MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW OF THE GLOBAL ECONOMY The year 2011-2012 was abetted by the continuing global volatility and challenges. The growth momentum of the Advance Economies was impacted as the protracted debt crisis in the euro area and fiscal fragilities dampened business and consumer confidence. The resource rich Middle East and North Africa (MENA) region has been facing significant internal challenges and geopolitical risks. These uncertainties led to widesbrad risk aversion and adversely affected capital flows to new projects. The growth prospects for 2012-2013 remain uncertain, with growth petering out in the euro area and moderating in the emerging markets, while a better-than- expected recovery is shaping up in the US. OVERVIEW OF THE INDIAN ECONOMY The Indian economy being exposed to global economic environment has been impacted by the global uncertainties. In addition, on the internal front, the economy is facing challenges due to inflationary brssures, tight monetary conditions, low investments, delays in policy decision and negative perception created due to scams etc. In 2011-12 the GDP registered a growth of 6.5% driven by sectors like power, tourism, financial services etc. The slowdown in 2011-12 was seen in all the major sectors of the economy as compared with the brvious year. The services sector grew by 8.9%, Industry by 3.4% and Agriculture by 2.8% and Construction sector by 4.8% as compared with 9.3%, 7.2%, 7% and 8% respectively in 2010-11. Industrial growth remained subdued due to supply-side bottlenecks, particularly in the mining sector, and moderation in investment demand. The most dismal picture has been brsented by capital goods segment which has been in negative, territory during the fiscal. Significantly, slowdown was witnessed in capacity addition as defined by capital formation which decelerated to 5.5% in 2011-2012 as against 7.5% achieved in 2010-2011.The resilience of the Indian economy is being tested, but we hope the economy to bounce back in the short term. INDUSTRY STRUCTURE AND DEVELOPMENT The Construction industry is an integral part of the Indian economy and accounts for 7.8% of the GDP. It is the second largest employers of skilled and unskilled labour force in the country and is characterized by mix of both organized and unorganized entities. The infrastructure development story in India has been plagued with issues of implementation. As a result, the pace of growth has been much lower than required to sustain the desired economic growth. The Eleventh Plan envisaged the importance of investment in Infrastructure for achieving a sustainable and inclusive growth of 9% to 10% in GDP over the next decade. In this context, investment in physical Infrastructure has increased from the level of about 5% of GDP (in 2007) to about 8% of GDP by 2011-12, and is expected to rise to 10% as per the 2012-13 union budget. The cumulative investment in Infrastructure in the Twelfth Five-Year plan (2012-17) is targeted at around $1trillion, with nearly half of it expected to be channelized into construction. Private participation is expected to bring about 50% of the funding required, with the rest coming from public sources. Towards the same, in the Union Budget 2012-13, the tax free bonds were doubled to R 60,000 crores including R 10,000 crores each for NHAI, IRFC, IIFCL and power sector and R 5,000 crores each for HUDCO, National Housing Bank, SIDBI, and ports. Additionally allocation has been increased to R 25,360 crores towards the National Highways Development Programme, an increase of about 14 % over the brvious year. The Government has been actively encouraging private investment in Infrastructure through Public Private Partnership (PPP) to meet the massive Infrastructure funding requirement. In the course of the Eleventh Plan, the government has taken several initiatives for standardising the documents and processes for structuring and award of PPP projects in a transparent and competitive manner. However, we find that things in reality have slowed down, while the Government had grandiose plans, implementation mechanism is not well-oiled. Fiscal situation & Inflation adds further dimension to the growth story. BUSINESS OVERVIEW During the year, the Company has bagged lower orders both in India and abroad. The sectors of key businesses to the Company faced increased level of competitive intensity due to lower number of jobs and increase in competition. The order book position of the Company as on 31st March, 2012 was R 7,005.20 crores. During last 5 years, the Company has executed projects in, Abu Dhabi, Dubai, Qatar, Mauritius, Madagascar, Oman, Algeria, Liberia and Yemen. Currently, the Company is executing projects in Jordan, Liberia and Bahrain. During the year ended 31st March 2012, the Company achieved 38.28% of its turnover from overseas market. The growth of the Company has been well diversified across different segments and geographies on the desired line and focus. All the segments are well balanced and there is no over dependence on any one sector or geography and we remain brsent in all segments with a reasonable significant participation. CONSOLIDATED FINANCIAL PERFORMANCE Your Company has achieved total income of R 2,551.92 crores for the year compared to the brvious year's R 2,895.48 crores showing a decrease of 11.87%.The EBIDTA for the year was R 278.57 crores compared to R 251.53 crores in the brvious year resulting in increase by 10.75%.The Consolidated Profit before Tax for the year was R 150.56 crores compared to R 151.35 crores in the brvious year resulting in a marginal decrease of 0.52%.The Consolidated Profit after Tax for the year was R 88.14 crores compared to R 118.97crores in the brvious year resulting in decrease by 25.91%. OPPORTUNITIES In the long-term, India continues to offer considerable opportunities aided by its favourable demographic profile. Its large consumer market has attracted global companies, many of whom have made India their manufacturing hub. However, in order to harness this potential and achieve sustainable growth, the country needs to push forward critical reforms and build innovative public-private partnerships to deliver rapid and inclusive growth as also provide an enabling environment for upgrading infrastructure. The Government has announced measures to kick-start key infrastructure development projects and thereby provide a catalyst to revert the economy to a higher growth trajectory. Overseas Market The infrastructure segment in the overseas market, even in the face of uncertain economic conditions, is showing resilience in certain pockets. In view of the visibly strong infrastructure potentials, the Company has identified Middle East and Africa as the key markets. In Middle East, Saudi Arabia and Qatar have projected strong infrastructure investment in the coming years. Countries such as Dubai, Kuwait and Abu Dhabi which saw slowdown post 2008 financial crisis are slowly picking up, but we do not expect them to reach br 2008 levels in infrastructure investment in the short term. Africa, given the abundance of natural resources such as coal and iron ore, has seen investment in green field mines by global mining corporations and thus mining driven infrastructure opportunities are available in both short and medium term in both railways and marine segments. South East Asia is another market where opportunities are available. South East Asian economies are slowly reaching sustained GDP growth in excess of 6%, and are now developing infrastructure to sustain the same going forward. Specifically countries such as Indonesia, Myanmar and Vietnam with plenty of natural resources and increasingly improving political climate are attracting investments in mining and energy related infrastructure. Given the favourable environment and our successful execution history in overseas markets, we are increasingly looking at overseas for driving our future growth. Road: Road has been the key drivers of infrastructure growth in India. Ministry of Roads, Transport and Highways (MORT&H) has brpared a Master Plan for the National Exbrssways Network for a total length of about 18,637 km. This is in addition to the initiatives taken up under National Highway Development Programme (NHDP). NHDP is being implemented under several phases. The Working Group on road sector for Twelfth Plan in its report stated that ongoing phases of NHDP - I, II, III and V involving upgradation to four or more lanes of about 32,750 km to be completed within the Twelfth Plan at an estimated fund requirement of R 3,23,774 crores. Further it is proposed that existing National Highway Network of 71,772 km may be increased to about 85,000 km in the Twelfth Plan, for the development of regions which are currently not connected by National Highways. During the year 2011-12, an ambitious target of awarding 7800 KM was set, of which 6700 KM was awarded. Post this success, the target for the year 2012-13 have been decided at 9500 KM, marking an increase of 21.79 per cent over last year and an increase in investment by 73.6 per cent. Of these, a total of 4,360 km of roads will be awarded for maintenance under the OMT (Operate, Maintain, Transfer) system for the first time. The investment in the current year will hopefully bring in the required acceleration for successful implementation of the twelfth plan. Railways: The annual Plan of 2012-13 envisages the highest-ever planned investment in the railways at R 60,100 crores. The Indian Railways plans to bring in new technologies and augment the existing infrastructure through High Speed Corridors, Dedicated Freight corridors etc. MRTS / Urban Infrastructure: The urban population share may reach 50% in 25 year thereby adding 300 to 400 million to the existing population of about 350 million. Urbanisation in India has been relatively slow in past, but is now expected to accelerate. The segment has been showing strong growth. Last year saw commencement of operations on Bengaluru Metro. Also construction was initiated on Jaipur Metro. Delhi Metro has been a success story and is in its 3rd phase of expansion. The Government is encouraging private sector participation in major urban transport projects. We expect the segment to remain strong and be a continuous source of opportunities. Ports: As per the data provided by Indian Ports Association, cargo handled at major ports decreased by 1.7% in the year 2011-12, for the first time in 12 years, primarily due to reduction in iron ore exports. The rate of addition of new capacity is expected to be higher in minor ports relative to major ports, and private investment is expected to drive the same. Ministry of Shipping has broadly identified 42 projects valued at R 14,500 crores to be awarded in the current fiscal. The target includes development of two new ports on east coast. The Maritime Agenda 2020 envisages investments worth over R 1,48,500 crores in the maritime sector. The agenda aims to create a port capacity of around 3,200 MT to handle the expected traffic of about 2,500 MT by 2020. A majority of the projects will be implemented through the public-private participation (PPP) model. The Private investments in the port sector have increased significantly over the years. Power: The capacity addition in eleventh Five year plan is estimated to be ~55GW as against an original target of 78GW, with about 60% being added in last two years. The execution has been slow due to concerns on fuel availability, land, environmental issues and long term financing. In the twelfth five year plan a target of 62GW of capacity addition has been defined, which would require an investment of R 6,38,600 crores in power generation RISK AND CONCERNS A. Global Events India being now connected with the global economy is not insulated from the events impacting the global economy. Political and economic events which may have an impact on Indian economy could be as under: • Economic instability in European Union, with some countries still impacted deeply by recession • Political instability in Middle East & North Africa, leading to slowdown in investment in infrastructure, at least in the short term. B. Domestic Events: Despite the Construction Industry in India witnessing growth in comparison to other emerging economies and developed economies in the last year, the developments on the economic front cast constraints and challenges on the prospect of the industry mainly due to the following: • Change in government policies, priorities and its budgetary allocation for infrastructure development. • Inflationary brssures, leading to sustained high interest rate, leading to a sustained stress of tightening Liquidity position and interest rate risks. • Delay in award of contract and releasing work fronts and technical clearances for execution of projects. • Availability of skilled manpower and high attrition levels of employees in the industry. • Dispute resolution mechanism is time consuming resulting into significant blockage of working capital. • Increasing competitive intensity across segments, due to mushrooming of competition in the last few years, and slowdown in award of projects. • Negative perceptions on the domestic front (various scams, high inflationary levels, etc.), there is a possibility of capital moving out of India. Your Company's brsence in projects across various segments of construction business both in India as well as abroad has helped to mitigate the above constraints and also ensure long term sustainable growth with profitability. OUTLOOK The Company has diversified in segments and geographies since 2008, and is continuing in the same direction for driving its growth. Apart from consolidating its business in Marine and Transportation segment, the Company intends to scale up its brsence in oil & gas and hydro & tunnelling construction. Geographically, the Company would enhance its overseas brsence. Over the last 3 years the Company had a sustained revenue share of 30% from overseas markets, and the strategy is to increase it to 40% and beyond over the next 2 years, through consolidation of its forays into Middle East and Africa. The Company would continue to maintain its status as a prominent Transnational Infrastructure Company recognized for its business innovation, focused on Total Satisfaction and creating enhanced value for all our stakeholders. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACIES The Company has in place an adequate Internal control system. The financial control operates through continuous Internal Audit and distribution of functional responsibilities. Internal Auditors conduct audits of sites of the Company throughout the year to test the adequacy of the internal systems and suggest continual improvements. Internal Audit reports and adequacy of internal controls are reviewed by the Board's Audit Committee on a regular basis. The operational control exist through well laid out system of checks and balances and hierarchy of reporting from site level to central management groups to the senior management and the Directors. HUMAN RESOURCES DEVELOPMENT At AFCONS, employees are a part of the performance raising team in professionalism, opportunity, responsibility, belongingness and accomplishment with Company's vision. Our employees are considered the most valuable asset and the Company is committed to enable employees to maximize their contribution to the company, while also maintaining effectiveness between their work and personal lives. By creating a framework for managing Work/ Life effectiveness, the Company enhances our ability to develop and retain our employees and demonstrate our commitment to creating a great place to work in the AFCONS Innovative Culture. The Company HR Policy focuses on the following key areas: • Talent Acquisition through a defined talent management strategy in alignment with business goal and targets. • Imparting Learning and Development to employees and brpare them for their current and future roles. • Adequate Compensation Package coupled with Incentives, rewards and recognitions. • Culture building focus on building a culture of innovation and creativity in construction process. The Company has taken many initiatives towards effective training and development for the employees at various levels. Some of the innovative initiatives of the Company includes Anugam-HR Induction program initiated through E-Learning platform, Whole Wellness Program, focused training sessions and workshops to continuously improve the skill sets of the employees. The Classroom @ site and Classroom @ H.O. program has been very successful. Your Company endeavour to provide its employees a professional, congenial, safe work environment coupled with opportunities for personal growth and development. For the sixth consecutive year, Construction World has rated us as one of the best companies to work for in the Construction and Infrastructure sector. CAUTIONARY STATEMENT The statement in Management Discussions and Analysis describing the Company's operations and expectations are "forward looking statements". Actual results may differ owing to environmental dynamics. |