MANAGEMENT DISCUSSION & ANALYSIS Indian Economy Indian economy, in the recent past, faced testing times with issues like lower growth, high levels of inflation and widening current account deficit; escalated by an unsupportive external environment. However, on the back of strong policies, it is currently placed on a cyclical upturn. The growth rate of the economy, measured by the growth in GDP at constant (2011-12) market prices, improved from 6.9% in 2013-14 to 7.3% in 201415, according to the provisional estimates released by the Central Statistics Office. "is rebound raises hopes of a steady economic recovery and further growth in forthcoming quarters. India is one of the very few countries for which IMF and World Bank have raised their growth assessment. The year 2014-15 has witnessed key policy reforms, aimed at aiding growth revival. The growth agenda of the Government has been tethered to the revival of manufacturing, unleashed in the "Make in India", initiative, accompanied by liberalization of foreign direct investment, a large array of investment facilitation measures and steps to improve saving. There has been a durable decline in inflation-both wholesale and consumer prices- in the recent months. The current scenario of price stability and related expectations seems to have convinced the RBI, focused on a glide disinflationary path, on gradual monetary easing to support growth. Headline WPI inflation moderated to 2.1% in 2014-15 (April-March) from 6% in 2013-14 due to lower food and fuel inflation, signaling a sharp decline in inflationary brssures in the economy. The performance of key industrial sectors based on the Index of Industrial Production (IIP) reveals the reversal in trends of industrial production in 2014-15, which had slowed down since 2011-12. In April 2015, industrial production expanded 4.1% compared to 3.7% in the same month last year and 2.5% in the brceding month. The RBI had, in two successive announcements, reduced the repo rate by 50 basis points (to 7.50%) in the last quarter of the financial year 2014-15. Subsequently, on 2nd June, 2015, RBI has further brought down the repo rate to 7.25% in an attempt to boost investment. The Government's reform-focused agenda — aimed at re-invigorating investment flows and reviving consumption — is expected to support growth in the real estate and construction sector too. The Centre has relaxed curbs on FDI in the housing sector, permitted the set-up of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), promoted faster infrastructure creation and decided to develop 100 SMART Cities' and new industrial clusters. India's GDP Growth is expected to edge up further to 8.2% in FY2016, helped by a supportive monetary policy in 2015, as inflation continues to trend lower and by a pickup in capital expenditure. Indian Construction Sector The Indian construction sector is the 2nd largest employer and contributor to economic activity, after agriculture sector. As per provisional estimates of India's GDP, the construction industry registered a growth of 4.8% in 2014-15 as against 2.5% in 2013-14. 50% of the demand for construction activity in India comes from the infrastructure sector; the rest comes from residential and commercial development, industrial activities, etc. Thenew Government tends to put its primary focus on infrastructure development and may continue with the estimated USD 1 trillion spend on infrastructure till 2017 as per 12th Five Year Plan. The proposed smart cities, enhanced metro rail connectivity, river interconnection, cleaning of rivers and increased focus on the road sector is expected to give a boost to infra development in India. Present levels of urban infrastructure are inadequate to meet the demands of the existing urban population. there is need for regeneration of urban areas in existing cities and the creation of new, inclusive smart cities to meet the demands of increasing population and migration from rural to urban areas. Needless to say, the Indian construction sector is poised for immense growth over medium to long-term. Infrastructure India's Infrastructure Sector has suffered in past 2-3 years due to dull macroeconomic conditions and delay in key policy related decisions. Political blockage, heavy interest burden and working capital crisis added to the woes of infrastructure companies. However, the new Government has put infrastructure creation at the top of its agenda as it seeks to kick-start the investment cycle that stalled in the face of an economic downturn in the past two years. Hon'ble Finance Minister Shri. Arun Jaitley, in his budget for the year 2015-16 underlined the Government's commitment to reviving the investment cycle to spur growth by increasing public expenditure in capital formation. In addition, many significant steps have been taken to improve the availability of funds for infrastructure. Highlights of the Union Budget 2015-16 are as follows: • Investment in infrastructure will go up by Rs. 70,000 crore a year in 2015-16 over year 2014-15. • The planned allocation for the Ministry of Road and Highways has increased significantly byRs. 14,031 crore to Rs. 42,913 crore for the year 2015-16. • National Investment and Infrastructure Fund (NIIF) will be established with an annual flow of Rs. 20,000 crore to it. • Government will permit tax free infrastructure bonds for projects in rail, road and irrigation sectors. • An additional sum of Rs. 40,000 crore for investment in roads and railways will be made available through conversion of existing excise duty on petrol and diesel to the extent of Rs. 4 per litre into Road cess. • Government would also consider this plug-and-play mode for other infrastructure projects as roads, ports, railway lines and airports. • Government will ensure 'House for all' by 2022, under which the Government will build two crore houses in rural India and four crore houses in urban India. Real Estate During the past few years, the Indian real estate sector had to confront tough times; difficult economic and business environment and high inflation that affected all stakeholders -investors, developers and buyers. As a result, significant unsold inventory and execution delays were brvalent in almost all real estate classes. The year 2014 was a mixed year for the Real Estate Sector as though the sector registered subdued sales; it was quite fruitful in terms of business sentiment, mostly due to the formation of new Government as it boosted the investor and business confidence in the Indian economy. The policy makers have taken several initiatives to revive the real estate sector and improve investor and buyer confidence. A number of regulatory changes and policy measures have been initiated and are likely to bear a positive impact on the Indian real estate sector. Some of them include relaxation of FDI rules, establishment & rationalization of REITs, redefining affordable housing, Housing for all by 2022, tax incentive on home loans, Smart City projects and setting up of National Industrial Corridor Authority. FDI inflow in construction development sector has been depleting in the last couple of years. According to statistics available with Department of Industrial Policy and Promotion (DIPP), FDI flows into the sector for the period April 2014 - March 2015 stood at USD 758 million compared to USD 1,226 million during same period last year. To help attract foreign funds in construction of townships, hospitals and hotels, the Government has relaxed the FDI policy for this sector by easing exit norms and reducing built-up area and capital needs. India allows 100% FDI in the sector through the automatic route. The new policy has done away with the three-year lock-in period for repatriation of investment. The investor can exit on completion of the project or after development of trunk infrastructure, that is, roads, water supply, street lighting, drainage and sewerage. Under the new policy, the minimum floor area requirement has been reduced to 20,000 square meters from 50,000 square meters earlier. It also brought down the minimum capital requirement to USD 5 million from USD 10 million. To boost the development of affordable homes, Government has exempted the conditions of minimum floor area as well as capital requirement if an investee/ joint venture companies commit at least 30% of the total project cost for low-cost housing. All these measures are likely to result in enhanced inflows into the construction development sector and creation of much needed low cost affordable housing in the country and development of smart cities. In a clear indication of renewed interest among investors in Indian real estate, the total private equity (PE) investments in the sector in 2014 more than doubled to Rs. 15,410 crore from Rs. 7,360 crore in 2013. A report by real estate consultancy, Cushman & Wakefield said this is the highest since 2008 when the figure was Rs. 17,440 crore. The total number of deals in 2014 rose to 73 from 40 in 2013 and average deal size rose by 15% to Rs. 210 crore. Location-wise, Delhi-NCR property market witnessed the highest PE investment of Rs. 5,910 crore during 2014, followed by Mumbai at Rs. 4,680 crore. With increasing capital requirements of the Indian real estate sector and in anticipation of improving macro-economic conditions, PE funds are likely to invest even more funds in the next few years. "is will be driven by Government measures to attract further investments and Real estate investment trusts (REITs) coming into play this year. With the easing of regulatory bottlenecks and several positive signs emerging on the horizon, the sector is likely to witness renewed momentum and grow much faster this year. Residential Real Estate The major drivers supporting real estate sector include urbanisation, rising income level, young population and growing number of nuclear families and strong expected growth in the manufacturing and service sector. Considering the increasing population and rapid urbanization in India, the demand for housing units is likely to continue increasing in the future as well. In line with the endeavour to have housing for all by 2022, the Government has set a target of constructing 6 crore affordable houses across urban and rural areas and has allocated Rs. 22,047 crore towards housing and urban development. "is is expected to provide a boost to the low cost housing segment. According to a Report by property consultant JLL India, Housing sales fell to 1.75 lakh units in the primary markets of seven major cities in 2014 as compared to nearly 2 lakh units in the brvious year. "ese seven cities are Delhi-NCR, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad and Pune. The year 2015 is expected to be positive for home buyers benefiting from reduced borrowing rates, increased developer-focus on affordable homes, largely stable prices, and better job and income prospects. Housing sales are estimated to rise this year to 1.92 lakh units in India's top seven cities on expectations of a cut in interest rate and stable prices, according to property consultant JLL India. Ports The Indian coastline is dotted with 12 major ports and about 60 operational non-major ports. According to the Ministry of Shipping,the Indian shipping and ports sector is the carrier of around 90% of India's trade by volume and 70% by value. The Indian port sector is gaining momentum with the Government's reforms in areas like land acquisitions, forest and security clearances. The Government has realized the potential of this sector and has taken initiatives such as 100% FDI for port development projects, income tax incentives, streamlining of security clearance procedures and close monitoring of developmental projects in the major ports. The Indian ports sector received foreign direct investment (FDI) worth USD 1,637.30 million (Rs. 6730.91 crore) between April 2000 and March 2015, according to the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry. The Centre has also proposed the corporatisation of the public sector ports under the Companies Act. "is move will definitely provide the scope for modernization of the major ports, apart from bringing in operational efficiency. The Government's port-led development Sagarmala project has further enhanced the growth prospects of this sector. Growth prospects The capacity of Ports in India was 1423.10 Million Tonnes (MT) as on 31st December, 2014 of which 823.63 MT was contributed by the 12 Major Ports. The Shipping Ministry's ambitious plan of Maritime Agenda 2020 projects Indian ports' capacity augmentation to 3,130 MT by 2019-20 for handling cargo of 2.5 billion tonnes. The capacity of major ports is estimated to each 1,460 MT by 2019-20. The12state-owned ports handled a combined 581.34 MT ofcargo traffic in 2014-15 registering a growth of 4.65%, according to Indian Ports Association (IPA). "ese ports had recorded 555.48 MT of cargo movement in 2013-14, only marginally up by 1.78% from the brvious fiscal. It is estimated that these major ports will handle 1,215 MT of cargo by 2019-20. The Plan Outlay of the Ministry of Shipping is Rs. 4,546.53 crore for the year 2015-16 including Rs. 932.79 crore as GBS. "is includes development of Indian Shipping, Ports, Inland Waterways and Shipbuilding Industry. Out of this total Planned Outlay, Port Projects have been allocated Rs. 2,503.24 crore for the year 201516 including Rs. 189.50 crore as GBS. The brsent Government has made its priority to push the port sector and get the clearances on fast track. Many private players have shown their interest to invest in the Indian port sector. All this will result in a healthy growth of the sector in near future. Roads & Highways India's vast road network of about 4.9 million kilometers (km) - the second largest in the world - can be broadly categorized into National Highways, Exbrssways, State Highways, District roads and Rural roads, "is network transports over 60% of all goods in the country and 85% of total passenger traffic, India's growing economy has witnessed a rise in demand for transport infrastructure and services. Due to the key infrastructural value of roads and its importance in connecting various parts of the country, building an extensive road network has always been an important agenda for the Government. Despite this, the Road sector in India continues to face multiple challenges in the form of execution impediments, financing constraints, delayed land acquisition, receipt of approvals & environment clearances and stressed financial position of the developers. However, the NDA Government has shown intent to revive the Roads & Highways Sector. The total Plan outlay for road transport and highways in 2015-16 increased by 126% or by Rs. 47,720 crore compared to Rs. 37,881 crore allocated in 2014-15. The budget figure includes both Central Plan outlay and States and Union Territories' Plan outlay allocated by the Centre. For 2015-16, the increased provisions have been made for the development of national highways, including projects relating to exbrssways and six-laning of crowded stretches of Golden Quadrilateral and two-laning of highways works under National Highways Development Project. The budget raised additional excise duty on petrol and diesel to Rs. 6 per litre from Rs. 2 per litre, which is levied as road cess. "is raises available funds for roads and railways to Rs. 431 billion in 2015-16 from Rs. 232 billion in 2014-15. There has been a pick-up in the ordering activity by NHAI in 201415. During the year, NHAI awarded a total of 3,000 kilometres of contracts compared to last year's achievement of 1,436 kilometres. Out of this, 700 kilometres were awarded under BOT mode and the remaining 2,400 kilometres under EPC mode. According to NHAI, it may award projects of 5,300 kilometres in 2015-16, out of which, 2,800 kilometres will be under EPC mode, 1,000 under BOT mode and remaining 1,500 kilometres under hybrid mode. The Government has set an ambitious target of building 30 kilometres of roads per day from 2016-17. At brsent, the road construction pace is 3 kilometres per day. Efforts are being made to slash construction delays and fast track many stuck projects to increase the construction pace by 10-fold in the next two years. "is will lead to completion of more projects which were stacked up in the brvious years. Operational Review Man Infraconstruction Ltd. (Man Infra) is an integrated EPC (Engineering, Procurement and Construction) Company with strong focus on Port, Residential / Commercial and Industrial & Road construction segments. The Company's management has four decades of experience in civil construction activities. Man Infra has increased its focus as a Real Estate developer since 2013. The Company has significant experience in construction management and has inherent skills and resources to develop and deliver Real estate projects. The Company delivered a healthy performance with an imbrssive growth in bottom line for the financial year 2014-15. It remained cautious in bidding for EPC projects and maintained its policy of not adding projects to the order book where the risk-return was unfavorable. The Company focused on execution of its existing order book and expediting its Real Estate Development Projects. The total outstanding EPC order book stood at Rs. 286 crore as on March 31, 2015. Out of the total order book, 55% was contributed by the Residential segment, 37% by Infrastructure segment and 8% by Commercial and Industrial segment. During the year, Manaj Tollway Private Limited, which was executing a 41 km Road project on DBFOT basis and where Man Infra holds 63% stake has issued a letter to Public Works Department, Government of Maharashtra (PWD) for terminating the Concession Agreement due to their inability to provide necessary Land for implementation of the Project. In this regard, Manaj Tollway Private Limited has claimed costs incurred and compensation in line with the terms of the Concession Agreement from the authorities. On the Real Estate front, Man Group launched its mega Real estate project, 'Atmosphere' in Mulund, in joint venture with a leading developer with an approximate saleable area of 1.8 million sq. ft. in Q3 FY2015. Theproject received tremendous response from the market with over 40% area of Phase I being booked in the first few days of launch. Also, the Company completed its first Residential development project in Ghatkopar, Mumbai in March 2015. The Company delivered a superior quality product before the scheduled delivery date enhancing customer satisfaction. Man Group continued to lay foundation for future growth and success through sustained momentum in business development. During the year, the Group added 4 Residential redevelopment projects to its portfolio in Mumbai. TheGroup has also entered into Development Agreement with few societies for redeveloping a sizeable MHADA project in Ghatkopar East, Mumbai. The Company is expecting to launch all these projects after all the necessary approvals are received translating into a strong launch pipeline for FY2016. Your Company will endeavor to add prudent Real Estate projects in its portfolio accelerating the growth of the Company's EPC as well as Real Estate development business. Financial Performance - Consolidated • Total Income stood at Rs. 34,488.00 lakhs for FY15. • EBITDA increased by 64% to Rs. 2,485.42 lakhs in FY15 as compared to Rs. 1,512.02 lakhs in FY14. • Profit after tax and minority interest increased by 64% to Rs. 4,741.01 lakhs in FY15 as compared to Rs. 2,890.35 lakhs in FY14. • The Company achieved a PAT margin of 13.75% in FY15. • The Company had a Cash & Cash Equivalent ofRs. 21,753.32 lakhs at the end of FY15. Risk Management The Company works in an environment which is affected by various factors, some of which are controllable while some are outside the control of the Company. At Man Infra, we have developed a robust risk management framework that reduces the volatility due to unfavourable internal and external events, facilitates risk assessment and mitigation procedure, lays down reporting procedure and enables timely reviews by the management. The following section discusses some of these risks and steps taken by Man Infra to mitigate such risks. 1. Economic Risk a. Risk: An unexpected development in any of the macroeconomic variables may adversely impact the Company's profitability or viability. Both Infrastructure and Real estate are cyclical industries and they get impacted more by the changes in macroeconomic variables like interest rate, GDP Growth, purchasing power, inflation, among others. b. Mitigation Plan: Man Infra continues to be conservative and follows well defined internal prudential norms. The Company has attempted to hedge against the inherent risks of Real Estate business by following joint development model. It maintains a low debt equity ratio, high liquidity and strong clientele with broadly timely payment track-record which helps in minimizing the impact of any downturn in economy. 2. Execution Risk a. Risk: Real Estate and construction projects are subject to various execution risks like regulatory hurdles, delay in receipt of approvals, availability of labour and raw material, etc. Any such delay may result in cost overruns and impact the Company's operations unfavorably. b. Mitigation Plan: Man Infra has put in place processes that include milestone based time & quality checks that help to ensure adherence to quality, cost and delivery as per the plan. The Company deploys a well-defined standard operating procedure - from project planning to delivery - and adheres to internal checks and balances with regard to every project. Extensive diligence is carried out before entering into partnerships for joint development. 3. Liquidity Risk a. Risk: The Real estate business has significant initial outflow with staggered and long-term inflows. Delays in project cycle; inadequate funding resources may have an impact on the liquidity position of the Company. b. Mitigation Plan: Man Infra has a sound liquidity position with approximately Rs. 217.53 crore in cash and equivalents on the book as on March 31, 2015. TheCompany maintains financial discipline with regards to the investment and subsequent cash flow generation from a project. Moreover, the Company has also been taking adequate measures to manage working capital cycles like monitoring and closely following up with debtors. For the EPC business, the Company also receives mobilisation advances, which aids liquidity management. 4. Input Price Risk a. Risk: The Group's Real estate operations as well as EPC contracts are subject to cost overruns due to increase in material cost or labour cost. The Company's earnings may be affected from the volatility in the price of input. b. Mitigation Plan: For EPC projects, Man Infra has a price escalation clause where the increase in the input cost is directly passed to the client. For development projects, Man Infra takes this risk into account at the time of launch. Also, the Company usually sells the projects in a phased manner which aids in covering the rise in cost of construction in subsequent sale. 5. Competition a. Risk: All Companies face the risk of competition, across all industries. In order to stay competitive in the market, Companies resort to various tactics to achieve a sustainable and a profitable growth. b. Mitigation: The Company's endeavor is to offer high-value product for quality conscious customers. The Company constantly focuses on deploying latest technologies for projects and cost effective measures to enhance operational efficiency resulting in timely delivery. Man Infra also strives to offer distinctive features in its projects to stand out from competition. 6. Sales Volume a. Risk: The performance of the Company may be affected if there is substantial difference between the estimated and actual sales volume of the Real Estate development projects. b. Mitigation: The volume of sales in the Real Estate business depends on the nature and location of the project, design & layout and the reputation of the developer. Man Infra launches its projects depending on the brvailing market conditions. It strives to build a worthy reputation in the industry by delivering superior quality product and maintaining long-binding relationships with all its clients and stakeholders. Human Resources The Company believes that its capability to brserve and continue its growth depends largely on its strength of developing, motivating and retaining talent. It firmly believes that highly motivated and empowered employees are its best assets to maintain a competitive edge in the market. The management is committed to continuously upgrading skills and competency at all levels with the aid of extensive training. The Company has obtained certifications for both Safety - OHSAS 18001, and Environment ISO 14001 underlining its commitment to employees' safe working conditions and social awareness. Man Group has a team of more than 500 employees as on 31st March, 2015. The Company's employees possess requisite qualifications and technical expertise to execute projects across the Real Estate and construction services domain. TheCompany's HR will continue to focus on maintaining excellent work culture, employee development and competitive compensation to ensure a motivated and empowered workforce. Internal Control Systems The Company has an adequate internal control system to safeguard all assets and ensure their efficient productivity. The Company practices quality management system for design, planning and construction that complies with international quality standards. The Company has a suitable internal control system for the business processes, operations, financial reporting, compliance with applicable laws and regulations. The Internal Audit firm conducts periodical audits to ensure adequacy of internal control systems and adherence to management policies. Wherever deemed necessary, internal control systems are also reassessed and corrective action is taken, if required. Cautionary Statement "i s management discussion and analysis may contain forward looking statements that reflects your Company's performance with respect to future events. The actual results may differ materially from those anticipated in the forward looking statements as a result of many factors. |