MANAGEMENT DISCUSSION AND ANALYSIS REPORT CONSTRUCTION INDUSTRY OUTLOOK: Construction Industry Overview The construction/infrastructure sector is likely to get major boost from the Government's focus on development of infrastructure in India. While the recovery in the sector is likely, it would be gradual as majority of players are still burdened with leveraged balance sheets and stalled or slow moving projects. Furthermore, if structural constraints like uncertainty in land acquisition, delays in approvals, and inadequacy of long term funding avenues are not tackled swiftly, the project implementation on the ground may not gather momentum, thereby delaying recovery in the infrastructure sector. In addition, aggressive bidding in the past and inability or limited ability to raise equity for back on topic projects have also impacted viability of infrastructure projects. These impediments need to be overcome for project implementation to gather pace. Difficulty in achieving financial closure and overall weak macro-economic environment had also reduced the risk appetite of developers towards new projects. These factors, amongst others, have resulted in relatively modest growth in Gross Fixed Capital Formation (GFCF) and Construction GVA (Gross Value Added) in 9 months of FY 14-15. With the political stability, sharper focus on infrastructure development and improvement in economy, new projects announcements are likely to pickup in FY 15-16. The construction industry is the second largest industry in India after agriculture. It accounts for about 11% of India as GDP. It makes significant contribution to the national economy and provides employment to large number of people. There are mainly three segments in the construction industry like real estate construction which includes residential and commercial construction; infrastructure building which includes roads, railways, power etc; and industrial construction that consists of oil and gas refineries, pipelines, textiles etc. Indian Construction Industry Outlook The recovery in the construction sector is expected to be gradual and would be linked with on-ground impact of the policy measures as well as availability of funding. With high leverage, ability to raise funds via stake sale in subsidiaries, monetization of assets, or dilution of equity will be key in improving liquidity and capital structure of construction companies that have been aggressive in the BOT space in past. Many companies have either raised or have plans of raising funds through equity route like Qualified Institutional Placement (QIP)/Rights issue/Warrants/Preference shares or sale of stake at the SPV or holding company level to reduce overall indebtedness at the Group level. The likely reversal in the interest rates cycle would also provide some respite. The construction industry in India is highly fragmented. There are number of unorganized players in the industry which work on the subcontracting basis. To execute more critical projects, nowadays bids are increasing placed in consortium. But the profitability of the construction projects varies across different segments. Complex technology savvy projects can fetch higher profit margins for construction companies as compared to low technology projects like road construction. Various projects in Construction industry are working capital intensive. Working capital requirement for any company depends on the order mix of the companies. The construction industry operates on the basis of contractual agreements. Over the years different types of contracts have been developed. It mainly depends on the magnitude and nature of work, special design needs, and annual requirements of funds and complexities of job. Construction projects can be materialized through number of smaller contracts which mainly depends upon size of the project and diversified nature of activities to be carried out in the project. As a result, Subcontracting is a common phenomenon in the construction industry. Provisions for Infrastructure sector in Budget 2015-16 In the Budget 2015-16, the capital outlays for roads, and railways have been increased by Rs.140.3 billion and Rs.100.5 billion respectively which along with significantly higher Road Cess will enable higher public spending towards these infrastructure projects. In total, investment in infrastructure is proposed to increase by Rs.700 billion in FY16 (BE) over FY15 (RE). Recognizing the need of reviving private sector participation in infrastructure projects, Budget has proposed rebalancing of risks in PPP projects with Government taking up major risks, appointing an Expert Committee for analysing the possibility of and replacing multiple prior permissions with a br-existing regulatory mechanism, and rationalizing dispute resolution mechanism. The budget also proposes to set-up 5 Ultra Mega Power Projects totaling 20 GW in the plug-and-play mode wherein all clearances and linkages will be obtained before the award of project. It has also announced its intent towards some large infrastructure projects like building 100 smart cities and Sardar Patel Urban Housing Mission, which will provide long term infrastructure opportunities. In the railways sector, the focus is on faster execution of Dedicated Freight Corridor (DFC) which is an important on-going project. Investments & Government Initiatives: International investment FDI regulations in India were relaxed in late 2014, making it easier for international companies to invest in the nation's construction industry. As of December 3rd 2014, the minimum thresholds for contributing to Indian projects have been significantly reduced. Foreign firms can contribute to any projects with a minimum built area of 20,000 sq m, whereas before that threshold was 50,000 sq m. Similarly, the minimum capital investment by foreign firms has been halved from $10 million to $5 million. Government Initiatives The Indian Government is taking every possible initiative to boost the infrastructure sector. Some of the steps taken in the recent past are being discussed hereafter. The Reserve Bank of India (RBI) has notified 100 per cent foreign direct investment (FDI) under automatic route in the construction development sector. The new limit is effective 2 December 2014, RBI said in a notification on its website. Recently, the Government has relaxed rules for FDI in the construction sector by reducing minimum built-up area as well as capital requirement and liberalized the exit norms. The Cabinet has also approved the proposal to amend the FDI policy. India and the US have signed a memorandum of understanding (MoU) in order to establish Infrastructure Collaboration Platform. The document showcases the relationship between both the Governments which intend to facilitate US industry participation in Indian infrastructure projects to improve the bilateral commercial relationship and benefit both the Participants' economies. The MoU's scope envisages efforts in the areas of Urban Development, Commerce and Industry, Railways, Road Transport and Highways, Micro Small and Medium Enterprises, Power, New & Renewable Energy, Information and Broadcasting, Communications & Information Technology, Water Resources, River Development and Ganga Rejuvenation. Challenges: Despite the rapidly recovering construction market, many companies are still finding it difficult to be successful. Margins are tighter than ever and a lot of companies are trading dollars, but not finding the success they are seeking. 5 challenges the construction industry is facing right now. Undercapitalization—Operating money is critical to achieve success. Do not underestimate the capital needed to pursue the most profitable projects and have the cash necessary to fund those projects until draws can be obtained. Many bad decisions are made while companies are in panic mode due to their cash being unavailable. Bad Cash Flow—we all know that getting paid gets harder and harder all the time. Submitting for draws and having an understanding of how each particular client pays is critical to maintaining a positive cash flow into your businesses. A missed draw or poor paying clients has caused many problems in our industry. Stay on top of your cash flow and draw dates. Inadequate Planning—Understanding your manpower and cash issues can determine the success or failure of any project. Do not overestimate your capabilities or underestimate your cash flow. Map out the details of all of the projects going on and what you are bidding that could happen in the nearfuture. Know who you are and what you can do. Inflexibility—Map out your plan and continually review your plan versus reality. Be willing to make changes when you see your plan is failing. Working without a plan or refusing to gauge success against that plan has doomed many companies to continue down a road to failure. Have a willingness to change the plan and learn. If you haven't failed, you have not done much. However, learn from failures and incorporate that knowledge into the next plan Uncontrolled Growth—Know who you are, who works for you, and what all of your capabilities are. When growth is not controlled, we lose site of who we are and what we are capable of. Set realistic goals and allow your company to grow at the same rate as your capabilities. We hope some of these suggestions will help every one of our clients realize the success hard work should deliver. Unfortunately, sometimes working harder is not the answer. We need to work smarter. Future Outlook of the Industry India's construction sector is forecast to grow at 7-8 percent each year over the next decade following the election of a new government, according to a news report by an international consultancy giant. The country will see increased economic growth, and the removal of barriers to foreign investment will "spur demand for construction" over the coming 12 to 18 months, says PricewaterhouseCoopers India report. The report has been brpared for The Big 5 Construct India exhibition in September and offers a snapshot of the US$157 billion Indian construction sectorfollowing the May elections. "With a new government having been formed at the Centre, with a strong mandate to stimulate economic growth, the outlookfor the sector appears positive," it says. An estimated US$1 trillion is being spent on infrastructure over the five years to 2017 and there is increased investment in industrial projects by the government. But it is the private housing sector that the PwC report highlights as a key growth area. It says, "Demand for real estate has been one of the drivers of construction sector growth over the last 10 year. Improvement in economic conditions has the potential to drive demand for real estate, as housing continues to be a favoured investment asset among Indian households." The report's positive forecast is reflected in a strong increase in interest for this year's Big 5 Construct India show in Mumbai, said Muhammed Kazi, Senior Project Manager of the Big 5 Construct India, which runs from September 11 to 13 at the Bombay Exhibition Centre in Mumbai. He said, "The country of 1.2 billion people is set to undergo a boost in the construction sector and this new report gives a snapshot of where the country is heading. "The Big 5 Construct India is organised by the Federation of Indian Chambers of Commerce and Industry (FICCI), Ministry of Urban Development, in association with dmg events, will bring together suppliers and contractors for three days. Alongside the products, there will be the opportunity to examine a range of key industry issues, from sustainability and equipment to building regulations and alternative technologies, through workshops and seminars." The total construction market in India for FY2014 was US$157 billion, an increase of US$4 billion over FY2013. Infrastructure accounts for49 percent, housing and real estate42 percent and industrial projects 9 percent CCCL COMPANYSCENARIO Performance Highlights In an adverse environment the company had been successfully executed the projects. Company began the current financial year with an order book which stood at Rs .43315.80 Lacs. The size and structure of the organisation was geared for catering to take up larger projects but with economic slowdown and lower order booking coupled with slower project execution the asset base and the fixed cost structure which was built up affected the company's profitability. The lower turnover and operating margins in an environment of high interest costs severely affected the Company's profitability. In addition, further litigation and non payments of claims adversely affected the Company's liquidity. Company's revenue growth and profitability was muted in the last few quarters due to order execution-related issues. CCCL's revenue declined in FY 2015 due to slowdown in order execution. Delay due to exogenous factors such as delay in procuring environmental approvals, land acquisition and government decision making have adversely affected performance. Delayed project execution has in turn affected payment from clients and the Company's cash flows. The year under review has seen enhanced working capital requirements. This has been due to clients delaying payments. Amounts due from clients have shot up to Rs. 1070.18 crores ( including retention of Rs.168.95. Crores.) as the recovery has been slow. In certain cases we have initiated legal action for recovering these dues. Dues from clients for completed major projects to the tune of Rs.102.57 crores has added to liquidity crunch. The Infrastructure sector is facing strong headwinds, including slowdown in order booking caused by shortfall in investments in the infrastructure sector, increased commodity prices and high interest rate scenario. As a consequence of certain unexpected developments which were beyond the control of management, mainly delays in decision making by the Company's major clients and delays in settlement of claims, the expected cash flows have not materialized for the Company. These factors coupled with slowdown in Infrastructure industry has resulted in lower turnover, lower operating margins and high interest costs for the Company which has consequently led the Company to incur net loss for the first time since its inception. STEPS TAKEN OR PROPOSED TO BE TAKEN FOR IMPROVEMENT: Company has taken view of all these factors seriously and to overcome the above challenges, has proactively undertaken the following steps directed at improving its operational efficiencies: Claims Realisation: Persistent efforts are being made by Company to collect dues and claims. The Company has set up a strategic senior management team to recover dues and claims outstanding from Clients. Total outstanding as of 31st March 2015 is Rs.107018.17/- lacs (including retention of Rs.16895/- lacs).Overdue outstanding more than 180 day is Rs.1073.05/- Lacs. Cost optimisation: Over the past 12 months, Company has implemented cost optimization measures such as cutting overheads and rationalization of human resources. These internal cost cutting has brought down the overhead cost to the tune of Rs.38.29 crores. Reduction in Working Capital: Insistence on higher advances from customers and better credit terms with suppliers are being negotiated. Monetization of assets: Company is proactively exploring monetization of assets either at the parent level or in its subsidiaries / step down subsidiaries. Bidding for Jobs: The Company has been careful in bidding for new jobs and is taking jobs only on a selective basis. CAUTIONARY STATEMENT It is explicitly states that some of the statements in the Management Discussion and Analysis report are likely to be forward looking and it may so happen that the actual events or results may differ from what the Board of Directors/ Management perceive in terms of the future performance and outlook due to factors having a bearing on them and which are beyond brcise perception. Company's operations may be affected with supply and demand situations, input prices and their availability, changes in government regulations and policies, tax laws and other factors such as Industrial relations, fund constraints and macro economic development. For and on behalf of the Board of Directors R.Sarabeswar Chairman (DIN: 00435318) S.Sivaramakrishnan Managing Director (DIN: 00431791) Place: Chennai Date: August31, 2015 |