MANAGEMENT DISCUSSION AND ANALYSIS INDIAN ECONOMIC SCENARIO The decisive outcome of the national elections beyond sentiment and boosted expectations of major economic reforms in India. The thrust on the reform process is clearly visible, with the government simplifying procedures for doing business in the country, putting in place a transparent taxation system, relaxing FDI in a few sectors, allowing auction of coal mines to the private sector, and closing allocations in the telecom sector at a fast pace. Resolution of structural bottlenecks and faster clearances for projects in infrastructure and industry are also welcome changes expected to facilitate investment. However, despite the initiation of these positive reforms, the country's economic growth did not witness significant acceleration during FY 2014-15. This could be attributed to the inherent time lag involved for business confidence and reforms to translate into higher levels of capital investment and private consumption expenditure. As per the new data rebased to FY 2011-12, released by the Central Statistics Office (CSO), GDP growth was only marginally higher at 7.3% in FY 2014-15 compared to 6.9% in FY 2013-14. Though economic growth has been moderate, there are plenty of positives from the year under review. Aided by the oil price decline, current account deficit and inflation, both impediments to higher growth, have declined considerably. Further, the gradual reforms being undertaken by the government have enhanced business and investor confidence, encouraging capital inflows. Going forward, it is widely expected that the Indian economy would grow faster if the incumbent government carries on with its growth agenda and reforms. Based on the new methodology, as per the CSO estimates, real GDP growth rate is expected to be in the region of 8-8.5% in FY 2015-16. The International Monetary Fund (IMF) brdicts that India will emerge as the fastest growing major economy in the world, with growth expected to rise to 7.5% in FY 2015-16. INDIAN CONSTRUCTION INDUSTRY Overview The construction industry, which is a part of the services sector, is the largest employer in the country after agriculture. It accounts for the employment of more than 30 million people, including a large number of unskilled or semi-skilled workers, as well as highly skilled workers and extremely sophisticated high-end engineering experts. (Source: Business Standard) The industry has backward and forward linkages with more than 250 other sectors, including important ones such as hospitals, schools, townships, offices, houses and other buildings;urban infrastructure (including water supply sewerage, drainage);highways, roads, ports, railways, airports; power systems; irrigation and agriculture systems; telecommunications etc. It contributes to about 8-10% of the country's GDP. It contributes to a large share of raw material off-take, including cement, concrete and steel, among many others. In addition to material, it is also responsible for large off-takes for specialised equipment such as excavators, backhoe loaders and tunnelling machines. Infrastructure and real estate contribute to about half of the revenues of the construction industry each, thus constituting an integral part of the country's socioeconomic, infrastructure and industrial development. (Source: Business Standard) Government impetus towards the sector The government's crucial support,through a reform-focussed agenda, is aimed at re-invigorating investment flows and reviving consumption in the real estate and construction sector. Affordable housing, smart cities and infrastructure development are some important steps in that direction. Accordingly, the Union Budget 2015-16 was aimed at providing the necessary roadmaps, increased budgetary allocations and administrative measures to expedite the growth of infrastructure, which in turn is likely to provide the much needed boost infrastructure development in the country. other notable measures (outside the purview of the union Budget): • The RBI has undertaken several steps to ease funding availability for infrastructure projects, which include incentives to banks for long-term bonds raised for lending to the sector; flexibility in refinancing norms for infrastructure projects etc. • The Government further aims to create a channel for faster execution of project through steadfast approvals and facilitation of clearance of receivables to the private sector via fast-tracked bureaucratic decision-making etc. business review Ahluwalia Contracts India Limited (ACIL) is one of India's leading, integrated construction companies, EPC, delivering quality icons of excellence across the construction value chain, with strong emphasis on EPC projects. With quality as its hallmark, ACIL is the first Building Construction Company in India to have IMS of ISO 9001:2008 (QMS), ISO 14001:2004 (EMS) & 1800:2007 (OHSAS). The Company's high-end project portfolio encompasses projects across residential and commercial complexes, hotels, institutional buildings, hospitals and medical colleges, corporate offices, IT parks and industrial complexes, metro rail, power plants, automated car parking lots, etc. ACIL's five decades of experience in offering turnkey solutions in engineering and designing has positioned it among the country's foremost construction companies, with a marquee client list spanning public and private sectors. With an increasing proportion of public sector projects contributing to its growth, the Company has a robust Order Book pipeline of Rs. 3,370 Crores, as on 31st March 2015. Delivering consistently on its promises and leveraging its strengths, including time-bound delivery of quality projects, ACIL continues to make the most of the burgeoning opportunities in the country. Steered by a new positivity in its business model as a result of fresh infusion of capital, ACIL is strategically focusing on profitable and responsible growth. company performance After a spectacular turnaround witnessed last year, ACIL continued registering a steady growth during the current year. The Company's Income from Operations for the year stood at Rs.10,599 Million as against Rs.9,603 Million recorded in the brvious year, recording a growth of 10.37%. The Company's EBITDA almost doubled to Rs.1,265 Million in FY 2014-15, compared to Rs.654 Million recorded in FY 201314 -constituting a growth of 93.43% - recording a profitability margin of 11.94%. The PAT for FY 2014-15 almost grew threefold to Rs.641 Million compared to Rs.217 Million recorded in the brvious year - recording a profitability margin of 6.05%. SAFETY, HEALTH AND ENVIRONMENTAL PERFORMANCE QUALITY, ENVIRONMENT, HEALTH & SAFETY POLICY The Health, Safety and Environment Committee is primarily responsible to monitor and ensure that the highest standards of environmental, health and safety norms are maintained, and the Company's operations are in compliance with applicable laws across all locations. The Committee fulfils its responsibilities by reviewing the management of health, safety, environmental and social impacts of the Company's various projects and operations. At ACIL, management of safety, health and environment has two general objectives: One, brvent occurrence of incidents and accidents that may result from abnormal operating conditions and two, reduction of adverse effects that result from normal operating conditions. Terms of Reference of the Safety Committee, inter alia, includes the following: • Monitoring and ensuring the highest standards of environmental, health and safety norms. • Ensuring compliance with applicable pollution and environmental laws at the Company's works / locations by putting in place effective systems in this regard and reviewing the same periodically. • Reviewing, as the Committee deems appropriate, the Company's health, safety and environment related policy and making recommendations as necessary. • Reviewing the Company's performance on health, safety and environment related matters and suggesting improvements as the Committee may deem necessary • Reviewing procedures and controls being followed at the Company's various projects for compliance with relevant statutory provisions. • Reviewing regularly and making recommendations about changes to the charter of the Safety Committee Health, Safety and Environment Policy ACIL's commitment being a responsible corporate citizen demands that it has a specific policy to ensure that it takes definite steps to protect the environment, as this effort ranks high among our corporate goals. The Company's HSE Policy is testimony to this effort, which ensures that it constantly shares best practices and provides a safe and healthy workplace for its employees, contractors and visitors. The policy is made available to all the employees worldwide on Sparsh (ACIL's intranet), and through posters and instructions on digital and physical display areas across the Company's campuses. ACIL is ISO 9001:2008, ISO 14001:2004 & OHSAS 18001:2007 certified Company and it has documented its objectives and targets at the corporate and development centre levels, which are monitored and tracked at regular intervals. The Company has also implemented operational controls for impact management, based on severity. Safety philosophy 1. A positive belief that all personal injuries can be brvented. 2. An acceptance on the part of management and supervisors of their responsibilities to brvent personal injury. 3. A conviction that it is reasonably possible to safe guard all construction and operating exposures which may result in accidents. 4. A recognition that it is necessary to train to all employees to work safely and understand that it is to their advantage as well as the company's to work safely and they are expected to co-operate in doing so. 5. An acceptance of the fact that it is good business from the point of both efficiency and economy to brvent accidents. objectives • Prevent accidents/harmful effects on health • Analyse working conditions at sites • Constant improvement Targets • Achieve zero tolerance for injuries in execution • Comply with legislation/codes in respect of safety • Provide realistic training at all levels Methodology: • Report & record all incidents (major/minor) • Constant review /up gradation of safety plans / techniques • Appoint nodal officers to address safety/health concerns • Identify hazards in construction and take brventive measures ACIL has a detailed Safety manual & standard operating procedure providing safe working procedure of construction activities. Health Construction workers are frequently stressed about work-related injuries and pain and often fail to seek help, putting themselves at risk for more injuries and mental health issues, including debrssion, anxiety, and even suicide, according to a new study by researchers at Harvard School of Public Health (HSPH). At ACIL, health and medical services are provided to all employees, including on-ground workers. Regular feedback mechanisms ensure that they are aware of their health status. ACIL also provides primary medical care services and specialist expertise in the area of monitoring of work environment. In case of an unforeseen event or a mishap, the Company liaises with the concerned hospital authorities at a nearby hospital to take care of the injured. Hospitals have been identified in the vicinity and the injured personnel requiring medical treatment are referred to the nearest hospital. Employee care like testing of drinking water, garbage disposal, provide hygienic toilets, regular pest control and all other factors which may affect the health of the employees or workers, are undertaken. RISKS AND CONCERNS The Company recognises the importance of identifying and actively managing the full range of business risks and putting in place response mechanisms that mitigate these risks, thereby minimising their impact on business. The Company has a well-defined Enterprise Risk Management (ERM) framework in place. Through its disciplined and holistic approach, the ERM function augments risk response decisions and reduces surprises while benefiting from any possible business opportunity. Regular measures are taken to effectively bring down threats to manageable levels, thus instilling renewed confidence in reaching the desired goals, taking informed decisions about exploiting opportunities, etc. To ensure that the risk management framework remains robust, the system is periodically upgraded to meet business needs. risks and mitigation strategies Credit Risk Nature of risk • The payment collection process may extend over a period of time, as a matter of business practice. • Clients/suppliers budgeting constraints can impact their ability to make required payments. • Creditworthiness of clients may deteriorate and the Company can be adversely affected by bankruptcies or other business failures of its Clients. • Mitigation Strategy ACIL's credit terms are standard. • Timely and rigorous process in following up with Clients for payments as per schedule. • ACIL has suitably streamlined the process to develop a focused and aggressive receivables' management system to ensure timely collections. Contractual Risk Nature of Risk • Pertains to ACIL's obligation to provide services with full adherence to contracted terms of quality, time deadlines, output per hour, protection of confidential information, etc. Mitigation Strategy • ACIL follows a meticulous process to evaluate the legal risks involved in a contract and ascertain its legal responsibilities under the applicable law of the contract. • A strategic priority is to restrict liabilities to the maximum extent possible. • The Company has 'no consequential losses' clauses to protect itself. ACIL ensures that the risks are protected through various insurances like workers compensation, Directors' and Officers' Liability insurances(ESIC) etc. Execution Risk Nature of Risk • Significant numbers of ACIL's clients are Large Industrial House, Corporates, Institutions and Government Authorities. • Failing to maintain discipline and meet client expectations on project delivery could result in damage to reputation, loss of repeat business, which could potentially have an impact on revenues and profitability. Mitigation Strategy • Continual investments in processes, people, training, information systems and quality standards mitigate the risk to successful project delivery. • ACIL has adopted quality models and practices, such as ISO, to ensure identification of risks and their mitigation at various levels in the planning and execution process. • Senior management personnel, project managers and process leaders are entrusted with the responsibility to enhance execution competencies. • Planned intervention and escalation systems are further deployed to minimise risks. Directors and Officers Liability Risks Nature of Risk • The Directors and Officers of ACIL are required to take material decisions in the best interest of the Company. • Such decisions might result in errors and omission, and ACIL might be sued by other counterparts. Risk Mitigation Strategy • Directors and officers engage, consult and take opinion from reputed legal professionals, experts to mitigate the impact of this risk. • ACIL always tries to limit its contractual liability for damages arising from negligent acts, errors, mistakes or omissions by directors and officers in rendering services. • Appropriate insurance cover. However, any occurrence not fully covered by insurance or insurance not available on reasonable terms could have an adverse impact on business. • The successful assertion of one or more large claims against ACIL could adversely affect the result of its operations and financial condition. Competition Risk Nature of Risk Increasing competition from domestic and international construction companies may affect market share and profitability. Risk Mitigation Strategy • Through deep domain knowledge, technology prowess and branding, the Company has created strong differentiators in terms of quality and product offerings. • ACIL has adequate strong clients base, consisting of large and mid-sized corporations. Political Risk Nature of Risk • Political situations or uncertainties regarding government policies can interrupt or disturb the settled commercial terms of a project, impacting operations and revenue. Risk Mitigation Strategy • With greater thrust on infrastructure by successive governments, this risk has been alleviated to a considerable extent. • To ensure minimal intrusion from the political machinery, the Company ensures that its work speaks for itself. • The residual risks are managed by seeing opportunities to control costs to hedge from adverse policy changes. Assets and Inventory Risk Nature of Risk • Risks of fire, theft, accident, etc. may impact ACIL's operations and profitability. Risk Mitigation Strategy • The Company undertakes requisite steps to provide security to its assets and inventory by taking appropriate contractors all risk policy including Workmen Compensation Insurance Policy/Fidelity Insurance Policy, etc. to avoid or mitigate such a risk. information technology The IT function at ACIL endeavours to implement emerging IT tools that facilitate seamless data integration, better communication and automation. This has resulted in efficiencies in productivity across all functions through real time decision-making and proactive compliance to industry and regulatory needs. It has also led the Company to achieve synergy in the use of assets and resources, while ensuring improved consistency in management practices applied across all the systems. During the year, the Company continued to invest in its IT function to ensure that ACIL remains a truly scalable, technologically advanced and process driven organisation. To facilitate collaboration with clients, ACIL has implemented a unique software to customise all relevant information as per client requirements. The new system, through automated procedure, will also provide greater visibility and control on inventory, purchases and payments, thereby enhancing operational and cost efficiencies. Seamless management of internal business controls will also be part of the new system to ensure that accountability and integrity is maintained in every part of the organisation. Going forward, Information Technology will remain the bedrock of the Company's strategy for driving excellence across all functions. OUTLOOK India requires quality infrastructure. This simple fact is the long-term driver of the construction sector. Despite some short-term factors that may keep the sentiment subdued, the demand for the sector is likely to remain strong in the long run. The improving economic conditions and government measures to provide better infrastructure and housing are expected to have a positive effect on the sector. The focus on development of infrastructure in India has got a major boost through US$ 1 Trillion allocation for the sector during the 12th Five Year Plan. This will translate into a healthy business for the construction companies. Some of the proposals announced in the Union Budget 2015-16 are also expected to offer the much needed impetus to the sector. Relaxation of tax guidelines on foreign investment, implementation of REITs, increased funding for affordable housing and infrastructure projects, proposed building of 100 smart cities are all likely to provide long-term infrastructure opportunities. Other factors likely to augur well for private sector participation in infrastructure projects are: appointment of an Expert Committee to analyse the possibility of reduction in the number of regulatory permissions required for commencement of a project; proposal for rebalancing of risks of PPP projects with Government taking up major risks; and rationalisation of the dispute resolution mechanism. The myriad opportunities provide ample growth potential for industry players such as ACIL, which has, in the past, leveraged its intrinsic strengths to build extensive brsence across segments. A combination of housing demand and investment of funds in different asset classes, primarily through NCDs (providing fixed returns), as well as investment made towards the right projects can yield healthy returns. Steered by its strengths, ACIL is all geared up to take advantage of the opportunity matrix. The Company is constantly upgrading its competencies through state-of-the-art mechanised solutions enabling strict control on quality and deliverables. Also, significant efforts have been made towards cost control and optimisation of resources, reduction in debt, completion of loss contracts and so on. Backed by its operational prowess, the Company is confident of carrying the momentum forward for years to come. CAUTIONARY STATEMENT Statements in this Management Discussion and Analysis describing the ACIL's Objectives, projections, estimates and expectations may be 'Forward Looking Statements' within the meaning of applicable laws and regulations. Actual result might differ substantially or materially from those exbrssed or implied. Important developments that could affect the Company's operations include unavailability of finance at competitive rates- global or domestic or both, reduction in number of viable infrastructure projects, significant changes in political and economic environment abroad, tax laws, litigation, interest and other costs. |
