MANAGEMENT DISCUSSION AND ANALYSIS 1. Economic Overview 1.1. World Economic Outlook During the FY 2015-16, global recovery continued, but at an ever-slowing pace. The economy have seen a renewed episode of global asset market volatility, some loss of growth momentum in the advanced economies, and continuing headwinds for emerging market economies and lower-income countries. Firming of oil prices, lower capital outflows from China and decisions by major central banks have all contributed to improved sentiments. 1.2. India Economic Outlook: Despite of decline in exports due to weak global demand and private investment, India's economy has performed remarkably well. This performance reflects implementation of number of meaningful reforms such as: • Liberalizing Foreign Direct Investment (FDI) across-the-board, including by passing the long-awaited insurance bill. FDI reforms reflect a decisive change in philosophy, from viewing FDI as a tolerable necessity to something to welcome; • Vigorously pursuing efforts to ease the cost of doing business, which has allowed India to advance in cross-country competitiveness rankings; • Implementing a major public investment program to strengthen the country's infrastructure and make up for the deficiency of private investment; • Undertaking combrhensive reforms of the power sector, especially UDAY scheme. 2. Sector Overview Global energy demand is set to grow by 37% by 2040. In total, some 7 200 gigawatts (GW) of capacity needs to be built to keep pace with increasing electricity demand while also replacing existing power plants due to retire by 2040 (around 40% of the current fleet). Globally, cumulative investment of USD 16.4 trillion is required from year 2014-2035 which comes to an average of USD 740 billion per year. India is the 5th largest producer of electricity in the world. At an electricity-GDP elasticity ratio of 0.8, electricity will continue to remain a key input for India's economic growth. As per CEA, a total of 88 GW is expected to be added during 12th plan. Out of which 85 GW has been added till Mar 16. As per MNRE, RES capacity addition was 6937 MW against target of 4460 MW. GoI has set cumulative achievement target of 175 GW to be achieved by FY 21-22. The power sector of India has grown from 1362 MW in 1947 to 298 GW in 2015-16 and is mainly dominated by coal based generation. The total power generation in the country during FY 1516 was 1107 BU (including Bhutan import) as against a generation target of 1137 BUs, about 97% of the target. The contribution from the private sector was 348 BU which was 107.41% against target of 324 BU. 3. Discussion on Operations of the Company 3.1. Current Capacity Your company is currently operating an aggregate of 10,480 MW generation capacity comprising of 4,620 MW at Mundra, Gujarat, 3,300 MW at Tiroda, Maharashtra 1,320 MW at Kawai, Rajasthan, 1200 MW at Udupi, Karnataka and 40 MW (solar) at Kutch, Gujarat. We were the first to implement and commission the 660 MW supercritical technology units in India and are currently operating the largest supercritical technology capacity in the country Your company is the largest private power producer in the country with thermal power generation capacity of 10440 MW. During the year the Company sold on a consolidated basis around 64.6 Billion units. 3.2. Power Trading Volumes of electricity transacted in short term bilateral market and power exchanges have increased considerably in last 2 years on account of new merchant capacities of around 15,000 MW having commissioned, Overall in FY 15-16, spot power market remained vibrant with over 34 BUs traded in power exchange, 21% over 28 BUs traded in FY 14-15, Average price realization of electricity transacted in power exchange declined by 20% in FY 15-16 (Rs. 2,46/ kWh) vis-à-vis FY 14-15 (Rs. 3,07/kWh), This was mainly on account of increase in merchant capacity which surpassed the increase in overall demand growth as well as increase in transmission corridor congestion, Your company has strategically sold almost 85% of its net capacity under Long Term PPAs, Envisaging the short term market trends, your company has contracted around half of its available merchant capacity under Medium Term PPAs of 3-5 years, This has gone a long way in mitigating the risk of unsold capacity and falling realizations in short term markets, Your company is actively pursuing cross-border opportunities for either supply of power from India or setting up of generation projects in neighboring countries, Your company has been an active participant in the ongoing regulatory dialogue for creating a more robust short term market in India, Recognizing that going ahead, it is imperative for short term markets to play a larger and more important role, your company has been studying the role of short term markets in more vibrant energy markets, We have explored the available technologies and deliberated on the way forward, With this spirit, your company aims to be a key contributor in shaping the future of the short term market in India, 3.3. Coal Production Outlook Coal India is the single largest producer of dry fuel in the world and the government has set a target of doubling its production to 1 billion tonnes by 2020, During the FY 2015-16, CIL had produced 537 MT against target of 550 MT resulting in 8,6% growth over FY 14-15, During the same year, the CIL offtake was 532 MT resulting in 8,8% growth over brvious year, The Government is well aware of coal availability challenges and we are hopeful that it will take positive steps to safeguard projects based on domestic coal supply, Going ahead, implementation of these decisions shall be a key factor affecting project performance, Following are the initiatives undertaken by GoI to relieve the dearth of coal availability: • In fact, in June 2013 after several deliberations, the Cabinet Committee on Economic Affairs, acknowledged the hardships faced by power plants which are forced to meet their requirements through costlier imported coal supplies, due to the shortage of domestic coal supplies, Accordingly, they approved coal supplies to a capacity of 76,501 MW projects having linkages and a capacity of 4,660 MW projects not having linkages, Vide their decision, higher cost of imported coal is to be considered for pass through as decided by appropriate regulatory commissions, This also prompted amendments to the National Coal Distribution Policy (NCDP), • Following cancellation of 204 coal blocks vide Judgment passed by the Hon'ble Subrme Court, the Central Government promulgated THE COAL MINES (SPECIAL PROVISIONS) ACT, 2015 to reallocate these coal blocks for various specified end uses. A total of 67 coal mines have been allocated through auction and allotment out of 204 coal blocks cancelled by the Subrme Court, The Ministry of Coal (MoC) has allocated 37 coal blocks to 17 state utilities through the state dispensation route, The total value generated by the recent auction and allotment of captive coal blocks is estimated at Rs. 4,00,000 crores, • Govt. of India has also formed an Inter-ministerial Committee to formulate the mechanism, technicalities and procedures for implementing auction of linkages, Further, in order to reduce the transportation losses borne by the developers on account of vast distances between the mine and plant, the Govt, has also initiated an exercise on rationalization of linkages whereby the logistic losses will be minimized and improve efficiency in the entire value chain, • States like Jharkhand, Chhattisgarh and Odisha have also helped fast-track clearances for three critical rail lines in untapped coal-rich belts to evacuate a potential 300 million tonnes of coal a year, These three railway projects worth Rs. 7,500 crores are now expected to be complete before their scheduled deadline of December 2017, Your company is continuously monitoring developments on these fronts and taking appropriate steps to align itself with the coal regulatory environment, 3.4. International Coal Prices trend and outlook Entering the fifth year of the bear cycle for thermal coal markets, coal prices corrected another 9-11% YoY through 2015-16, slightly less than the 15-21% correction seen in 2014-15, China continues to grapple with its structural oversupply created before 2012, with a reported dip in both domestic demand and supply last year, Slow macro development has hit both power and industrial demand for coal, whilst inefficient mines got consolidated or shut down in a controlled manner, Thermal imports fell by 63MMT YoY, 33%, to multi-year low of 131MMT in 2015, While demand growth remains much of a question with further downside risks, supply-side reform initiated by the Government may mitigate further price drop, In fact, Q1-2016 domestic production in China was down 3,2% YoY to 811MMT only, annualizing to 108MMT of supply cuts, and is broadly in-line with demand drop of about 2.1% YoY, or 72MMT annualized. Chinese thermal imports may fall further in 2016 as the push toward equilibrium continues, but a base volume of 110-120MMT is likely amid economics, logistics and need for blending. We shall continue to watch out for risks of hydro out-performance and coal rail freight reduction that may squeeze imports. Australian miners are starting to rationalize, as prices start to work against their favour in AUD$ terms in H2-2015 -Overall volumes have been kept stable in 2015 as miners battle take-or-pay (T/P) commitments versus margins, but come 2016 export cuts will likely be more visible with expected 3-5MMT drop. With a lower rollover of Japanese term-contract from $67.8 last FY to current $61.6 and the apbrciation in AUD, we estimate that average selling prices (ASP) for Australian miners have fallen 10-15% since Sep-15, which shall force hard decisions. Longer term, Galilee basin projects will increase exports towards the end of the decade. With a slowdown in both China and India, Indonesian coal prices have also fallen and forced smaller, cash-strapped miners out of the market. The general strength of USD against local Rupiah has posed headwinds to Indonesian miners as the majority of their cost is USD-based. 3.5. APTEL Order and the way forward Despite facing huge financial losses, the Mundra power plant has been supplying power to the States of Gujarat and Haryana fulfilling its PPA commitments in good faith in interest of the consumers. The APTEL, vide its order dated 7th April, 2016, set aside the CERC order dated 21st February, 2014 and decided that the promulgation of Indonesian regulations as also the non-availability / short supply of domestic coal constitute a Force Majeure event under the PPAs, and has directed the CERC to assess the extent of impact of such Force Majeure events on the project, and give relief as expeditiously as possible within a period of three months from 7th April 2016. 4. Growth Plan: Currently, Adani Power has installed capacity of 10,480 MW making it India's largest private power producer. Your company remains committed to expanding towards the goal of achieving a thermal power generation capacity of 20000 MW by 2020 to bridge the power deficit in the country with revised Tariff Policy and GoI's vision of 24*7 Power to all by 2019. Also with consolidation taking place in Indian Power sector, there exists an opportunity for capacity addition through M&A route. This is in line with our vision to be a leader in infrastructure development for nation building. The company plans to expand its thermal business adding additional capacity of 1600MW at Kawai, 1600MW at Jharkhand, 1600MW Udupi and 540 MW at Sarguja in near future. 5. Human Resources The exponential growth your company has achieved during these years is an outcome of your employees consistently living the company's values viz.., Courage -Trust - Commitment. With a view to meet the aspirations of achieving 20,000 Mega Watt's by 2020, your company is committed to creating a sustainable organization that is culturally strong with a strong pipe line of young leaders. In line with this strategy your company has hired more than 300 GET's / ET's & MT's to strengthen the bench strength. Depending on the employee segmentation and role requirement relevant training programs are conducted in the Behavioral, Functional. Managerial and Leadership areas. Your company recognises that for creating a sustainable organization Identifying Hi - Potential employees and training them for future organizational needs plays a very critical role. Training needs of these high potentials are identified by carrying out Assessment/ Development Centres & individual development plans are drawn for them. Development of these identified employees is monitored by the CEO of the organization. In year 2015, your company has been recognized as one of the Top - 100 - Great Places to Work in India, by GPTW, India. And in top 100 out of 700 organizations across 20 industries that had participated. GPTW, India is organized by Great Place to Work in collaboration with Economic Times. A holistic employee wellness approach has been devised to ensure that employees stay healthy. Complete health check-up is organized every year for all the employees. Your company believes in being a responsible corporate citizen and as a part of corporate social responsibility your company has been relentlessly working on educating children of families who are financially not able. This year uniquely, your company took up the cause of Swachha Bharat and have adopted 2 slum societies at Ahmedabad in Gujarat. Employees volunteered actively in this initiative and this has resulted in a success. 6. Financial Performance Consolidated total income (including other income) for the year increased by 29% to Rs. 25,433 crores as compared to Rs. 19,792 crores in the brvious year. Revenue increased mainly on account of Revenue from UPCL acquired during the year and also due to better operational efficiencies of other plants, The consolidated EBIDTA for the year increased by 44% to Rs. 8,755 crores compared to Rs. 6,083 crores in the brvious year. The consolidated net profit during the year stood at Rs. 489 crores as against net loss of Rs. 816 crores during the brvious year, New capacity addition due to UPCL acquisition and improved operational efficiencies resulted in higher net generation of 69,39 Billion units as compared to 54,67 Billion units in FY 2015, Standalone total income for the year surged at Rs. 13,277 crores compared to Rs. 11,037 crores in the brvious year, The standalone EBIDTA pegged at Rs. 3,900 crores as compared to Rs. 2,874 crores in the brvious year, The standalone net profit during the year stood at Rs. 6 crores as against net loss of Rs. 69 crores during the brvious year, Other key developments during the year were: During the year, the Company has completed the acquisition of Udupi Power Corporation Limited ("UPCL') and consequently UPCL has become a wholly owned subsidiary of Adani Power Limited w,e,f, 20th April, 2015, Pursuant to a Composite Scheme of Arrangement under section 391 and 394 of the Companies Act, 1956 which became effective during the year, the Solar Power Undertaking of Adani Enterprises Limited ("AEL"), along with its assets and liabilities got demerged from AEL and transferred into the Company, from an appointed date of 1st April, 2015, 7. Cautionary Note Statements in the Management Discussion and Analysis describing the Company's objectives, projections, estimates, expectations and others may constitute "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results may differ from those exbrssed or implied. Several factors that could significantly impact the Company's operations include economic conditions affecting demand, supply and price conditions in the domestic and overseas markets, changes in the Government regulations, tax laws and other statutes, climatic conditions and such incidental factors over which the Company does not have any direct control. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. |