Management Discussion & Analysis Along with brdictions of the future based on the foundation of existing scenario, the company brsents its annual report of SIPL (Sadbhav Infrastructure Project Limited) for the year 2014-15. It is inclusive of consideration of the derivatives such as economic standing, political situation and all the other global developments. 1. ECONOMIC A report published by an esteemed organization such as United Nations, states that a number of economies have encountered various country-specific challenges, including structural imbalances, infrastructural bottlenecks, increased financial risks and ineffective macroeconomic management, as well as geopolitical and political tensions. United States Economy showed promising results in the second quarter as opposed to its slowdown in the first quarter. Therefore, developing countries and economies in transition have seen a more divergent growth. The improvement in India's economic fundamentals has accelerated in the year 2015 with the combined impact of strong government reforms, RBI's inflation focus supported by benign global commodity prices. The steps taken by the government in recent times have shown positive results as India's gross domestic product (GDP) at factor cost, registering a growth rate of 7.3%. A financial survey conducted by World Bank states that Indian economy is becoming the world's fastest growing major economy from the fourth quarter of 2014, replacing China's. Its growth is expected to continue at 7-7.5% despite the global downturn. The long-term growth prospective of the Indian economy is moderately positive due to its young population, corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy. 2. INDIAN ROAD SECTOR Currently, India has the world's second-largest road network of ~ 4.7 m km. National highways constitutes only 2% of the total network however they carry ~ 40% of the traffic. Out of these national highways, only 24% are 4 lane or more which provides a huge opportunity for growth to the Company. Your company will continue to focus on roads and highways sector and moreover on BOT segment. Over the past few years, the Indian road sector was faced with numerous challenges such as delays in land acquisitions, forest/environmental clearances, delays in financial closure, reduction in traffic growth, etc. However, with the change in the Central Government, it has provided an array of hope and we have already witnessed several positive reforms in the road sector. FY2016 Union Budget increased the allocation by 3x from Rs. 308 bn in FY2015 to Rs. 856 bn in FY2016. There has been a significant pick-up in project awards and execution. Some of the important decisions taken by the Central Government/NHAI/RBI are - • De-linking of forest and environmental clearances • 100% exit clause for the developers after 2 years of project completion • Deferment of brmium for affected projects • Classification of road projects as "secured" by Lenders • One time fund infusion for languishing projects • Extension of concession period for languishing projects for reasons attributable to NHAI • Exclusion of land acquisition and other allied costs from total project costs so as to empower MORTH • Amendment in the MCA so as to improve cashflows and project delivery • RBI's 5/25 funding mechanism • Fast track dispute resolution A fewer restrictions on foreign direct investment (FDI) for infrastructure projects has increased the pace of infrastructural developments. Provision of Tax holidays for developers of most types of infrastructure projects, some of which are of limited duration is also brsent. Opening up of the infrastructure sector through PPPs is an added advantage to the investors. 3. OVERVIEW SIPL, a subsidiary of Sadbhav Engineering Ltd., was incorporated in 2007 and is now one of the leading roads and highways BOT companies in India that specialises in the development, operation and maintenance of highways, roads and related projects. SIPL owns a project portfolio consisting of ten BOT projects of which six projects are fully operational, one is partially operational and the remaining three projects are in various stages of completion. As on 31.03.15, Average residual life of portfolio stands at 18 years and 9 month which is one of the highest in the industry and thereby ensuring revenue visibility over a long period of time. These projects are implemented and held through special purpose vehicles, including joint venture entities. We, SIPL, are br-qualified on an annual basis to bid either directly or through joint ventures for DBFOT projects, subject to certain eligibility criteria, of project values up to Rs. 26,500.00 million by the NHAI up to December 31, 2015. We are also involved in the development, operation and maintenance of national and state highways and roads in several states in India including Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana, Madhya Pradesh and Telangana and border check posts in the state of Maharashtra. SEL, which also functions as a corporate promoter for the company, has an established track record of executing projects with over 25 years of experience in construction activities in the transport, mining and irrigation sectors since its incorporation in 1988. We apply the focus on assets primarily in states where the company currently has operations. primarily because GDP of these states over last 20 years is far higher than average India's GDP. We believe these regions brsent low risks for toll collection. Your company enjoys the benefit of being brsent in the entire value chain of BOT roads projects thereby reducing reliance on third parties and also increasing the profitability by retaining the margins. Traffic and EPC consultants are appointed to carry out detailed study of the traffic growth and the road structure and In-house financial and traffic estimates of the assets are arrived at before helping in submitting rational bids for the asset. Lenders are approached for achievement of Financial Closure (FC) of the project and then EPC contractors are finalized before the appointed date and initial work on the project is carried out. To ensure diligent monitoring, and other than the engineers appointed by NHAI and Lenders, SIPL also appoints a marquee engineer who gives monthly tracking of the work being carried out on the project. The company had a total of 1,338 employees who do not belong to a union. Therefore, the experience of any kind of work stoppage, strike, demonstration or other labour disturbances from them was not faced by us. Your company has successfully completed the Initial Public Offering in September, 2015 by raising Rs. 4916 mn out of which Rs. 4250 mn is by way of primary issuance of shares. The operational projects cover approximately 1,531.16 lane kms and the projects under development cover approximately 1,061.48 lane kms. In addition to that, as on date, our subsidiary MBCPNL completed 14 check posts and is developing 10 more check posts for the same aforementioned project. In addition to the above projects, our Company has initiated the process to acquire from SEL, SIPL's corporate promoter, 74.00% of the outstanding equity interest in MBHPL and 27.18% of the outstanding equity interest in DPTL. This restructuring is in accordance with our overall growth strategy to consolidate all BOT road projects to be developed by the company, in which SEL has shareholding. The company has also agreed to acquire 60.00% of the outstanding equity interest in DPTL from HCC Concessions and HCC. The project portfolio will hence increase to 12 BOT projects, with seven fully operational projects, one partially operational border check posts project and four projects in various stages of development. During 2014-15, company has completed acquisition of stakes from JV partner in 2 SPVs namely ARRIL and HYTPL. 4. OPPORTUNITIES & STRENGTHS We therefore believe that the industrial activities in these regions will continue to grow substantially which will lead to an increase in the traffic, and our business will be able to benefit from it. We also believe that the strategic locations of our projects in high economic growth areas strengthen the stability of our revenue and our ability to close financing arrangements for the projects. Sizeable and diverse portfolio of projects in several states in India has led to effective toll collection and toll management systems. A timely execution and an integrated management team for the project has added to our strengths. Out of total NHDP program of 46902 kms, length of 13878 kms is yet to be awarded as on 30.09.15. Your company looks forward to capture the immense growth opportunity in the Indian road sector. Also, your company is poised to participate in the innovative structures which are current evolving in the country such as Hybrid Annuity model, infrastructure investment trust, etc. 6. RISKS & CHALLENGES The management of company has identified the risk in two categories i.e. (1) Internal and Business Risk and (2) External Risk. The successful completion of projects depends on our joint venture partners & EPC contractors and is therefore, sometimes, contingent on their performance. These projects are high valued contracts. Some of these entail a penalty for delay in completion of the project on time. These may adversely affect our profitability. Also, cost overrun due to problems of land acquisitions, removal of encroachment and complying with environmental standard and our insurance coverage may not adequately protect us against possible risk of loss. Delay due to sub-contactor's performance and shortage in supply of raw materials can postpone projects and eventually result in delay of the payment. Non-maintenance / break-down, mishandling of machines and equipment of pose a major risk towards non execution of projects and liability towards the organization. A temporary setback is faced by the organization if any key managerial personnel were to leave. Any negligence towards health and safety of workforce and employees can affect our performance. An additional financial burden on the company, due to repayment and interest on external commercial borrowings, which is required to be made in fluctuating foreign currency, also contributes towards internal risks faced by the organization. External Risks beyond the control of Management are identified in various ways. Any change in the government policy, political situation, regulatory environment and civil disturbances will have adverse effect on company's business. Natural risks like adverse weather condition, fire, floods, earthquakes etc. However these risks are passed on by taking the Insurance Coverage from Insurance Company. Changes in the tax structure of sales tax, VAT, entry tax, RTO tax etc. also play a major role. An increase or decrease or withdrawal of tax benefits and other incentives by the Government will have an impact on our net income. An increased competition from large national and international organizations is also an area of concern. Deviation from estimated traffic volume may affect future earnings in case of toll based BOT projects. 7. MINIMIZING RISK A risk management exercise not only identifies risks, but also reduces risks to an acceptable level. Your Company has risk management policies to manage and overcome these risks to ensure smooth functioning of the Company's business operations which are reviewed periodically by the Directors of the Company. This provides a window for quick decisions. SIPL, a subsidiary of Sadbhav Engineering Ltd., manoeuvres to supply materials effectively and keep the cost escalation risk to a minimum. Before entering into any joint venture agreement we thoroughly analyse the prospective venture partners' past performances and credentials. We plan elaborately to execute all our projects before the scheduled time. We have a proven track record of completing work within the stipulated time. An unhindered flow for project execution was led by long term arrangement with suppliers for requisite raw materials for the tenure of the project. We have a full-fledged team of technical experts at our workshop, who are responsible for the repairs and maintenance of the equipment. Therefore, work without stoppages or no significant labour disruptions during its operational history was paved way for by our extensive employee welfare scheme which looks after their health and safety. We have taken contractor's all risk insurance policy in respect of projects and workmen's compensation polices to protect against losses caused to workmen through accident. Most of the critical work is done by us and only very minimal portion of the work is sub-contracted. We always insist to have a performance guarantee and quality assurance from them. As a company, our ability to foresee and manage business risks plays a crucial role in achieving positive results even from the downturn of economic situations. 8. SEGMENT WISE PERFORMANCE As on March 31, 2015 the Company has only one reportable business segment, that of infrastructure development. A segment wise performance on consolidated basis is given in the note no. 2.37 to the consolidated financial statements. 9. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACIES SIPL with Sadbhav Engineering Ltd. as its promoter has internal controls for its business processes across departments to ensure efficiency of operations, compliance with internal policies and applicable laws and regulations. Also the protection of resources, assets and accurate reporting of financial transactions as criteria, is fulfilled. This system of internal control is supplemented by extensive internal audits, regular reviews by management and standard policies and guidelines to ensure the reliability of financial and all other records. The ERP system of the company is already operative. It connects all sites with the corporate office, and by providing real time information to the top brass of the company. With this comes better management and control of all the processes. 10. FINANCIAL OVERVIEW We generate revenues primarily from toll collection, user fee and annuity receipts. The company also provides operation, maintenance, advisory and project management services for our projects. For the financial year ended March 31, 2015, our consolidated revenue from operations and net loss amounted to Rs. 5,002.99 million and Rs. 3,433.02 million, respectively. Company's total revenue has increased by 33.56% from Rs. 3959.88 mn in FY2013-14 to Rs. 5288.87 mn in FY2014-15. This increase is primarily due to full year of tolling for RPTPL (CoD was achieved in January-2014) and start of toll collection for additional check posts in MBCPNL. Cash EBITDA for the Company has increased by 47.24% from Rs. 2519.37 in FY2013-14 to Rs. 3709.62 mn in FY2014-15. 11. HUMAN RESOURCE DEVELOPMENT A major part of the company strategy is satiated towards our employees whose relentless support and devotion took our company to great heights. We realize that they are responsible for our existence as well as our goodwill. Therefore, as a responsibility towards them, we look after their social amenities like Medical, PF, Gratuity, LTA etc. The Human Resource team strives to attract the best possible talent and groom it to fulfill vision and mission of the Company. SIPL, a subsidiary of Sadbhav Engineering Ltd. recognizes the potential of each employee and provides them the right opportunity to grow. Regular in-house and external training which includes knowledge and skill development are provided to enhance their progress. We strive to maintain a professional, value-driven work environment where every employee feels satisfied and apbrciated. Our positive approach towards competency development allows us to attract, retain and build the best team. 12. CAUTIONARY STATEMENT Statements in the Management Discussion and Analysis describing the Company's objectives, projections and approximate estimate may be "forward looking statements" set in the framework meaning of applicable securities laws and regulations. Actual results may differ materially from those exbrssed or implied. Important factors that could influence the Company's operations include economic developments within the country, demand and supply conditions of the industry, input prices, changes in Government regulations, tax laws and other factors such as litigation and industrial relations. |