MANAGEMENT DISCUSSION AND ANALYSIS REPORT AN OVERVIEW The Company has a long standing reputation as a consistent sectoral leader amongst the public sector construction companies in the Country with specialization in execution of Railway Projects on turnkey basis and otherwise. After commencing business as a railway construction company it diversified progressively since 1985 to roads, buildings, electrical substation and distribution, airport construction, commercial complexes, as well as to metro works. It has been one of the few construction companies in the public sector to have earned substantial foreign exchange for the Country and paid dividend without fail every year to the Government. The Company has executed many land mark construction projects in the last 38 years both in the Country and abroad. In India, in particular, it has also been undertaking projects even in difficult terrains and disturbed regions. The Company is an ISO certified Company for Quality, Environment, and Occupational Health and Safety Management systems, a Schedule 'A' public sector company, and a Mini Ratna - category I. LEGAL STATUS AND AUTONOMY The Company, a legal entity separate from the Government, is legally, functionally, and financially autonomous, operates under the corporate laws as an independent commercial enterprise, does not receive any budgetary or financial support from the Government, nor is it a dependent agency of the Government. However, the Government of India through the Railway Ministry and the Department of Public Enterprises under the Ministry of Heavy Industries, monitors its performance through a system of Memorandum of Understanding (MoU) as regards targets to be achieved every year as part of accountability to the Parliament in respect of all government companies. Government can issue and does issue guidelines to regulate and bring about some uniform pattern in the functioning of the Company as a public sector company. However, no Government department has any supervisory authority to exercise control over the Company which is managed and run under the superintendence, control, and direction of its Board of Directors as per the Companies Act. BUSINESS ENVIRONMENT The growth rate of Indian Economy in 2012-13 was a decade low of 4.5 %, as per the revised estimates by Ministry of Statistics and Programme Implementation. The year 2013-14 is the second year in a row during which the GDP growth rate remained below 5%, i.e. at 4.7%, attributable to many external and domestic factors including global liquidity crunch, and high inflation and large current account and fiscal deficits leading to domestic supply constraints. Global growth is expected to improve in 2014-15 following late recovery observed in 2013. As per IMF estimates released in February 2014, world GDP growth is projected to strengthen from 3.0% in 2013 to 3.6% in 2014 and 3.9% in 2015. The Economic Survey 2013-14 brdicts that infrastructure development would be the key area for sustaining high growth. There is need to channelize investment for projects that are crucial for overall economic growth and expediting implementation by addressing issues like delays in regulatory approvals, land acquisitions and rehabilitation, environmental clearances, etc. Ircon is operating in a highly competitive environment where private infrastructure companies have started quoting aggressively to secure projects as opportunities have become limited due to economic slowdown. Construction industry is highly susceptible to variation in commodity prices and interest rates and many infrastructure companies have been hit by the high rate of fluctuation in recent years. Ircon has managed these risks well and has avoided venturing into high risk contracts. Opportunities for the Company i n creation of physical infrastructure lies in the following areas: Railways - "Indian Railways Vision 2020" envisages laying of 25000 km of new lines, quadrupling 6000 Km network with segregation of passenger and freight lines, electrification of 14000 km, completion of guage conversion, construction of 2000 km of high-speed corridors. Dedicated Freight Corridor (DFC) project involving Western corridor from Mumbai to Rewari and Eastern corridor from Ludhiana to Dankuni is also being implemented through a mix of bilateral/ multilateral debt, budgetary support, and PPP. The corridors are targeted for completion in the terminal year of the 12th plan i.e. 2016-17. Upgradation of passenger amenities and development of Railway Stations are the other two areas where opportunities existed for the Company and Ircon is already into it through its subsidiaries, IrconISL and IRSDC. Roads - Focus in road sector continues to be on the development of the entire National Highway network to minimum acceptable two-lane standards, special accelerated road development programme in the Northeastern region, development of roads in Left Wing Extremism affected areas, Prime Minister's Reconstruction Plan (PMRP) for construction/ re-construction of roads in the State of Jammu and Kashmir, road connectivity in rural areas under ongoing Pradhan Mantri Gram Sadak Yojna (PMGSY), etc. Electrical projects - Electrical projects under BOT/ BOOT/ BOLT may provide opportunity for the Company directly or as a member of joint venture/ consortium. The other areas of interest are Railway electrification and extra high voltage (765 kv) sub-stations. Signalling & Telecommunication projects - There are opportunities for the Company in securing international projects in Signalling & Telecommunication (S&T). Your Company is already executing projects under Pradhan Mantri Gram Sadak Yojna (PMGSY), and construction of road over bridges (ROBs) for Indian Railways and various state governments, Electrical sub-stations, Railway electrification, Power supply & distribution network and Industrial electrification projects, S & T Projects, etc. The Company is also executing projects in Malaysia, Sri Lanka, Bangladesh, Nepal and Algeria. Opportunities are coming up in Myanmar and Oman. OUTLOOK The Vision, Mission, and Objectives of the Company as stated in its Memorandum of Understanding with the Ministry of Railways for 2014-15 are:- Vision To be recognized nationally and internationally as a specialised construction organisation comparable with the best in the field covering the entire spectrum of construction activities and services in the infrastructure sector. Mission i) To effectively position the Company so as to meet the construction needs of infrastructure development of the changing economic scene in India and abroad. ii) To earn global recognition by providing high quality products and services in time and in conformity with the best engineering practices. Objectives i) To enhance the size and value of business activities of the Company so as to achieve a turnover of Rs. 5500 crores bythe year2016-17. ii) To achieve reasonable returns on the capital employed. FINANCIAL PERFORMANCE In the year 2013-14, the Company has registered total income of Rs. 4307 crores, as compared to the total income of Rs. 4471 crores achieved in 2012-13. Nearly 94% of the total income (amounting to Rs. 4067 crores) has arisen from operation, out of which 53% (Rs. 2137 crores) has been contributed by foreign projects. Operating income from foreign projects has increased by nearly 8.2% in the last one year. Profit before tax increased by 23.05% from Rs. 1015 crores in 2012-13 to Rs. 1249 crores in 2013-14, and Profit after Tax has also increased by 24.25% from Rs. 730 crores in 2012-13 to Rs. 907 crores in 2013-14. Net Worth has increased by 30.13% during the year. Earnings per share have increased by 23.08% from Rs. 368.76 in 2012-13 to Rs. 453.88 in 2013-14. The Board of Directors has recommended a dividend @ Rs. 41 per share (410% on the paid-up share capital) for consideration and declaration by the shareholders. The Company has already paid an interim dividend @ Rs. 51 per share (510%) in February 2014. The dividend of Rs. 81.16 crores payable after declaration at the Annual General Meeting together with the interim dividend already paid (Rs. 100.96 crores) would take the total dividend pay-out for the year 2013-14 to Rs. 182.12 crores, which is 920% of the existing paid-up share capital of the Company. OPERATIONAL PERFORMANCE Sectoral Performance Railways continued to be the primary sector of interest. During 2013-14, Railways accounted for 96% of operating income, Highways accounted for 3%, and the balance 1% resulted from buildings, electrical projects, etc. A sector-wise comparative position is given below. The table below shows that proportion of railway works vis-a-vis highway works has progressively increased in the last three years. The proportion of operating income from railway construction works has increased from 81% in 2011-12 to 96% in 2013-14, whereas the proportion of income from highway sector has gone down from 14% in 2011-12 to 3% in 2013-14. The share of income from electrical projects and sub-stations (which form part of "Others") has also decreased by 60% as compared to last year. STRENGTHS The Company has rich experience of timely execution of a large number of international projects, especially in developing countries. Its key strengths continue to be imbrssive financials (reflected in the consistent profitability and healthy balance sheet of the Company), established credentials, and competent manpower. The Company has a track record of quality performance in time to the satisfaction of customers. OPPORTUNITIES A revival of interest in the development of infrastructure sector in the last two years in India as well as abroad, particularly in Railway sector, has opened up several opportunities for securing more business. The Company is gearing itself to benefit from the opportunity brsented by EPC and DBFOT projects both in Railway and Highways, and projects in real estate, to leverage financial strength of the Company. The Company is also targeting upcoming metro Light Rail Transit (LRT) projects in India and abroad. CONSTRAINTS Although every organization has to work within a certain legal framework, the Company as a public sector company faces more constraints (not applicable to private sector companies) which put it at a disadvantage in a competitive market. Availability of soft credit with overseas competitors and flexibility in procurement and operations with private competitors are some of the other factors. STRATEGY In view of the competition expected from emerging Indian construction infrastructure companies who are looking at foreign markets, Ircon may have to review its strategy to remain in the market. Ircon has limitations in taking up investment projects particularly in foreign country on PPP basis. Ircon may have to work out new strategies to get projects abroad. Currency risks in projects have increased in recent years. Ircon will have to continue to manage the risk well. In the coming years business environment for the infrastructure sector may improve, however, only the most efficient companies may survive in the highly competitive and risky market. The Company is focused towards strategic business development to sustain and improve its order book position by giving a thrust to its areas of core competence and international business. Core competence of the Company namely, Railways, Highways, electric sub-stations, S&T, and Railway Electrification, is being further consolidated. RISKS AND CONCERNS A. Project Risk Management A formal Risk Management framework is in place from August 2007. The Company has a Risk Management Committee of whole-time directors and a Rapid Action Group at General Manager / Executive Director (below board) level to ensure its implementation. Risk Management Policy, Risk Management Processes, and MIS reports formats including MIS reports on Risk Management have been evolved in accordance with the Framework. Reports from Rapid Action Group for managing and mitigating risks are submitted through the Risk Management Committee to the Audit Committee for review. In India, a major concern in execution of projects is non availability of encumbrance free land, and delayed approval of drawings and estimate due to which there is a risk of time and cost overruns which are seldom compensated by the client. The Company's employees and projects have been and are exposed to risks and threats to life, liberty, and property while operating in risky geographical areas. It however takes pride in executing brstigious works in the nation building task. The Company has taken measures with the help of the Government to provide adequate security, facilities, and also insurance coverage in such places. Policies and procedures are in place for ensuring health and safety. B. Treasury Risk Management Your company was assigned a 'CARE AAA' rating by Credit Analysis & Research Limited (CARE) for long-term non-fund based credit facilities and an 'A1+' rating (earlier denoted as 'PR1+', and has now been standardized in accordance with circular dated 15th June 2011 issued by SEBI) for short-term non-fund based credit facilities in 2008-09 based on BASEL II norms of the Reserve Bank of India (RBI). These rating have been reaffirmed in an annual surveillance review by CARE in November 2013. Ircon conducts its business in various countries and, therefore, has to deal in foreign currencies. Execution of projects abroad necessitates investing some funds in foreign banks in order to take care of any exigency arising on account of temporary cash flow mismatch. However, dealing in foreign currencies involves foreign exchange risk and the exchange rate may change unfavorably before the currency is exchanged. In order to minimize or eliminate foreign exchange risk, these exchange rate fluctuations are monitored constantly and surplus funds are exchanged / repatriated to India at the appropriate time, and in accordance with the laws. Efforts are made to provide a natural hedge by matching foreign currency inflows and outflows from various foreign projects. Investment guidelines for foreign projects have been formulated to ensure placement of funds with Foreign Banks in a fair and transparent manner. A review is being undertaken to mitigate the currency risk on the foreign projects. INTERNAL CONTROL SYSTEM The Company has adequate internal control mechanism and an Internal Audit System commensurate with its size and nature of business. To make the internal control system more effective and project specific, a combrhensive internal audit manual with guidelines for internal auditors is in place. Projects are closely monitored through online/offline reporting formats and the key performance indices are monitored by the management on monthly basis. The Company has in place a structured organizational chart and a system of delegation of powers. This coupled with robust internal MIS systems (online reporting format), ensures appropriate information flow to facilitate effective monitoring. Adherence to these processes is monitored through internal audits in two phases during every financial year. The Company has an internal audit system that requires the Internal Auditors to comment on the existence of adequate internal control systems and compliance therewith in addition to the opinion on existence of proper risk assessment and mitigation mechanism. The Internal Auditors are experienced chartered accountant firms directly reporting to the Management which also ensures their independence. Reports of the Internal Auditors are reviewed, compliances are ensured, and a synopsis of Audit Reports along with compliance are put up by Internal Audit Department for consideration by the Audit Committee. The internal control and audit system are being reviewed periodically by the Management as well as the Audit Committee, followed up by corrective action, whenever necessary as a part of continuous improvement. A structured Fraud Prevention, Detection, and Control Policy (FPDC Policy) along with a Whistle Blower Policy duly approved by the Board of Directors is in place with facility to make e- complaints in confidence. HUMAN RESOURCE The Company aims to achieve the right size and right mix of human resource/ employees for the organization. Since your Company is a project based company, there is fluctuations in the manpower requirements which are being taken care by recruiting employees on deputation, contract, and service contract. Recruitment strategies have been re-engineered to make them more in line with the overall strategy of the Company. Training programmes are designed so as to enhance both technical and managerial skills of employees. A Performance Management System based on the 2nd Pay Revision Committee recommendations is in place which focuses on Key Result Areas for all projects and functions in line with the goals, objectives, and targets of the Company under the Memorandum of Understanding signed with the Ministry of Railways. The company is brparing competency based framework for managing human resources, and an initiative GROW (Get Ready to Outperform and Win) was introduced, with an aim of building competency map for the Company, as well as identifying competency pool of employees at all levels. The Company offers the benefits of Contributory Provident Fund, Gratuity, and Post retirement Indoor Medical benefits through a Medical Trust. The Company has evolved, based on the 2nd Pay Revision Committee recommendations, a Pension Scheme as part of superannuation benefits. |