MANAGEMENT DISCUSSION AND ANALYSIS REPORT Industry Analysis The infrastructure and construction sector had yet another year of subdued growth. Many of the customer segments like Steel, Power etc. continued to put further investments on slow track due to reasons like stressed financials, excess capacity etc. There has been no pick up in credit demand of Corporates from banking sector signaling absence of any major upswing in capacity expansion projects across various sectors. On the realty sector, across various regions, the launches have been lower compared to brvious year. Developers have put emphasis on reducing their inventory of unsold apartments. Customers in residential segment brferred "ready to move" apartments to minimize the risk of delay in handing over. The passing of the Real Estate (Regulation and Development) Act, 2016, during March 16, is expected to significantly influence the operations of this sector and benefit the buyer. The investment climate in 2016-17 is expected to be subdued in view of the financial stress in key sectors like Steel, Power etc. The drought like conditions across many states is also likely to result in shortfall in agricultural production and put brssure on rural demand. This may have a cascading effect on investment sentiment and cause further delay in investment cycles. Review of Business of Coromandel Engineering Company Ltd The Company had participated in tenders worth Rs. 835 Crores across industrial, commercial and residential segments, during the year. There was stiff competition on the pricing front. Your Company could not secure any major order during the year due to lower prices offered by competitors. The decision on placement of orders were also deferred in few cases. During the year, the major constraint faced in execution of the projects was the continued delay in payment by certain clients, due to liquidity issues at their end . This in turn had an adverse impact on the Company's cash flow leading to slower execution of work in certain projects. While the Management took various efforts to obtain the overdue payments from clients, it continued to face delays in settlement. On the residential front, the Company has completed handing over of all the pending property development projects in Chennai and Coimbatore. The Company is on the lookout for taking up fresh projects in property development in mid/brmium range. However due to the existing inventories available in the market, demand and pricing for fresh launches are expected to be under brssure. Further launches will have to await the formation of Real Estate Regulatory Authorities in each State to approve new projects, as per the Real Estate (Regulation and Development) Act, 2016. Risk Management Given below are some of the major risks that impact the Company in the construction business and the broad mitigation measures adopted by the Company. Bidding Risk Quoting with very thin margins to win orders matching the pricing of competition, leading to low margins while executing the project. Mitigation Measures 1. Site visits and thorough study of project scope before quoting for tenders. Structured process and formats to cover all possible activities and related costs while quoting. 2. Fixing minimum margins to be targeted and approval process for additional discounts, based on commercial justification. Risk in Process Activity Linkage of processes from quoting and getting orders, deployment of cost and timelines, mobilisation and work execution to be ensured. In the absence of this linkage, actual cost and timelines may vary adversely. Mitigation Measures 1. Ensuring elaborate detailed study of the site conditions and scope of the project with cross functional teams. 2. Plan for Project execution done elaborately with process linkages. 3. Monitor the monthly progress with the plan laid out. Quality Risk The risk of quality of work not being as per agreed specifications, resulting in short passing of work done, delays in payment and additional rework costs affecting profitability and loss of reputation. Mitigation Measures 1. Evaluating quality standards of Vendor/Service Providers and having a br-qualified panel for placing orders. 2. Rigorous Monitoring of the quality of incoming materials and work execution. 3. Ensuring periodic certification from clients agreeing on the quality of work completed Risk of Timely Completion Not completing the work as per agreed timelines, leading to cost escalation, levy of liquidated damages and loss of further business . Mitigation Measures 1. Timely mobilisation of site team and other requirements, on getting the order. 2. Ensuring timely availability of material/labour/ equipment in a co-ordinated manner. 3. Monitoring the requirement of drawings/front clearances needed from client and ensure these are communicated in advance and delay from client is documented. Cost Escalation Risk Increase in cost of inputs beyond budget leading to margins getting affected. Mitigation Measures 1. Project Cost estimates to be based on specific site conditions, seasonal cost and availability factors and anticipated cost push over tenure of the project . 2. Transparent escalation clausesto be included in the contract. 3. Negotiating better rates from suppliers/service providers, leveraging volumes across sites. Client Concentration Risk Dependence on select industries/ limited repeat clients impacting order inflow in the event of slowdown in sector or customer attrition. Mitigation Measures 1 Work on getting orders from widergeographical locations/ industry segments after proper risk evaluation. 2. Getting technical approval/brqualification by project consultants/architects to widen client base. 3. Execute projects on time meeting customer quality requirements to ensure brference from existing customers for repeat orders. Compliance Risk Contractual and Legal - non compliance of specific contractual obligation and general obligations in practice and statutory non compliance will result in penalty and loss of reputation. Mitigation Measures 1. Monitoring industry specific statutory requirements (like Real Estate (Regulation and Development) Act, 2016) and continuous education and training to employees to ensure compliance. 2. Checklist to capture applicable contractual obligations on a case to case basis from quotation stage and ensure onerous clauses are not accepted. 3. Establishing documentation to safeguard contractual non compliances due to client issues. Human Resources Risk Inability to attract and retain right talent, impacting the performance and growth of the business Mitigation Measures 1. Identifying good performers and ensuring opportunities for career growth through challenging roles and performance related compensation. 2. Attracting talent from industry with up to date technical skills through market related compensation. Liquidity Risk Not generating adequate cash vis-a-vis requirements, resulting in delayed payments affecting operations and increase in borrowings, leading to higher interest cost. Mitigation Measures 1. Ensuring timely certification of the work done by client to ensure quicker invoice turnaround. 2. Monitoring collections from clients based on certified invoices as per contractual terms and put in escalation mechanism for follow-up when delays occur. 3. Ensuring better credit terms from suppliers. Discussion on financial performance with respect to operations Income from operations: During the year, the Company achieved revenue from Operations of Rs. 12221 lakhs as against Rs. 23039 lakhs in the brvious year. The degrowth was mainly in Contracts due to lower order book and delay in execution of work resulting from delay in payment by certain customers. This, in turn, had affected inflow of materials and services. In the case of PDD, lower revenue during the year was due to completion of major sales of the projects under execution in Q4 of brvious year. Summary of Financial Results : Due to lower volumes, the margin at site level was affected. Steps were taken to reduce the various fixed costs like hire charges, manpower and other administrative costs. EBITDA was at Rs. 1225 lakhs. Interest cost came down during the year due to lower level of borrowings. Net Worth The net worth of the Company as at March 31, 2016 was Rs. 4448 lakhs as compared to Rs. 4407 lakhs as at March 31, 2015. Internal control systems and their adequacy Your Company has an Internal Control System commensurate with the size and complexity of Operations. The overall objective of the process of Internal Control is to safeguard the assets of the Company, ensure that Operations are conducted in orderly and efficient manner and high standards of Corporate Governance are met. Your company has established and is maintaining adequate internal controls within the system to ensure completeness and accuracy of financial and other information, which are used by management for supervision and control. The adequacy and effectiveness of internal controls are monitored regularly by the internal auditors and measures for improvement are adopted from time to time. Also as part of the internal control systems, it is being ensured that all applicable laws are complied without any lapse. Periodic updates are being sought from the relevant sources to keep abreast with the latest changes in any applicable law and the compliance thereof. The Audit Committee of the Company meets periodically to review and recommend quarterly, half yearly and annual financial statements of the Company. The Audit Committee reviews the important findings and corrective measures from internal audit reports. The Committee holds discussions with the internal auditors, statutory auditors and the management on the matters relating to internal controls, auditing and financial reporting. The Committee also reviews with the statutory auditors, the scope of their audit and findings. Human Resources The company believes that the human capital is the key contributor for the business growth and competitiveness. This includes not only the employees of the Company, but the skilled labour engaged at project sites, through sub-contracting. During the year, due to lower volume of operations, a thorough review of the available manpower was done. Rationalisation of manpower was done to minimize the cost without affecting the operations. Productivity of employees as well as labour engaged through sub-contractors was improved through close monitoring. The total permanent employee strength of the Company as at the end of the year was at 127 . On behalf of the Board M.M. VENKATACHALAM (DIN: 00152619) Chairman Place: Chennai Date: April 25, 2016 |