is expected to occur gradually. With the proposed amendment to the Electricity Act, 2003 (EA, 2003) on the anvil, the market structure may alter significantly in the long-term. 1.2 Generation The installed generating capacity in the country as on March 31, 2015, was 272 GW (and an additional 43 GW of captive power). Grid capacity addition during the financial year for the country was 25 GW as compared to capacity addition of 20 GW during the brvious financial year. 1.3 Fuel Coal production by Coal India Limited (CIL) and its subsidiaries was 494 MT in FY15 against 462 MT in FY14, reflecting a 7% growth y-o-y as against CAGR of 2.3% experienced in the last three years. The process of captive coal block auctions is aimed at facilitating the growth of domestic coal production, Thermal coal imports this year stood at over 150 MT. Domestic natural gas production was 33,656 MCM against 35,407 MCM in FY14. (Source: www.coalindia.in , www.petroleum.nic.in ) 1.4. Transmission The backbone transmission of system in India is mainly through 400 kV AC and 220 kV AC networks with the highest transmission voltage level being 765 kV. Transmission lines capacity has increased to over 3 lakh Ckm in FY15, reflecting an increase of 7,5% over the brvious year. 1.5 Distribution The recently issued 'Performance Report of State Power Utilities' by Power Finance Corporation (PFC) for FY13 indicates that Aggregate Technical & Commercial (AT&C) losses of state owned distribution utilities are still at very high levels. Financial health of state electricity utilities in retail distribution continues to remain the most critical issue for the sector's viability. As part of the proposed amendments to the EA, 2003, separation of the wires and supply businesses is envisaged. This is expected to increase competition in the supply sector, though reliability of wires & network remaining with the incumbent would continue to pose challenges. 1.6 Power Trading Around 115 BUs of electricity were traded in the short-term power market during FY15 (as compared to 105 BUs in FY14), accounting for around 9% of the total generation. With increased opportunities, the challenges in the power trading sector have also grown The competition has grown fierce due to an increase in the number of CERC licensed traders from 13 in FY05 to 71 in FY15. Due to this, trading margins are also under immense brssure. Power trading is also adversely affected by continued corridor constraints for power flow from brdominant generating regions in East & West to consumption centers in the South leading to brvalence of high prices for the customers in the southern states. 1.7. Power Services Business With the opening up of the Electricity Sector, several private players started establishing power plants in India to meet the demand supply gap. With this development, the market for outsourcing of O&M of Power Plants also opened up in India. Today, it is estimated that over 15,000 MW capacities have been outsourced for O&M. In the next 2-3 years, additional 12,000 MW of capacity is expected to deploy outsourced power services. Further, in the transmission sector, with the entry of private players in last few years, there is an opportunity for O&M services and project management consultancy services. 1.8. Changes to Regulatory Environment Regulatory reforms in the power sector are critical given the current challenges across the value chain. The following are some of the important regulatory changes that took place in FY15; • Electricity (Amendment) Bill, 2014 The Electricity (Amendment) Bill, 2014 was introduced in Lok Sabha on December 19, 2014. The Bill seeks to segregate the distribution network from the electricity supply business and to introduce multiple supply licensees in the market amongst other changes. The Bill has been referred to Parliamentary Standing Committee on Energy which has submitted its report. Your Company is actively participating in the public consultation process directly and through industry associations. • The Coal Mines (Special Provisions) Bill, 2015 and Coal Auctions Hon'ble Subrme Court, vide its judgment dated August 25, 2014, read with its order dated September 24, 2014 cancelled the allocation of 204 captive coal blocks. To reallocate the cancelled captive coal blocks, the Parliament, passed the Coal Mines (Special Provisions) Act, 2015. This provides for allocation of coal mines, through auction and allotment, and vesting of the right, title and interest in and over the land and mine infrastructure, to successful bidders and allottees, with a view to ensure continuity in coal mining operations and production of coal. Ministry of Coal put on auction Schedule II (42 producing and ready to produce blocks) and Schedule III (32 substantially developed coal blocks) in the months of January and February 2015. As per indications available from Government of India, the process of auction of coal blocks is likely to continue in the months and years ahead. • CERC Tariff Regulation 2014 CERC notified tariff regulations under 'Term and Conditions of Tariff, 2014', which will form the basis for regulations for a period of five years with effect from April 01, 2014 to March 31,2019 and shall be applicable to all Central Generating Stations, Inter-State Generating Stations and the Inter-State Transmission Systems for whom the tariff is determined under Section 62 of EA, 2003.The key changes are with regards to tax and calculation of incentives for thermal power plants. As per the new regulations, the base rate of Return on Equity (RoE) would be grossed up with the effective tax rate of the respective financial year. The effective tax rate would be considered on the basis of actual tax paid for the financial year by the generating company. The incentive for thermal power plants would be calculated based on the Plant Load Factor (PLF) instead of Plant Availability Factor (PAF) and would be paid at the rate of 50 paise/kWh for every unit generated above 85% PLF. Apart from these, the regulations have tightened the operating parameters such as Station Heat Rate, Auxiliary Consumption and Secondary Fuel Oil Consumption for thermal power plants. 2. OPPORTUNITIES AND OUTLOOK The growth in domestic market has in the last few years been constrained given the uncertainties around fuel supply, financial condition of discoms, challenges of land acquisition, water linkages and various statutory clearances. As the power sector is seen as a key driver supporting the growth of the nation at large, the new Government at the Centre has been pursuing reforms which is expected to ease some of the known constraints. The opportunities that exist for your Company is as follows: • Generation o Greenfield projects in India and international geographies of focus o Due to the current financial stress in the power sector in India, there are assets which may be available for acquisition. The Company is evaluating and will continue to evaluate opportunities to acquire projects in various stages of development across the country. o Renewables: The Company is exploring multiple options, both Greenfield and through possible acquisitions. Distribution With growing focus on improving the state of distribution business, several business models have been evaluated in the past. While the PPP route has been successfully demonstrated in Delhi, the distribution franchisee model has been accepted by a few states as the route to bring in private investments, expertise and management skills in the distribution business. • Transmission Over the next few years, the demand for transmission capacity is expected to increase significantly, driven primarily by increase in generation capacity and also due to requirements of open access, inter-regional transfers and integration of infirm renewable power in the system. 3. OPERATIONAL PERFORMANCE The Company is in the process of setting up Thermal Power Projects at various locations more particularly in Tamilnadu. The project at Tamilnadu is consisting of 3X660 MW i.e. 1980 MW capacity is being set up by the Wholly Owned Subsidiary SRM Energy Tamilnadu Pvt. Ltd. As such there are no other operations at brsent and the related expenses incurred during the current period are considered as br operative expenses pending allocation to the power project. The company's networth has been significantly reduced and it has been incurring cash losses, the board of directors of the company, in its meeting held on March 09, 2015 has decided to sell/dispose off the power plant transferred in its wholly owned subsidiary, subject to necessary approvals from the shareholders and other statutory authorities, if any. 4. PROJECT AT CUDDALORE As stated in the last Annual Report, the paucity of funds, resulting from the Company not being able to proceed with the Proposed Rights issue, due to reasons beyond its control, has considerably slowed down the progress of the project. Considering the brvailing power industry scenario in the country coupled with the slower pace of growth of the country as a whole, prospective investors have deferred their decisions on investments, which has further compounded the problems. The Company's applications for allotment of Govt, land entrapped in the project site are in advanced state of process with the authorities concerned and it is expected that the necessary allotments will be received shortly. 5. HUMAN RESOURCES The Company has a team of dedicated work force who are regarded amongst its most valuable assets. Adequate opportunities like sponsoring for training programs and seminars are provided to the professional staff to update themselves in the changing technological era. 6. INTERNAL CONTROL SYSTEMS The Company has a well defined internal control system for operations, financial reporting and statutory compliances. Suitable internal checks have been built over the financial reporting system to ensure that transactions are properly authorised, accounted for and reported. Regular internal audits by an external Audit' Firm gives more teeth to the internal control systems. In addition, review of subsidiary companies was carried out this year. The summary findings are reported to the audit committee of the Board who actively review the same and suggest ways and means for improving and strengthening the internal control systems. 7. RISKS AND CONCERNS The key risks and concerns facing the Power sector in India are as follows: • India's domestic capacity is heavily skewed towards fossil fuels which has a negative impact from an environmental perspective. Regulatory orders to address climate change can adversely affect valuations of coal based power stations. • Pace of economic growth can slow down leading to lower growth in demand for power in India. • Slowdown in pace of regulatory reforms in the country can affect aspects such as renewables scale-up, Case I and Case II bidding,opportunities for private player in distribution sector, amendment of EA, 2003, etc. • Domestic coal supply may continue to remain inadequate or inaccessible to meet the growth in generation capacity. • Infrastructure constraints such as railways and port capacity that may affect the transportation of domestic coal and logistics of imported coal. • The imposition of export restrictions or levy of taxes by energy exporting countries could make the cost of imported energy into India more expensive and unattractive for discoms. • The poor financial health of SEBs continues to be a factor that impedes the growth ofthe sector. • Shortage of domestic gas and expensive LNG imports affects the financial viability of gas-based power plants. • Delays in land acquisition, environmental clearances and other approvals remain an area of concern. Lack of water is another threat to the capacity addition plans. • The availability of cost-effective capital for funding of new projects could be a cause of concern given current exposure of banks to power sector and stranded assets which can result in NPAs. The key risks and concerns specific to your Company are as follows: • Delays in land acquisition, environmental clearances and other approvals remain an area of concern. • Power Projects face major land acquisition hassles, coupled with stringent regulatory mechanism, leading to delays in obtaining clearances required for the project. • Shortages/ delays in supply of main and Balance of plant equipments. • Volatility in exchange rates and coal prices • The availability and cost of capital for funding of new projects could also be a cause of concern, given that power projects are capital intensive. The economic and monetary policies will need to play a key role in ensuring that these projects receive timely funds. • Considering the huge amount of funds required and the gestation period for the projects, financing of power projects is always a constraint. • Lack of availability of skilled manpower. 8. RISK MANAGEMENT The Company has defined Risk Policy to govern and mitigate the risks involved in its activities. The policies will be reviewed periodically and corrective actions taken wherever required, especially considering the volatility in currency movements. The Company will be exposed to Currency Risks both during the project implementation stage and operations. During the project implementation stage the Company will be exposed to currency fluctuation risks, considering that the EPC Contract has been awarded to an overseas contractor and major portion of funding for the project is expected to be in Foreign Currency. Subsequently on commencement of operations, the Company will be exposed to currency as well as price risks since major portion of coal requirement is proposed to be met through imports. The Risk Management framework ofthe Company ensures, amongst others, compliance with the requirements of Clause 49 of the Listing Agreement. The Risk Policy ensures providing and review of risks associated with the economy, statutory regulations, competition, foreign exchange, interest rate etc by the Board. Risk Management as a formal exercise began in your Company as require in the Clause 49 mandate. Risks are evaluated based on the probability and impact of each risk. The Risk Management Committee (RMC) has been formed which comprises the Executive Directors, Chief Risk Officer and other senior managers. The RMC meets every quarter to review the risk plans and to suggest further mitigation action points. The Audit Committee of Directors reviews the major risks at quarterly Audit Committee meetings. CAUTIONARY STATEMENT Statements in the Management Discussion and Analysis, describing the Company's objectives, projections and estimates may be forward-looking statements within the meaning of applicable securities laws and regulations. Actual results may vary from those exbrssed or implied, depending upon economic conditions, Government policies and other incidental / related factors. |