Lanco Infratech Ltd

In this section, any reference to "we", "us" or "our"refers to LANCO Infratech Limited along-with its subsidiary companies. The discussion ofour financial condition and results of operations included in this section should be readin conjunction with the consolidated financial statements of LITL and its subsidiaries.Figures have been rounded off to Rs. million.

1. Industry Structure and Developments

1. ECONOMIC OVERVIEW:

The Indian economy made a strong rebound in the FY 2009-10 as government’sstimulus packages took hold, after facing slowdown in the second half of the FY 2008-09.India expects to get back to the high-growth trajectory soon. Developed economies like USand Europe are still reeling under the impact of recession. This reflects the resilienceof the Indian economy.

It is true the Indian economy felt the lingering impact of the global slowdown in theFY 2009-10 too. For example, the export sector continued to report negative growth untilNovember. However, a positive aspect of the global recession for India was that prices ofcommodities, especially crude oil tumbled. Since India meets about 80% of its crude oilrequirement through imports and continues to subsidise retail sale of petroleum productslike petrol, diesel, domestic LPG and PDS kerosene, the drastic fall in internationalcrude oil market was a big relief for the government facing huge fiscal deficit.

However, the country had to battle with unusually high food inflation in the wake ofpoor monsoon, which may ease soon as the country is expected to have a good monsoon thisyear.

As per national accounts data, the Indian economy returned to strong growth level inthe first quarter of FY 2009-10 and continued the strong momentum with the real GDP risingby 8.6% yoy in the Jan-March quarter. Earlier data revisions were also released; theOct-December growth rate was revised up to 6.5%, and as a result, annual average real GDPgrowth rate for FY 2009-10 was 7.4% (6.7% in the previous year). This marks a resilientgrowth performance for India given the global economic turmoil during the period.

Source: CSO.

Power Generation

Installed Power Generation Capacity by Sector and Fuel

The following table shows summary of India’s installed power generation capacityas of March 31, 2010 sector wise and fuel wise:

Source: CEA, March 2010

The Indian power sector has historically been characterized by demand-supply gap whichhas been increasing over the years. In FY09, peak energy deficit was at 12%. This figurefor 2010 has infact increased to 13.3% as per CEA’s provisional numbers.

India’s peak power shortage is projected to further rise in coming years.

Planned Capacity Addition

The Government has envisaged an ambitious target of providing "Power for All"by 2012. In the Eleventh Five year plan, a capacity addition of 78,700 MW was targeted. Atthe end of the Tenth Plan, the installed capacity stood at 132,329 MW. The additionalcapacity planned in the Eleventh Plan is close to 60% of the total installed capacity atthe end of the Tenth Plan.

Fuel and sector wise capacity additions envisaged during the Eleventh Five Year Planending March 31st, 2012

Source: CEA

The Road Sector

India has one of the largest road networks in the world (over 3 million km at present).For the purpose of management and administration, these roads are divided into thefollowing five categories:

• National Highways (NH)

• State Highways (SH)

• Major District Roads (MDR)

• Other District Roads (ODR)

• Village Roads (VR)

The National Highways facilitate medium and long distance inter-city passenger andfreight traffic across the country. The State Highways facilitates medium distances amongmajor centers within the State.

The District Roads and Village Roads provide villages accessibility. Today in thecountry about 65% of freight and 80% passenger traffic is carried by the roads.

National Highways Authority of India (NHAI) is mandated to implement National HighwaysDevelopment Project (NHDP) which is India’s largest ever highway project. Thegovernment has taken policy initiatives to attract private developers and to do 20 km aday. While the Governments through Public Private Partnership is enthusiastic aboutinvesting in road and highway projects. The actual investment is much below the target.Despite this under achievement, the road sector saw a five-fold jump in highway projectdisbursals in FY 2009-10 compared with FY 2008-09. Upto Feburary, NHAI awarded 36 projectsof 3,166 km against 8 projects spanning 643 km in FY 2008-09.

National Highways presently have a total length of 70,548 km and serve as the arterialnetwork of the country. The development of National Highways is the responsibility of thecentral government.

Real Estate

The Indian real estate sector plays a significant role in the country’s economy.It is second only to agriculture in terms of employment generation and holds a significantshare in Gross Domestic Product (GDP).

Almost 80 per cent of real estate developed in India is residential space, the restcomprises of offices, shopping malls, hotels and hospitals. According to Jones LangLaSalle, faster economic growth in Brazil, Russia, India and China (BRIC) could result inthe property markets of those nations recovering at a faster rate compared to the Europeand US.

The pace of urbanization will pick up further in coming years as cities are expected togenerate bulk of new jobs. Those who migrate to cities for job will need accommodation. IfIndia has to manage its urbanization, it must provide cheaper housing in cities. Thatmeans there is a huge scope in this sector.

According to government estimates, there is a shortage of 22.4 million dwelling unitsin the country. Thus, over the next 10 to 15 years, 80 to 90 million housing dwellingunits will have to be constructed with a majority of them catering to middle- andlower-income groups.

Opportunities:

With the rapid growth of the economy in recent years, the need of adding capacity toovercome infrastructural constraints has increased. Traditionally, power, railways, roads,ports, airports and telecommunications were the exclusive domain of the government.However, policies have changed gradually over the past two decades as bridging thewidening gap between demand and supply in infrastructure assumed prominence on thegovernment’s agenda. Government has taken key policy initiatives to attract privateinvestment into the sector.

Power:

The National Electricity Policy (NEP), 2005 recognizes electricity as a "basichuman need" and targets a rise in per capita availability to 1,000 units per personby the end of 2012.

Per Capita power consumption has gone up from 567 units in 2003 to 704 unit in 2008. Tofulfill the objectives of the NEP, a capacity addition of 78,700 MW is envisaged duringthe Eleventh Five Year Plan. The power sector is expected to grow at 9.5 per cent perannum.

In power sector, the year 2009-10 accounted for the highest capacity addition, i.e.9,585 MW in a single year in the last 60 years. Altogether in the 11th five-year plan62,302 MW capacity is likely to be added in the power sector, as against the target of78,700 MW. As stated by Hon’ble Minister of Power, Mr. Sushil Kumar Shinde, whileaddressing the Construction Summit 2010, the government is now planning to set the targetof achieving 1,00,000 MW capacity addition in the 12th Five Year Plan. 60% of which isexpected to be added by the private sector.

With the Indian economy on a high growth trajectory, bridging demand-supply gap isgoing to be a serious challenge in coming years. The Electricity Act, 2003 stipulateslong-term open access to private power producers for inter-state transmission ofelectricity. The sector has attracted private investment.

Power trading market in the country is also growing fast. This offers scope for privatedevelopers to sell power in the merchant market through short-term contracts.

The present operating capacity of the group is 1,349 MW, which is expected to increaseto 9311 mw on completion of the 7,962 MW under construction. There are major opportunitiesemerging for Lanco in this sector keeping in mind the power addition targets for the XIand XII Five Year Plans.

Transmission:

India possesses a vast opportunity to grow in the field of power generation,transmission, and distribution. A huge capital investment is required to meet thisrequirement. This has resulted in many power generation, transmission, and distributioncompanies to establish operations in the country under the PPP program. There are strongopportunities in transmission network ventures with an additional 60,000 circuitkilometers of transmission network is expected by 2012 translating to a total investmentopportunity of about US$ 200 billion.

Power Trading:

The calendar year 2009 witnessed consolidation of the short-term power market in India.The short-term power market not only grew in absolute size in volume terms, but its shareas a percentage of total electricity generation in the country also grew noticeably.

On price front, although the year witnessed highest ever prices for electricitytransacted through power exchanges and trading licensees, especially in the months ofApril and August 2009; overall the weighted average price of electricity transactedthrough short-term market in the year 2009 was lower as compared to the price in the year2008. Salient features of the year are listed below:

Of the total electricity generation in India in 2009, the short-term power marketcomprises only 8 per cent. The balance 92 percent of generation is being procured mainlyby distribution companies through long-term contracts.

In volume terms (kWh) the size of the short term market in India, excluding UI anddirect bilateral sale between distribution companies, was about 30.6 billion kWh (units)in the year 2009. As compared to the volume of electricity transacted through short termmarket in the year 2008, this was about 20.3 per cent higher. The weighted average priceof electricity transacted through power exchanges was Rs. 5.73 per kWh and through tradinglicensees was Rs. 6.41 per kWh in the year 2009. The corresponding values for the year2008 were Rs. 7.57 per kWh and Rs. 7.04 per kWh, respectively.

There has been robust growth in the electricity trading from 2005-06 which is evidentfrom the chart. Trading has increaed from 14 billion units in 2005-06 to 27 billion unitsin 2009-10.

Lanco Power Trading Limited, the power trading arm of LITL, performed well during theyear 2009-10 and traded total 4,269 Mus of power with a net turnover of Rs. 19,712million.

Roads:

The Eleventh Five Year Plan places high priority to the expeditious completion of worksapproved under the different phases of the NHDP. For the roads and bridges sector, theEleventh Five Year Plan envisages a total investment of Rs. 3,141,520 million. Of this,the shares of the Centre, the States and the private sector are expected to be 34.2, 31.8and 34 per cent, respectively.

With a view to expediting the progress of the NHDP, the Ministry of Road Transport& Highways has set a target of completion of 20 km of NHs per day, which translates to35,000 km during the next five years (2009-14) at the rate of 7,000 km per year. The NHAIformulated Work Plans (Work Plan I & II) for awarding 12,000 km each during the years2009-10 and 2010-11. These Plans lay down a specific timeframe for various activities andare being monitored very closely at various levels. Work Plan I (2009-10) covers balancestretches of NHDP Phases II, III & V. So far, 14 projects for a length of about 1,300km have already been awarded, bids for 20 projects covering a length of about 2,000 kmhave been received and are under process and another 23 projects for a length of about1,700 km are presently on offer.

Source: Department of Road Transport & Highways.

To fund the implementation of NHDP, a part of the fuel cess is allocated to the NHAI.The fund allocated from the cess is leveraged to borrow additional funds from the domesticmarket. The Government of India has also taken loans for financing various projects underthe NHDP from the World Bank (US$ 1,965 million), Asian Development Bank (ADB) (US$ 1,605million) and Japan Bank for International Cooperation (32,060 million yen), which arepassed on to the NHAI partly in the form of grant and partly as loan. The NHAI has alsonegotiated a direct loan of US $165 million from the ADB for one of its projects.

Currently Lanco is developing two road projects and expects more opportunities in thisarea. Both the road projects will commence operation from FY 2010-11.

Real Estate:

In FY 2009-10, all the major players in the real estate business strived to overcomefrom the downturn of economic scenario of 2009. However, long-term growth story isexpected to remain intact, as the rise in standards of living and disposable incomes willlead to a robust demand for Real Estate, both Residential and Commercial properties.

According to the Confederation of Real Estate Developers’ Associations of India(CREDAI), the affordable housing segment is set to play an important role in India’sreal estate sector in 2010 on the back of an uptick in demand.

Moreover, 2010 is expected to be a positive year for the real estate sector. Therevival is expected to be driven by infrastructure growth, which, in turn, can acceleratereal estate activities both in the residential as well as commercial spaces.

Currently, the Company is developing Lanco Hills at Hyderabad and are concentrating onthis project alone in realty.

KEY THREATS:

• Macroeconomic factors in India. Most of the Company assets are located inIndia and accordingly, macroeconomic factors in India have a direct, significant impact onthe Company’s business, operational results and financial condition. Thesemacroeconomic factors include the growth of the Indian economy, interest rates, as well asthe political and economic environment. The Company believes that the Indian economy willgrow in the next few years and, consequently, we are currently developing, and expect tocontinue to develop, projects whose revenues are dependent on the Indian economy and theirutilisation rates.

• Dependence on government policy and regulation towards infrastructure. Thegrowth of the infrastructure industry in India and the Company’s infrastructuredevelopment business is dependent on Government policies and regulation. Infrastructuredevelopment in India has historically been the preserve of the central and StateGovernments, and has been constrained by various factors such as shortages of publicfunding, political considerations and issues of transparency and accountability. Changesin Government policies that began in the 1990s have facilitated the entry of privatecapital into infrastructure and have led to rapid growth in certain sectors. Morerecently, policy changes in the transportation, energy, urban infrastructure andindustrial and commercial infrastructure sectors have begun to attract significant privatesector investment. Changes in Government policy and support for the infrastructure sectorwill affect the Company’s growth prospects and operational results.

• Competition. The Company’s operational results are affected bycompetition in the infrastructure sector in India. The Company expect competition tointensify due to possible new entrants (both national and international players) invarious infrastructure segments and existing competitors further expanding theiroperations and the Company’s entry into new markets where the Company may competewith well- established companies.

• Bidding and execution qualification. Big Infrastructure projectdevelopment through a public-private partnership involves shortlisting interestedcompanies based on their technical and financial strengths. The nature of theGovernment’s process is such that the relevant experience in the infrastructuresector is a key eligibility condition for participating in bidding for new big projects.The ability to strategically partner with other players will also determine theCompany’s qualification for big projects.

• Changes in tax laws and regimes. The Company currently has operations andemployees located across many Indian states. Consequently, the Company is subject to thejurisdiction of a number of tax authorities and regimes in respect of Sales Tax / VAT andEntry Taxes. The revenues recorded and income earned in these various jurisdictions aretaxed on differing bases. The determination of the Company’s tax liabilities involvesthe interpretation of local tax laws in each jurisdiction. The Company have claimedcertain tax benefits under Section 80(IA) of the Income Tax Act, 1961, relating to powerprojects, which decrease the effective tax rates compared to the statutory tax rates.Further changes in the Company’s operating environment, including adverse changes inany of the taxes levied by the central or state governments or removal of tax concessions,exemptions or incentives, or claims by tax authorities could affect the Company’sfinancial condition and operational results.

• Investment in the Company’s new projects. The Company plan to makesignificant investments in a number of new projects over the next several years, and theCompany intends to bid for new projects. If the development of these projects costssubstantially less than what the Company has budgeted, or if the Company is able tocomplete these projects ahead of schedule, the Company’s financial condition andearnings could improve. Conversely, if the Company is unable to complete these projectswithin budgets and within the scheduled time or, once completed, these projects do notoperate profitably, the Company’s financial condition and operational results may beadversely affected.

• Credit Availability to fund the Projects. Power generation, construction(which includes EPC), and property development projects of the Company all capitalintensive and require high level of debt financing. The Company has in the past been ableto raise debt financing on terms acceptable to us. However, if for any reason the companyis unable to obtain adequate finances in a timely manner and on acceptable terms, theCompany’s financial condition and operational results could be adversely affected.

3. SEGMENT WISE PERFORMANCE ANALYSIS INCOME:

Composition of the total income for the year 2009-10 and 2008-09 is given in the tablebelow:

For the fiscal year 2009-10 and fiscal year 2008-09, share of Construction and Powermix in total revenue was more or less same. It is expected that the revenue mix willchange next year with the contribution from power increasing significantly.

Segment Result: Profit (+)/ Loss (-) before tax, interest and (Gain)/ Loss on foreignexchange fluctuation from each segment:

Before elimination of inter segment profit on transactions with subsidiaries andassociates, the profit/loss before tax, interest and (gain)/loss on foreign exchangefluctuation increased by 57% from Rs.8,453 million in FY 2008-09 to Rs. 13,232 million inFY2009-10. During the year elimination on account of inter segment profit on transactionswith subsidiaries and associates has gone up by 31% from Rs.1,290 million in FY 2008-09 toRs. 1,691 million in FY 2009-10. Profit before tax, interest and (gain)/loss on foreignexchange fluctuation increased by 61% from 7,163 million in FY 2008-09 to Rs. 11,541million in FY 2009-10. Details of Profit (+)/ Loss (-) before tax, interest and(Gain)/Loss on foreign exchange fluctuation from each segment are given below:

4. RISK AND CONCERNS:

• Financial Risk

Large capital expenditure is generally required for the development of Infrastructureprojects. The Company will incur large capital expenditure in the coming years which willbe financed in a mix of debt and equity. Majority of the under construction projects haveachieved financial closure. Initiatives have been taken to tie up finances of the upcomingprojects. Internal accruals of the operating companies are being utilised for equityrequirements of the expansion projects. Internal accruals of the company are mostlyutilised for the equity requirement of the new projects.

• Interest Rate Risk

Fluctuations in interest rates have a bearing on the Company’s interestincome/expense from interest bearing assets and liabilities. Further, an increase ininterest rates for the Company’s existing and future borrowings may affect theCompany’s ability to service long-term debt. Most of the Company’s borrowingshave fixed interest rates with reset clauses which gives the advantage of floating rate inthe long term and fixed rate in the short-term.

• Foreign Currency Exchange Rate Risk

The payment of some of the raw materials for the Company’s EPC and constructionbusiness and for capital expenditure on imported equipment and machinery may bedenominated in currencies other than Indian Rupees. Any decline in the value of the Rupeeagainst such a currency could make the Company’s purchases costlier.

Company formulated a comprehensive foreign exchange risk coverage policy to mitigatethe risk of Foreign Currency Exposure. The policy outlines the methodology for theefficient management of Forex, authority and responsibility structure and the instrumentsthat could be most effectively utilized to mitigate the risk. The implementation of thepolicy and effective management of the Forex Risk is being reviewed by the auditcommittee.

• Business Development Risk:

The Company is targeting big projects like UMPP projects in India as well as overseas,either in collaboration (JV) or on its own. Big projects require higher eligibilitycriteria which is not available to the Company. To mitigate the risk assistance ofInternational consultants is taken for searching partners for each sector. Strategicassociation is being developed with the companies having domain experience on a long-termbasis. On commissioning of the ongoing projects the Company will have higher eligibilitycriteria on its own.

• Execution Risk:

Timely execution of projects is an important parameter for a construction andinfrastructure Company. To mitigate the risk associated with the same, the Companyformulated effective project review mechanism. Placement of timely orders is beingpracticed to avoid project delays. Further, infrastructure projects have long gestationperiod and there might be some unexpected events that would lead to delay.

• Lower Margins on account of Project delays:

The Company runs the risk of reduction in margins due to increase in price of inputsand dependence on sub-contractors. Company initiated the process of creating a largevendor base and placement of long-term contracts with the suppliers for timely deliveryand stable prices. Selection of sub-contractors is done on the past efficiency record ofthe sub-contractor to avoid inefficient sub-contractors in the system.

5. INTERNAL CONTROL SYSTEMS:

The Company’s Internal Control System comprises of Standard Operating Proceduresthat have been incorporated through SAP, which are tested and tried at the OperationalLevel. These procedures are subject to internal audit by external firms. The internalauditors independently evaluate the adequacy of internal controls and concurrently auditthe majority of the transactions in value terms. Independence of the internal audit isensured by the direct reporting of Internal Auditors to the Audit Committee. The Companyhas also set up risk assessment and mitigation process. The Risk Management isperiodically reviewed to ensure that the Company identifies its risks through means of aproperly defined framework and mitigate the identified risks through proper action plansand reviews.

6. Discussion on Financial Performance with respect to operational parameters:

Company Overview:

The Company is an integrated infrastructure development company in India with presencein key areas like EPC & Construction, Power, Roads and Highways and PropertyDevelopment. The Company is constructing/operating power projects in 10 States across PanIndia. The Company remains focused on India, though open to tapping business opportunitiesin other parts of the world.

EPC and Construction

The Company’s business model provides integrated EPC and construction services inthe infrastructure sector.

Order Book Position:

The EPC and Construction order book as on March 31, 2010 stood at Rs. 257,137 million.During the year, the Company bagged EPC and construction contracts for Kondapalli (742MW), Vidharbha (1,320 MW), Amarkantak (1,320 MW) and Babandh (1,320 MW) projects. Thebreak-up of the current order book is as follows:

Note: CHH : Chhattisgarh, KAR: Karnataka, ORS : Orissa, AP : Andhra Pardesh, MH :Maharashtra, UP : Uttar Pradesh, UTT : Uttrakhand, SIK : Sikkim, TN : Tamil Nadu.

Power Business: Power Generation

The power business, which is mostly undertaken through special purpose vehicles, isexpected to contribute significantly to the company’s income and profits in comingyears. The Group has a portfolio of 9,311 MW of power projects, of which about 1,349 MW isin operation and the rest under construction.

Operating power plants

Key details on operating capacity are provided in the table below:

Currently, 53% of the Company’s generating capacity is operational on gas, 44% oncoal and 2% on hydro and wind.

Projects under construction:

Key details on projects under execution:

Of the total portfolio of 9,311MW capacity, 75% (6,960 MW) is on coal, 17% (1,596 MW)on gas and the rest 8%(755) on hydro.

The power generation capacity is expected to go up to 3,957 MW over next twelve monthswith the additional capacity of 133 MW from Kondapalli II, 1,200 MW from Udupi and Anparaeach, 70 MW from Lanco Green and 5 MW from Vamshi Industrial.

Power Trading:

Lanco Power Trading Limited, the power trading arm of Lanco, performed well during theyear and traded 4,269 million units of electricity with a net turnover of Rs. 19,544million. Year-wise details on trading volume and operating sales are provided in the graphbelow:

Infrastructure Projects:

The Company is developing two road projects in the state of Karnataka, which have acombined length of approx. 160 km. Currently, construction activities are in progress andare expected to be completed by FY 2010-11.

Property Development:

Lanco Hills project (LHTPPL), located in Manikonda of Hyderabad and spread over 100acres, is one of India’s largest integrated IT parks. The project is designed tosupport the operations of high-technology enterprises, especially those in fields of ITand IT-enabled services. The residential space is expected to comprise apartments, rangingfrom studios to three bedroom apartments, with amenities such as modern fitness andrecreation centres, health clinics, food courts and cafeterias, etc.

LHTPPL started work at the project in August 2007. Construction work for 4.00 millionsquare feet of residential space and 0.50 million square feet of office space isprogressing well. Residential project is expected to be completed in the fiscal year2010-11.

Geographically Diversified:

The Company is geographically diversified presence and so well placed to take advantageof the opportunities across the Indian Peninsula and de-risk the Business model.

Company Structure

Lanco Infratech Limited (LITL) is a holding-cum-operating company. As a holdingcompany, LITL invests through Special Purpose Vehicles (SPVs) created to undertakebusiness in areas such as Power Generation, Road projects on BOT basis, PropertyDevelopment, Power Trading, etc. Depending upon the extent of the investments, the SPVsare either subsidiaries or Associates.

Principles of Consolidation

The consolidated financial statements relate to Lanco Infratech Limited (the Company)and its subsidiaries and associates. The consolidated financial statements of the Companyand its subsidiaries are prepared based on a line by line consolidation by adding togetherthe book values of like items of assets, liabilities, income and expenses as per theaudited financial statements of the respective subsidiaries and are drawn up by usinguniform accounting policies for like transactions and other events in similarcircumstances and are presented to the extent possible in the same manner as theCompany’s individual financial statements. Inter Company receivables and liabilities,income and expenses are eliminated.

The financial statements of the subsidiaries are consolidated from the date on whicheffective control is transferred to the Company till the date such control exists. Thedifference between the costs of investments in subsidiaries over the book value of thesubsidiaries’ net assets on the date of acquisition is recognized as goodwill orcapital reserve in the consolidated financial statements as appropriate.

Equity method of accounting is followed for investments in Associates in accordancewith Accounting Standard (AS) 23 – Accounting for Investments in Associates, whereingoodwill/capital reserve arising at the time of acquisition and share of profit or lossesafter the date of acquisition are adjusted in investment value based on the auditedfinancial statements of the Associates. Unrealized profits and losses resulting fromtransactions between the Company and Associates eliminated to the extent of thecompany’s interest in the associate.

ANALYSIS OF FINANCIAL CONDITION

Sources and Applications of Funds

Shareholders’ Funds:

On a consolidated basis, the Shareholders’ Fund increased from Rs. 20,976 millionin FY 2008-09 to Rs. 33,448 million in FY2009-10, registering a growth of 59%.

During the year, company raised Rs. 7,274 million through Qualified InstitutionalPlacement (QIP) of 18 million shares of Rs. 10 each @ 394.90 i.e. at a premium of Rs.384.90 per share. Consequently the capital base rose from Rs. 2,198 mn in FY 2008-09 toRs. 2,385 million in FY 2009-10 and Security premium account increased from Rs. 10,307million in FY 2008-09 to Rs. 17,700 million in FY 2009-10. During the year, the Companysplit its Equity Shares of Rs.10 each into 10 Equity shares of Re.1/- each and raised itsauthorized capital from 2,500 mn shares to 5,000 mn shares of Re 1.

Minority Interest:

As on March 31, 2010, minority Interest in the consolidated financials of the companystood at Rs. 7,108 mn as against Rs. 7,033 million at the end of the preceding fiscal. Thechange in the minority interest was mainly because of change in profit or loss ofsubsidiary companies like Lanco Kondapalli, Aban Power, Lanco Amarkantak, Lanco Hills etc.compared to the previous year.

Minority shareholding in the major operating companies of the group is as below:

Loan Fund:

Total loan fund increased to Rs. 83,614 million in FY 2009-10 from Rs. 55,970 millionin the FY 2008-09.

Company wise break-up of the Loan fund is as follows:

Further, the details of the outstanding Foreign Currency loans including buyer’scredit as on March 31, 2010 are provided below:

Deferred Tax Liability:

On a consolidated basis, the deferred tax liability increased from Rs. 175 million toRs. 1,003 million primarily on account of higher deferred tax provision at Kondapalli,Aban and Amarkantak.

Application of Funds:

Total assets of the Company grew by 39% from Rs. 115,485 million to Rs. 160,283 millionThe broad break-up of the assets in the year

2009-10 and 2008-09 are provided in the table below:

Fixed Assets:

During the year, fixed assets grew by 29% from Rs. 54,139 mn to Rs. 70,015 millionmainly because of an increase in work-in-progress at various projects. While gross blockgrew, capital work-in-progress and incidental expenses during construction came downbecause of capitalization of Amarkantak (2X300 MW), Kondapalli (233 MW) and small hydropower projects.

Investments:

Investment grew by 106% from Rs. 9,837 million to Rs. 20,229 million during the period.Investment in marketable securities increased from Rs. 1,514 million to Rs. 7,810 million.

Net Current Assets:

During the year, net current assets grew by 73% from Rs. 20,178 million to Rs. 34,929million while the gross current assets grew by 36% from Rs. 51,509 million to Rs. 70,039mn and current liabilities grew by 12% from Rs. 31,331 million to Rs. 35,110 million.

Inventory increased by 23% from Rs. 13,223 million to Rs. 16,267 million primarily onaccount of an increase in the construction work in progress.

Sundry debtors increased by 86% from Rs.11,943 million to Rs.22,270 million. Sundrydebtors mainly comprised of receivables and retention money from construction and EPCbusiness and dues for power purchased by State Electricity Boards. Around 36% of totaldebtors belong to the debtors pending for more than six months but considered good andabout 91% of the same are in the books of Lanco Infratech (standalone) on account ofretention money which will be released on completion of work. The balance Rs. 14,200million is due for less than six months and considered good.

Consolidated Cash and Bank balance declined by 3% from Rs. 9,905 million to Rs. 9,628million and the bulk of cash and bank balance is in the books of Lanco Infratech –Standalone, Kondapalli, Aban and Lanco Hills, etc.

Loans and advances increased by 33% from Rs. 16,386 million to Rs. 21,800 million. Outof the total loan and advances, around 61% was in advances recoverable in cash or in kindor for value to be received, and 27% was in Share Application money. Most of the advancesrecoverable were in the books of Lanco Infratech - standalone. Current Liabilities andProvisions increased by 12% from Rs. 31,331 million to Rs. 35,110 million.

Around 64% of the gross liabilities and provision was in sundry creditors, for whichcompany-wise details are given below:

The bulk of the advances from customers are in the books of Lanco Infratech –Standalone and Lanco Hills.

Cash Flow:

Cash Flow from (used in) Operating Activities

Net cash generated from operating activities stood at Rs. 1,557 million in FY 2009-10.Cash generated from operations was Rs. 17,246 million which was adjusted by Rs. 12,544million on account of change in working capital and Rs. 3,145 million on account of directtaxes paid.

Cash Flow from (used in) Investing Activities

Net cash used in investing activities was Rs. 28,410 million in FY 2009-10, led byaddition of the fixed assets (after adjustment of sale of fixed assets) to the tune of Rs.15,353 million and purchase of investments (After adjustment of sale of Investment) of Rs.12,341 million.

Cash Flow from Financing Activities

Net cash addition from financing activities was Rs. 26,959 million in FY 2009-10, whichwas primarily due to inflows on account of net proceeds from borrowings of Rs. 28,534million, proceed from issue of equity share of Rs. 7,273 million and partially offset byinterest payments of Rs. 8,484 million.

Analysis of Operations:

Businesses and companies generating revenues during the current year:

Consolidated Financial Results:

Comparison of the results for the year ended March 31, 2010 with the year ended March31, 2009.

Sales and Operating Income: Sales and operating income increased by 34% fromRs. 60,710 million in FY 2008-09 to Rs. 81,580 million in FY 2009-10. The details of theSales and Operating Income are as below:

Sales and operating income after the elimination of the inter-segment income registered34% growth mainly on account of accelerated construction and EPC activities at variousproject sites, particularly at Anpara and Udupi, Growth in power segment was mainlybecause of implementation of Amarkantak and Kondapalli unit-II and electricity trading.

During the year Aban sold Verified/Certified Emission Reduction (VER / CER) to the tuneof Rs. 171 million and current inventory of unsold CER is at 33,105 units.

Income from property development was down by 116%. The steep fall on income was majorlyon account of the price discounts offered to existing as well as prospective customers ofLanco Hills. Revenue from property development is recognized following the"percentage of completion method" for transferring the significant risks andrewards of ownership. Under this method, revenue is recognized in proportion to actualcosts incurred as against the total estimated construction costs to completion, subject tothe condition that actual costs are 25 per cent or more of such estimated constructioncosts. Construction costs include the estimated construction, development, proportionateland cost and other directly attributable costs of the properties under construction. Theestimates of costs and revenues are reviewed by management periodically and effect of anychanges in such estimates is recognized in the period in which such changes aredetermined. As per Accounting Policy, the revenue recognised for the year is Rs. 875million and revenue reversed on account of cancellation and price revision is Rs 1,132million.

Elimination of Unrealised Profit on Transactions with Associate Companies. Theelimination of profit on transactions with associate companies represents the eliminationby Lanco Infratech of profit derived from construction and EPC services to its associatecompanies, to the extent of its shareholdings in such associates. The elimination ofprofit increased from Rs. 648 million in FY 2008-09 to Rs. 755 million in FY 2009-10,primarily as a result of an increase in EPC services provided to Lanco Infratech’sassociates in FY 2009-10.

Other Income: ‘Other income’ increased by 142% from Rs.552 million inFY2009-10 to Rs. 1,335 million in FY 2009-10, primarily reflecting net increase ininterest income from Rs.397 mn to Rs.622 million, gain of Rs.219 million from foreignexchange variations, increase in profit on sale of long term Investment of Rs.146 millionand rise in insurance received or receivable from Rs.20 million to Rs.130 million.

Construction, Generation and Operating Expenses: Construction, generation andoperating expenses increased by 25% from Rs. 49,076 million in FY 2008-09 to Rs. 61,494million in FY 2009-10. The increase was driven by the growth in revenue across verticals.As a percentage of total Income, construction, generation and operating expenses declinedfrom 81% in FY 2008-09 to 75% in FY 2009-10 reflecting increase in the operating margin.

Administration and Other Expenses: Administration and other expenses increasedby 57% from Rs. 2,750 million in FY 2008-09 to Rs. 4,311 million in FY 2009-10, primarilyreflecting an increase in employee-related expenses such as salaries and benefitsfollowing an increase in headcounts. Additional employees were required following anincrease in projects under construction and development.

Although as a percentage of total income, administration and other expenses remained atthe same level of 5%.

Interest and Finance Charges. Interest and finance charges increased by 63%from Rs. 2,185 million in FY 2008-09 to Rs. 3,554 million in FY 2009-10, mainly because ofan increase in borrowings at Lanco Infratech – Standalone and capitalization ofAmarkantak and Kondapalli II leading to an interest expenses of Rs. 1,312 million fromthese two projects to Profit and Loss account.

Depreciation. Depreciation increased by 224% from Rs. 1,073 million in FY2008-09 to Rs. 3,479 million in FY 2009-10, primarily because of a net increase in thegross block of fixed assets and adoption of written down value accounting method ofdepreciation in Amarkantak and Kondapalli (Unit II). The depreciation policy followed bythe company for all the thermal power projects capitalized during the year FY 2009-10 andonwards, is as per written down method, while for the projects capitalized prior to FY2009-10, depreciation policy is that of straight line method accordingly depreciationcharge has been higher.

During the year, the Company capitalized Amarkantak, Kondapalli and small hydroprojects, so gross block increased from Rs. 23,867 million in FY 2008-09 to Rs. 61,644million in FY 2009-10.

Profit Before Taxation and Before Minority Interest/Share of Profits of Associates.Profit before taxation, minority interest and share of profits of associates increased by69% from Rs. 5,530 million in FY 2008-09 to Rs. 9,322 million in FY 2009-10 majorly drivenby the Kondapalli II and Amarkantak I and higher revenue and operating margins ofconstruction and EPC.

Provision for Taxation. The Company had a tax expense of Rs. 3,643 million inFY 2009-10 as against Rs. 1,690 mn in FY 2008-09 – an increase of 116% –, whichis primarily attributable to an increase in current tax and deferred tax liabilities.

Increase in current tax income was because of an increase in income at construction andpower projects and also because of the hike in the Minimum Alternate Tax (MAT) rate.Deferred tax liability increased from Rs. 2 million in FY 2008-09 to Rs 828 million in FY2009-10. Increase in deferred tax liability was primarily due to higher provisioning atAmarkantak, Aban and Kondapalli power projects.

Share of Associates’ Profits. The Company has booked loss from Share ofAssociates to the tune of Rs. 178 million against profit of Rs. 5 million in FY 2008-09.This was on account of non-capitalisable expenditure of the associate companies on the newprojects being taken to Profit and Loss account.

Share of Minority Interest. Share of minority interests represent the interestof minority shareholders in various companies in power and property development sector.Share of minority interest in profits declined by 12% from Rs. 1,041 million in FY 2008-09to Rs. 915 million in FY 2009-10 mainly on account of loss at Lanco Hills.

Net Profit After Taxation, Minority Interest and Share of Profits of Associates.The net profit after taxation, minority interest, share of profits of associates andelimination of profit on transactions with associate companies increased by 83% from Rs.2,804 million in FY 2008-09 to Rs. 4,586 million in FY 2009-10. As per the AccountingStandard (AS) 21"Consolidated Financial Statements" and Accounting Standard (AS)23 "Accounting for Investments in Associates in Consolidated FinancialStatements", the Company has eliminated profit on transaction with Subsidiaries andAssociates to the tune of Rs. 1,691 million in FY 2009-10 against 1,290 million in FY2008-09. Before elimination of profit on transaction with Subsidiaries and Associates,profit after tax works out to Rs. 6,276 million in FY 2009-10 against Rs. 4,093 million inFY 2008-09, a growth of 53%.

Performance of the major Operating Companies/Projects:

The fiscal under review was good in terms of capacity addition. The Company increasedthe operating capacity from 506 MW to 1,349 MW. The projects that started power generationduring the year are:

1. Vamshi Hydro (Baner III, 5 MW of Hydro Based Capacity)

2. Amarkantak (Unit I of 300 MW, Coal based Capacity)

3. Kondapalli II (233 MW of Open Cycle, Gas based Capacity)

4. Amarkantak (Unit II of 300 MW, Coal based Capacity)

5. Vamshi Industrial (Dhrinidhar, 5 MW of Hydro Based Capacity)

The Company generated 5,614 mn units of electricity in FY 2009-10 as against 3,226million in FY 2008-09, registering a growth of 74%. During FY 2009-10, Kondapalli I signedan agreement for long-term top up gas supply from Reliance Industries’ KG D-6 block.As a result, generation from Kondapalli I increased by about 19%.

But there was a drop in generation from Aban plant because of a shortfall in gassupply.

Details on financial performance of major operating companies during the year:

Total Income:

Total Income of subsidiaries are as follows:

Lanco Infratech (standalone) has registered a turnover growth of 46% yoy on account ofan increase in construction and EPC activities. For the current year, most of theoperating turnover was from activities at Udupi, Anpara, Kondapalli II and Amarkantak.

Lanco Power trading company‘s turnover increased 58% because of increase in volumeof traded electricity. The company traded 4,269 million units in the FY 2009-10, asagainst 2,841 million units in FY 2008-09, posting growth of 50%.

During the year, the Company registered a turnover of around Rs. 8,640 million fromnewly-commissioned power plants i.e. Kondapalli II, Amarkantak and Vamshi Hydro Powerplants.

Despite higher generation, there was a drop in turnover of Kondapalli (368 MW) becauseof reduction in fuel cost from Naphtha after top-up gas supply began from RelianceIndustries’ D-6 block. Consumption of naphtha dropped from Rs. 7,686 million in FY2008-09 to Rs. 1,601 million in FY 2009-10.

Kondapalli II (233 MW open cycle), a merchant power plant, traded 444 million units andrealized Rs. 2,541 million, which works out to an average of Rs. 5.72 per unit.

During the period, Amarkantak project (2X300 MW) was implemented. The Unit I and IIwere capitalised on January 1 and March 25, 2010. Revenue from the sale of infirm power isrecognized on accrual basis as per the Central Electricity Regulatory Commission norms andas posted in the website of Western Region Power Committee.

Turnover of Lanco Hills dropped about 111%. The steep fall on income was majorly onaccount of the price discounts offered to the existing as well as prospective customers ofLanco Hills. Revenue from property development is recognized following the"percentage of completion method" for transferring the significant risks andrewards of ownership. Under this method, revenue is recognized in proportion to actualcosts incurred as against the total estimated construction costs to completion, subject tothe condition that actual costs are 25 per cent or more of such estimated constructioncosts. Construction costs include the estimated construction, development, proportionateland cost and other directly attributable costs of the properties under construction. Theestimates of costs and revenues are reviewed by management periodically and effect of anychanges in such estimates is recognized in the period in which such changes aredetermined.

Earnings Before Interest Tax Depreciation and Amortization (EBITDA):

All the major operating companies registered increase in EBITDA in absolute terms aswell as in the Margin terms.

Profit after Tax:

Details of the Profit after Tax (PAT) of major operating companies are as follows:

Lanco Infratech’s PAT jumped 84% to Rs. 4,864 million in FY 2009-10 on the back ofhigher operating revenue, better margin and increase in other Income. The increase inother Income was because of interest and profit generated from the sale of long-terminvestments. The depreciation policy followed by the Company for all the thermal powerprojects capitalized during the year FY 2009-10 and onwards, is as per written downmethod, while for the projects capitalized prior to FY 2009-10, depreciation policy isthat of straight line method accordingly depreciation charge has been higher.

Increase in the Profit after tax for the Kondapalli was primarily because ofcapitalization of 233 MW during the year.

Following the accounting policy, Amarkantak switched over to Written Down Value methodfrom the Straight Line method. So, Company has recalculated depreciation for all the fixedassets under written down value method on a retrospective basis from the day when theassets come into use. The switchover led to an increase of Rs. 1,209 million in totaldepreciation charged during the period which in turn brought corresponding reduction inthe net block of fixed assets as also a commensurate decline in profit for the period.Aban has registered a drop in the PAT because of lower generation due to non availabilityof the gas at plant site.

Lanco Hills registered a loss on account of the lower demand and price reduction.

7. Material Development in Human resources/industrial relations front, includingnumber of people employed: -

The Group’s human resources increased during the year from around 5000 to 5500spread across verticals comprising of Regular and Project Specific employees,Consultants/Advisors and Trainees. The real strength is in the distribution of theresources in different cadres – an increase of, 25% in the top and senior management;11% in the middle management and 22% in the junior management coupled with a decrease of10% in the non-managerial cadre as compared to the last year. The management pursued itsstrategic initiative of relocating to Gurgaon. Besides the Corporate even the ConstructionBusiness division is being moved to Gurgaon. This results in a total internal cohesivenessresulting in analignment to the Group Vision – "Most Admired IntegratedInfrastructure Enterprise". The focus has been on Consolidation and Re-prioritisationof Business to maintain the competitive edge and enhance stake-holders’ value.

The Group, in the process of transforming itself into high-performing organisation witha corporate culture that enables innovation, has completed implementing a PerformanceManagement System that links pay, incentives and career growth to the Performance,Contribution and Potential of each employee. As a second step, it is focusing onOrganization Design of each Business entity and the relationship with the Corporate. It isevolving Structures with well defined Roles and Responsibilities, Job Descriptions withclear Accountability, and well drawn out Key Result Areas linked to measurable outcomes– right from the CEO level to the last level in the Organization. Next, isidentification of Qualitative Star performers and developing their Competencies through asystematic process resulting in leaders capable of owning responsibilities at every level.Continuous, Consistent and Concerted Communication Campaigns are being carried out acrossthe Group to align the total Human Resources to the Mission, Vision and Values of theGroup. Another major initiative has been the decision to establish an Academy of Learningfor the Group to develop the Human capital of the Group.

Statements in this Report, particularly those which relate to Managements’Discussion and Analysis, describing the Company’s objectives, projections, estimatesand expectations many constitute "Forward Looking Statements" within the meaningof applicable laws and regulations. Actual results might differ materially from thoseeither expressed or implied. Shareholders and readers are cautioned that in the case ofdata and information external to the Company, no representation is made on its accuracyand comprehensiveness though the same are based on sources believed to be reliable. Utmostcare has been taken to ensure that the opinions expressed by the management herein containits perceptions on the material impacts on the Company’s operations but it is notexhaustive.

CHIEF EXECUTIVE OFFICER (CEO) AND CHIEF FINANCIAL OFFICER (CFO) CERTIFICATION

To

The Board of Directors of

LANCO INFRATECH LIMITED

We, the undersigned, in our respective capacities as the Managing Director and ChiefFinancial Officer of Lanco Infratech Limited ("the Company"), to the bestof our knowledge and belief certify that:

a) We have reviewed Financial Statements and the Cash Flow Statements for the YearEnded 31st March, 2010 and based on our knowledge and belief:

i. these statements do not contain any materially untrue statements or omit anymaterial fact or contain statements that might be misleading;

ii. these statements together present a true and fair view of the Company’saffairs and are in compliance with the existing Accounting Standards, applicable Laws andRegulations.

b) We further state that to the best of our knowledge and belief, there are notransactions entered into by the Company during the year which are fraudulent, illegal orviolative of the Company’s Code of Conduct.

c) We are responsible for establishing and maintaining internal controls and forevaluating the effectiveness of the same over the Financial Reporting of the Company andhave disclosed to the Auditors and the Audit Committee, deficiencies in the design oroperation of such internal controls, if any, of which they are aware and the steps we havetaken or propose to take to rectify these deficiencies.

d) We have indicated, wherever applicable, to the Auditors and Audit Committee:

i. significant changes, if any, in internal control over financial reporting during theyear;

ii. significant changes, if any, in Accounting Policies made during the year and thatthe same have been disclosed in the notes to the financial statements; and

iii. instances of significant fraud of which we have become aware and the involvementtherein, if any, of the Management or an Employee having a significant role in theCompany’s internal control system over financial reporting.