MANAGEMENT DISCUSSION & ANALYSIS MACRO ECONOMIC OVERVIEW The Indian economy grew by 7.3% in FY2015 vis-a-vis a 6.9% growth rate clocked in FY2014, crossing the $2.1 trillion mark and becoming the fastest emerging economy. The smart economic pick-up is largely on the back of performance of the manufacturing sector and a surge in public expenditure. During the year, India faced the challenges of policy paralysis, weakening of the Indian rupee and widening of the twin deficits, surging ahead on the path of revival. The higher growth trajectory has enabled India to address key structural concerns, whilst successfully tackling the inflationary brssures. Increase in capital expenditure and lowering trends of inflation, supported by a strong monetary policy, is expected to place India on a surging growth track of 8.2% in FY2016. A pro-investment attitude of the Government has also shaped a strong and structural growth pattern for the Indian economy. The International Monetary Fund (IMF) projects India to outpace China's growth rate in 2016. This is on the back of recent policy initiatives, pick-up in foreign investments, lowering oil prices, strong global ties and a dynamic investment atmosphere. Several debottlenecking initiatives taken by the new Government have imbibed buoyancy into the economy. With inflation hovering inside the Reserve Bank of India's (RBI) target and the current account deficit reined in, which is swiftly recovering business confidence, India has catapulted into a bright spot among the emerging economies. It is recognised as the only major country not to have suffered a growth downgrade by the IMF. Industry Overview Infrastructure is a vital component in encouraging a country's economic growth. Developing infrastructure enhances a country's productivity, thereby making firms more competitive and boosting a region's economy. A country's capacity to absorb and benefit from new technology and industries depends on the availability, quality and efficiency of more basic forms of infrastructure - energy, water and land transportation. Infrastructure development has always been the top agenda for India, considering the current global economic dynamics as well as domestic growth imperatives. However, it has now emerged as one of the single-largest imperative which could seriously compromise the country's economic growth trajectory. In the World Economic Forum's Global Competitiveness Report 2013-14, the country's overall infrastructure ranked 85th out of 148 countries. Recognising the almost limitless infrastructure requirements, the Indian Government has called for US$ 1 Trillion in infrastructure spending for the 12th Five Year Plan running from 2012 to 2017. It has called on the private sector to fund half of these infrastructure investments through Public-Private Partnerships (PPP). Its priorities include 9,500 Kms of new roads, besides other infrastructure. The Government has announced an increase of Rs. 70,000 Crore in infrastructure in 2015-16, with a key focus on railways and roads to help the country realise its true economic potential. India's infrastructure development is set to accelerate, backed by the underlying commitment that extra fiscal allowance will be channelled primarily into infrastructure spend. An example is the increased outlay of Rs. 140 Billion on roads and Rs. 100 Billion on Railways to strengthen the platform for delivery. The Government has put infrastructure creation at the top of its agenda to economic growth. It aims to kick-start the investment cycle that stalled in the face of an economic downturn. It remains committed to revive investment to spur growth by increasing public expenditure in capital formation. Boosting infrastructure investment by 1% of Gross Domestic Product has the capability to add 3.4 Million jobs in India. The Union Budget has proposed the creation of a 'National Investment in Infrastructure Fund' with an initial annual allocation of US$3.25 Billion. The fund will invest in public sector infrastructure finance companies which, in turn, will be able to leverage their higher credit rating to access domestic and international debt markets. Introduction of tax free infrastructure bonds for projects in rail, road and irrigation sectors is also on the anvil. An Expert Committee for brparing draft legislation on single window clearance been formed, with the motive of improving India's ranking in the ease of doing business from current 142 to target of 50 Roads India has the second-largest road network in the world at 4.7 Million Kms. This network transports more than 60% of all goods in the country and 85% of India's total passenger traffic. Road activity has seen a sharp spike in past few years, aided by improved and better connectivity between cities, towns and villages in the country. With automobiles and freight movement rising rapidly, it has necessitated a road network to carry the increased traffic. The Government has set aside 20% of the investment of US$ 1 Trillion reserved for infrastructure during 2012-17 to develop roads. The value of roads and bridges infrastructure in India is projected to grow at a CAGR of 17.4% during this period, from US$ 6.9 Billion in 2009 to US$ 19.2 Billion by 2017. The Cabinet Committee on Economic Affairs (CCEA) has approved six highway projects totalling 712 Kms, with a total investment of Rs. 12,646 crore. These projects, to be awarded under the engineering, procurement and construction (EPC) model, are divided into 10 packages under the national highways development project the states of Uttar Pradesh, Madhya Pradesh, Odisha, Himachal Pradesh and West Bengal. These will be implemented under the Build-Operate-Transfer (BOT) model. Power Power is one of the most critical components of infrastructure affecting economic growth and well-being of nations. The Indian power sector is one of the most diversified in the world. Sources for power generation range from conventional ones such as coal, lignite, natural gas, oil, hydro and nuclear power to other viable non-conventional sources such as wind, solar, and agriculture and domestic waste. The demand for electricity in the country has been growing rapidly and is expected to grow further in the years to come. Around 293 global and domestic companies have committed to generate 266 (GW) of solar, wind, mini-hydel and bio-mass based power in India over the next 5-10 years. The initiative will entail an investment of about US$ 310-350 Billion. The power sector has attracted FDI worth US$ 9,548.82 Million during April 2000 to February 2015. The sector has an investment potential of Rs. 15 trillion (US$ 237.35 Billion) in the next 4-5 years, providing immense opportunities in power generation, distribution, transmission and equipment. The immediate goal of the Indian Government is to produce two trillion units (kilowatt hours) of energy by 2019. This will mean doubling the current production capacity in order to achieve 24x7 electricity for residential, industrial, commercial and agriculture use. The National Solar Mission has been revised with a target of 100,000 MW capacities by 2022. The Government has also sought to restart stalled hydro power projects and increased the wind energy target from 20 GW to 60 GW by 2022. The international Monetary Fund (iMF) projects india to out pace china's growth rate in 2016 on the back of recent policy initiatives, pick-up in foreign investments, lowering oil prices, strong global ties and a dynamic investment atmosphere. real Estate The Indian real estate sector is one of the most globally recognised sectors. It is the second-largest employer in India, after agriculture, and is slated to grow at 30% over the next decade. Real estate comprises four sub sectors - housing, retail, hospitality, and commercial. According to a study by ICRA, the construction industry ranks 3rd among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. The Indian real estate market is expected to touch US$ 180 Billion by 2020. The housing sector alone contributes 5-6% to the country's GDP. Also, during the period FY2008-20, the market size of the sector is expected to increase at a CAGR of 11.2 %. Under the Sardar Patel Urban Housing Mission, 30 Million houses will be built by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership (PPP), interest subsidy and increased flow of resources. Water infrastructure India has more than 16% of the world's population, but only 4% of the world's renewable water resources and 2.4 % of the world's land area. Meeting the water demands under conditions of limited resources is increasingly a big challenge. Business opportunities revolve around four key themes: water demand management, water supply management, water infrastructure up gradation, and water utilities management. Under these four key themes following are the key business potentials. • Metering, instrumentation, equipment supply in the demand side has a business potential of around US$ 32 Billion • Involvement in Public Private Partnership (PPP) model with the state utilities, urban local bodies for water supply and distribution has a huge opportunity of around US$ 1750 Billion • Setting up of water treatment plants, sewage and effluent treatment plant has an opportunity of around US$ 1303 Billion • Involvement in water EPC business and providing solutions in the form of integrated water resource management for utilities-business potential of around US$ 45 Billion • Rs. 2,037 crore will be provided for Integrated Ganga Conservation Mission "NAMAMI GANGE" Future Outlook With a series of on-going measures by the Government and regulators, the infrastructure sector is expected to see increased investments. Infrastructure investment (as measured by Gross Fixed Capital Formation) is expected to surge to 12.1% of GDP by FY2020. Rising demand for infrastructure facilities, given the rapid growth in urbanisation, bulging of the middle class and an increasing working-age population, would engender substantial increase in infrastructure investments during the current decade. Sustained increase in infrastructure is expected to be one of the crucial factors for strong growth during the current decade. Significant investment in physical infrastructure will also lead to employment generation, increased production efficiency, reduction in cost of doing business and improved standard of living. The investment outlook for fiscal 2016, thus, hinges on increased public investment. Roads, power transmission/ distribution and railways sectors come into the picture because spending on these sub-sectors have a significant multiplier effect of creating demand for steel, cement, capital goods and commercial vehicles, spurring investments in the manufacturing space as well. Business Overview About the company Subrme Infrastructure India Limited (SIIL) is a well-diversified and multi-faceted company with a strong base in infrastructure related activities. The Company provides construction services as an EPC contractor, principal contractor and sub-contractor across various states in India and also undertakes road projects on a BOT basis. It has a strong brsence across 13 states in India, with multi-state execution capabilities in 6 EPC segments: Roads, Bridges, Buildings, Railways, Power and Water Infrastructure. The overall operational capabilities and competence in executing large scale infrastructure projects have enabled the Company to emerge as a leading infrastructure player. It has executed and delivered several projects for the Government and its related agencies, allowing the Company to expand its pan India brsence and establish a strong brand name in the industry. SSIL has built a varied portfolio in key infrastructure projects by fully integrating its operations. It is well-integrated in terms of raw material availability through ownership of quarries, crusher plants, and ready mix concrete (RMC) and wet mix plants. The Company has 6 EPC projects under its umbrella. It has a current portfolio of 11 BOT projects, of which 4 are already operational. The EPC component of its BOT projects are executed by the parent company (SIIL), thereby reducing the execution risk COMPETITIVE STRENGTHS CURRENT ORDER BOOK The Company's current order book stands at Rs. 50,324 Million, sbrad widely across 6 verticals and 13 states. The Company serves a strong clientele which is a mix of Government and private projects. With roads and bridges contributing more than 48.9% to the total order book, the Company is increasingly focusing on expanding its base specifically in North and West of India. Project execution capabilities The Company has developed a strong cluster strategy to control and customise its construction process. This is enabled by making heavy investments in it's own construction equipment and machineries. In addition to this, to deliver higher margins, the Company has successfully backward integrated to gain a better control over its projects and their execution. This brvents it from having to depend on external sources for equipment supplies. Backward Integration The Company has 6 quarries and several crusher plants, RMC plants and asphalt plants. The availability of the ready-mix transit mixers enables it to service multiple locations from a single nodal point. All the quarry sites are within a radius of 100-150 Kms from the project sites. Close vicinity to quarries provides an assured supply of aggregates, which generally constitutes 25-30% of the total raw material costs. This ensures smooth and uninterrupted supply of raw materials enabling timely execution of projects and higher margins. The move improves efficiency and logistics advantage, resulting into significant cost savings. It addresses the requirements and technical challenges related to the projects by customising the raw material. This helps in reducing the effect of increasing prices of the raw materials, benefiting the overall margins. The business model offers clear margin advantage of ~3-4% and results in giving the Company a clear competitive edge. Cluster-Based Strategy The project execution and bidding at SIIL is handled through a cluster-led approach, which makes captive use of the region where it wins a project. The methodology basically focusses on containing the prime cost by regulating the direct expenses for transportation of raw material. After it secures a quarry, the Company aims at bidding aggressively for more projects in the same cluster. This enables it to avail sizeable cost advantages in acquiring new projects, leading to saving of tariffs and taxes and building a healthy order book. completion of BOT projects The successful completions of a significant number of the Company's BOT projects are expected to deliver strong annuity income. It is expected to increase incremental revenues and add to its bottom line. Barring the Jaipur Ring Road Project, all the other under-construction BOT projects are projected to attain completion, taking the total number to 10 operational assets. The estimated average daily toll will range between Rs. 10 to 13.0 Million per day, once all the 10 BOT projects get operational. This will further rise to Rs. 17.0 Million per day as the 11th BOT asset also gets in the operational mode. contribution from roads & Bridges to the total Order Book Diversification Geographic Diversification The Company has a geographically diversified and a sustainable model. Its brsence in different sectors and regions enables it to mitigate risks related to its projects, supported by its corporate headquarters in Mumbai and regional offices in Gurgaon and Kolkata. SIIL is also exploring opportunities in key overseas markets, such as the Middle East. This enables the Company to benefit from key synergies of operating a sbrad out portfolio of diverse operating businesses Vertical Diversification The Company is well diversified through 6 verticals in the EPC segment namely: Roads, Power, Building, Water Infrastructure, Bridges and Railways. This makes it best placed for long-term sustainable growth with infrastructure development taking place across states. Further, the Company is focusing on acquisition of more EPC orders, particularly in the water and power segments. This enables the Company to benefit from its brsence in diverse verticals, and being hedged again a slowdown in any particular sector it has brsence in. Our esteemed clientele A diversified client base across the Government and private sector has helped establish a brand name over a short period of a decade. It caters to clientele such as NHAI, MMRDA, CPWD, PWD, BMC, Indian Railways, Ramprastha Developers, and NBCC, among others. These strategies are supporting the Company in expanding its operations - geographically and vertically - and reinforcing its leadership position in the industry. Reduced need for Capital Expenditure With the Company having incurred costs on capital expenditure in the past, it is not expected to be in need of incurring any major capex over the next 2-3 years. The entire raw material capex of the Company is already in place, with a diversified brsence across 13 states. The working capital is likely to improve as minimal mobilization advances will be utilised for the project work to initiate Financial restructuring During the year, the Company carried out significant debt restructuring, enabling it to avail the key benefits through an enhanced working capital limits and interest cost financing. The key features of the restructuring plan are as follows: 2-Year Moratorium on Debt Repayment on existing Loan of T 4.2 Billion: The payback period for this loan is 8 years (resulting in door-to-door tenor of 10 years). Similarly, a portion of existing working capital borrowings has been converted to a working capital demand loan with a door-to-door tenor of 7 years, including a 2-year moratorium on debt repayment. Reduction in Interest Cost: The earlier interest cost of 12.5-13% has been lowered to 11% during the debt moratorium and pay-back period. • Enhancement of Working Capital Limits: Fresh working capital lines of T 750 Million for fund-based and T 1.75 Billion for non-fund based facilities has been sanctioned. • Ring Fencing of the EPC Business: Future cash flows from the EPC business will not be blocked in a particular segment of the business and will be circulated in the operations of business. THREATS & CONCERNS HIGH INTEREST RATES The Reserve Bank of India (RBI) has maintained a key focus on keeping inflation rates low before it goes for any rate cut. A slowing down of economy and increasing cost of credit has been adversely affecting the Company's margins and profitability. The construction sector has faced a very challenging environment over the past 2-3 years due to the high interest rate environment. Government Policies A major portion of SIIL's Order Book consists of projects awarded by the Government agencies. Any change in the Government's policies may impact the Company's future plans and resultant performance. Slowdown in regulatory approvals & Bank Lending One of the prime reasons for significant delay in project execution is delay in getting regulatory clearances majorly witnessed in the forest and environmental sectors. All of SIIL's BOT projects have received the requisite approvals and have financial closures well in place. Of the 11 BOT projects, 4 are already operational; the remaining 7 projects are in advanced stages. investment Slowdown As a major portion of revenue comes from projects by Government Agencies, a significant slowdown in government orders across verticals may impact the Company's revenue visibility. However, the Company believes the new Government's focus on infrastructure development is slowly reviving, from providing solutions on the ground to strong de-bottlenecking. A strong order book position, backward integrated model, cluster-led strategy and vast industry experience ensure a competitive edge for the Company. execution risks The Company has multiple projects in the BOT space which face inherent risks in their execution. Nevertheless to ensure that risks over the projects is diversified the EPC portion of these projects is executed by SIIL. traffic risks All the project routes of SIIL are in key commercial corridors, attracting huge industrial traffic with no alternate route available. The Company always focuses on executing its projects in high density and high growth areas with a decent visibility of traffic. Even then fluctuations in the level of traffic can affect the collection of toll charges over a period of time and can be significantly risky for the Company. Fresh Working capital sanctioned for fund base facilities external Macro conditions The infrastructure industry, features in the like any other sector, is exposed and vulnerable to risks and to any adverse changes in the overall macro-economic situation. In case of prolonged recessionary conditions leading to a slowdown in economic growth, the Company and its profitability may also be affected. Financial Overview We maintained our EBIDTA margins on a sustainable basis. Our margins expanded to 16.5% during the year, compared to 14.3% in FY2014. During the year, we recovered claims of T 210.5 Million. However, our Profit After Tax declined by 80.8% from T 900.3 Million in FY2014 to T 172.50 Million in FY2015, mainly due to higher finance and interest cost. Our cash flow position improved significantly as we gained a 2-year moratorium post-restructuring on principal and interest repayment. During FY2015, we allotted 2.0 million equity shares on conversion of warrants issued to promoter entities. Another 3.6 Million shares were issued at T 277.39 a share to Qualified Institutional Buyers. risk management The Company identifies that evaluation and effective management of their risks is crucial for keeping its performance steady and delivering adequate value to its shareholders. The Company keeps assessing risks at regular intervals and takes measures to mitigate the same. Internal Controls The Company has efficient structure of internal control and systems to mitigate the risks associated with the sector it falls under. The policies, procedures and systems are well laid out and regularly monitored by the top management ensuring all digressions or deviation is always within control. The Company has a strong information and communications systems which supports capture and exchange of information enabling the employees to efficiently carry out their responsibilities. The Control Policies and procedures ensure that the Company directives are duly carried out. And the sound system for financial and management reporting enables assessment of internal quality performance over the period of time. The Company has introduced automation in its working styles. Use of QA / QC methods, Project Management & Control Tools, Safety Manuals, is the hallmark of company's operations. As an organisation, it is always on the move to improve its productivity further by resorting to new management of tools as they become available. Human resources The Company believes that satisfied, highly-motivated and loyal employees are the base of any competitive and growing organisation. Therefore, it strives to build a highly skilled and qualified workforce, supported by a safe and healthy work atmosphere. The Company has built a work culture based on sincerity, hard work and a pursuit for perfection. It holds regular training sessions to upgrade the skills and the knowledge base of its employees. Moreover, the company ensures that it recognises and rewards exceptional performance by its employees time and again. and other forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause assumptions, actual future results and events to differ materially from those exbrssed in the forward-looking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirely by the assumptions, qualifications and risk factors referred to in the management's discussion and analysis of the Subrme Infrastructure India Limited Annual Report, 2014-15. cautionary Statement This document contains statements about expected future events, financial and operating results of Subrme Infrastructure India Limited, which are forward-looking. By their nature, forward looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the assumptions, brdictions |