ashoka buildcon ltd Management discussions

Source: MoRTH Annual Report 2022-2023

2.2. Ordering Activity in the Sector

To enhance infrastructure development and help it overcome the impact of the COVID-19 epidemic, the Ministry set the highest ever objective of 14,300 Kms for award and 12,200 Kms for construction for the fiscal year 2022-23. Overall, road projects totaling more than 65,000 Kms in length and costing more than Rs.11 lakh Crore are under construction, with work on projects totaling more than 39,000 Kms finished and work on projects totaling more than 26,000 Km in progress. In the first nine months of fiscal year 2022-23, national highways totaling 5,774 km in length were built.

The Ministry of Road Transport and Highways has been granted roughly Rs 52,000 Crore more in 2023-24 than in 2022-23. Almost majority of the increased funding has been designated for NHAI investment. The Ministry of Road Transport and Highways? total spending for 2023-24 is anticipated to be Rs.2,70,500 Crore. This is a 25% increase over the updated forecasts for 2022-23. Capital expenditure is expected to be Rs.2,58,606 Crore in 2023-24, while revenue expenditure is expected to be Rs.11,829 Crore. Capital spending is expected to account for 96% of Ministry spending in 2022-23.

During 9 months of FY23, a total of 6,318 km of National Highways has been awarded by MoRTH whereas the National Highway constructions stand at 5,774 km. Out of the ~24,800 km approved under Bharatmala Pariyojana Phase-I, total length of 17,555 kms have been awarded. However, of the 10,000 Kms pending projects to be completed under Bharatmala Phase-I a total of 5,972 km have been awarded.

2.3. Union Budget 2023-24

Capital expenditure allocation increased by 33% from FY23 to Rs.10 trillion, reflecting the Government of India?s commitment to National Infrastructure Plan (NIP) expenditures. Over the years, roads have been the primary focus of budget allocations. The Government of India has allotted Rs.2,70,434.71 Crore (96% for capital expenditure) to the Ministry of Road Transport and Highways in the Union Budget 2023-24. Almost majority of the increased funding has been designated for NHAI investment.

The government has agreed to extend the 50-year interest- free loan to state governments for another year to stimulate infrastructure investment and incentivize complementing policy initiatives, with a considerably increased expenditure of Rs.1.3 lakh Crore.

The NHAI has been assigned Rs.1,62,207 Crore, which is 15% more than the revised estimates for 2022-23. To help stakeholders and stimulate private investment in infrastructure such as roads, trains, and power, an Infrastructure Finance Secretariat would be formed. Critical transport infrastructure projects for last and first mile connectivity in the coal, steel, fertiliser and food grain sectors have been identified and will be prioritised with an investment of Rs.75,000 Crore, Rs.15,000 Crore of which would come from private sources. (Source: Union Budget 2023-2024)

3. COMPANY OVERVIEW

3.1. Business Overview for the Fiscal

During FY23, the Company recorded a revenue growth of ~37% on a standalone level whereas the higher increase in operating expenses impacted the profitability. The Revenue growth has been driven by commencement of execution on few new projects and strong execution on projects continuing from the previous year.

3.2. Successes in Asset Monetization Program

Asset monetization program continues to substantiate ABL?s full cycle credentials and efficient use of capital to develop, construct, commission, operate and sale of investments.

The improvement in the overall business environment also helped your Company in its efforts for monetizing some of its assets. Divestments of CGD business and road project SPVs will facilitate successful exit to financial investor of UEPL and ACL respectively.

Currently the Company is pursuing sale of HAM projects, toll projects & annuity projects of National/state highway authorities and CGD business.

NHAI toll road projects were earlier sold to Galaxy Investments II Pte. Ltd. (KKR owned entity), however considering unanticipated delay in completing condition precedent customary for such transaction, ACL and KKR mutually agreed to terminate transaction without any financial implication to either parties.

3.3. Project Updates

During the year under review:

> NHAI declared 26^th October 2021 as Provisional Commercial Operation Date (PCOD) for Tumkur to Shivamogga - Package I in November 2022 and in January 2023, NHAI declared 19^th November 2022 as PCOD for Kandi to Ramsanpalle project.

> The declaration of PCOD for these projects makes the respective SPV eligible for Annuity payments from NHAI for the operations period of 15 years at an interval of every 6 months from said date.

> The company also achieved the Financial Closure for Baswantpur to Singnodi HAM Project of Rs.1,079 Crore in October, 2022.

> The Company?s step-down subsidiary, Ashoka Highways (Bhandra) Limited received on June 01, 2022, Rs.97.37 Crore inclusive of interest towards full & final settlement in respect of all claims / counter claims, COS work with NHAI and other disputes under the Concession Agreement.

> The Company?s step-down subsidiary, Ashoka Highways (Durg) Limited received on October 07, 2022, an extension of a total of 240 days in the Concession Period from the end date of the concession period i.e. July 22, 2028, to March 19, 2029 on account of settlement of various claims including loss of toll, with NHAI.

3.4. Key Projects Won

The fiscal year 2022-23 saw an order inflow of Rs.9,453.24 Crore. Some of the key projects that your Company secured were:

¦ LOA from the Government of the co-operative Republic of Guyana of USD 106 Mn in June, 2022;

¦ Improvement of Baraiyerhat - Heanko - Ramgarh Road (R151 & R152) by widening & Reconstruction of Existing Pavement, Bangladesh worth USD 80.15 Mn;

¦ LOI for a project for Department of IT & Communication, Govt. of Rajasthan of Rs.599.99 Crore in August, 2022;

¦ Seroni Road (excluding) to Sheopurkalan (including) GC Project excluding TRD and S&T work in connection with Gwalior - Sheopurkalan GC Project of North Central Railway worth Rs.284.65;

¦ LOA from East Central Railways of Rs.208.89 Crore in August, 2022;

¦ LOI from Provident Housing Limited of Rs.254.50 Crore in August, 2022;

¦ LOA from South Western Railway of Rs.258.12 Crore in September, 2022;

¦ LOA for EPC Project in Kerala of Rs.1,668.5 Crore in December, 2022;

¦ Award for Projects of Rs.754.57 Crore for Madhya Pradesh PoorvKshetra Vidyut Vitaran Company Ltd. in December, 2022; and

¦ LOI for Dakshinanchal Vidyut Vitran Nigam Ltd. Project of Rs.807.64 Crore in January, 2023.

3.5. Order Book

The Company ended the fiscal year 2022-23 with an outstanding order book of Rs.15,805 Crore.

The breakup of the order book for Roads and Railways projects comprise of Rs.9,595 Crore, which is 61% of the total order book. Among the Road project order book, HAM projects are to the tune of Rs.1,728 Crore and EPC Road projects are worth Rs.6,318 Crore and Railway is around Rs.1,549 Crore. Power T&D and others are around Rs.3,965 Crore which is approximately 25% of the total order book. The total EPC building segment is INR 2,221 Crore which is 14% of the total order book and EPC work of CGD business compromises of balance Rs.25 Crore.

With infrastructure development being the key focus area, the Company has tremendous opportunities for growth. The best in class execution and strong balance sheet provides a strong base for the company to capture a sizeable share of this opportunity.

3.6. Innovation, Quality, Safety and Environment

The Company continues its focus on the latest technology, innovative construction practices as well as ensuring high quality in its entire work. Your Company is also conscious of the threat posed by global warming to our planet and therefore takes its responsibility towards the sustainable construction. Your Company is very much sensitive and concerned about the health and safety of all its employees and other stakeholders. QHSE Policy and procedure have been framed and are implemented at all Project sites and offices.

In this regard, your Company has the following accreditations:

¦ Integrated Management System comprising of Certification of ISO 9001: 2015, ISO 14001: 2015 and ISO:45001:2018

¦ Quality Management System ISO:9001:2015

¦ Environmental Management System ISO 14001: 2015;

¦ Occupational Health and Safety Management System; ISO:45001:2018; and

¦ Green House Gases Monitoring and Measurement and planning for reduction management system ISO 14064.1:2006 & ISO 14064.2:2006

3.7. Resources and Liquidity

Divestments of CGD business and road project SPVs (developing & managing road concessions for NHAI and state authorities), would contribute to release capital locked in equity if the projects and also help in reducing the consolidated project debt of your Company by over Rs.5,616 Crore as on March 31, 2023 and improve the ability to raise additional funds when required. The Long Term rating of the Company is ‘AA/Stable? by Acuite and ‘AA- / Stable? (Reaffirmed) by CRISIL. The Company is thereby comfortably placed in its working capital financing.

Interest cost have gone up due to overall increase in Bank Rates / Repo rates but due to a proper mix of products like Supply Chain Finance, Working Capital Demand Loans and Corporate Credit Cards have kept the cost at reasonable levels. The Company is comfortable in sourcing for the funding of the ongoing projects and upcoming projects

3.8. Challenges Risks & Concerns

(a) Market Risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of risk interest rate risk and currency risk. Financial instruments affected by market risk include borrowings, trade and other payables, security deposit, trade and other receivables, deposits with banks etc.

i. Interest rate risk: - The Company?s activities exposed to interest rate risk. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company dynamically manages interest rate risks through a mix of fund-raising products and investment products across maturity profiles and currencies within a robust risk management framework.

ii. Foreign currency risk: - Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Company?s exposure to the risk of changes in foreign exchange rates is very less and relates primarily to the Company?s creditors for capital expenditures.

iii. Commodity Price Risk

The company is exposed to the risk of price fluctuations of Raw materials required for their road projects such as Bitumen, Cement, Steel (Iron & Steel), Crushed Stone, etc.

The company proactively manages these risks through forward booking, inventory management and proactive vendor development practices. The risk of price fluctuations in commodities is also mitigated to certain extend based on

the price escalation clause included in the contracts with the customers.

(b) Liquidity Risk

Liquidity risk is the risk that the Company may not be able to meet its present and future cash flow and collateral obligations without incurring unacceptable losses. The Company constantly monitors the liquidity levels, economic and capital market conditions and maintains access to the lowest cost means of sourcing liquidity through banking lines, trade finance and capital markets. In addition, processes and policies related to such risks are overseen by senior management.

(c) Regulatory Risk

The Company is exposed to risks attached to various statutes, laws and regulations. The Company is mitigating these risks through regular review of legal compliances carried out through internal control and audits.

(d) Human Resource Risk

Retaining the existing talent pool and attracting new talent are major risks. The Company has initiated various measures including training and integration of learning and development activities. The Company has formulated various schemes in the interest of the employees.

3.9. Human Resource Management

The Human Resource Department of the Company has significantly invested in its employer brand to attract and retain top talent and is focused on communicating the Company culture, values, and employee value proposition to differentiate themselves and appeal to prospective candidates. The Human Resource Department is dynamic and there have been further developments and emerging practices post pandemic period.

Training and development delivered via virtual mode i.e. e-learning offers the chance to the organization to deliver training at far reduced cost than traditional methods which require physical space and provisions. One of the biggest challenges of e-learning is ensuring the way the training delivered is effective and that employees retain key information.

The Human Resource Department provides an excellent platform for employee to maximize their productivity and human resource potential while maintaining high level of quality standards. The process has an embedded learning management system that enables learners to perform a variety of activities including content creation, tracking, reporting and management of the learning function.

The Ashoka Buildcon?s Learning Environment (ABLE) offers several benefits, including flexibility to learners to access learning content at their convenience, pace, anytime and anywhere. It provides accessibility to individuals who live in remote areas, or have other constraints that prevent them from attending traditional classroom training sessions. The platform provides personalized learning experiences and access to the session, material that suit their needs, and progress at their own speed. It is cost effective and is more affordable. The ABLE provides opportunities for individuals to update their skills and knowledge and allows our professionals to acquire knowledge in their domain.

This platform incorporates multimedia elements such as videos, simulations, and interactive quizzes. These features make the learning process more engaging and enhance understanding by catering to different learning styles for up-skilling and reskilling of our employees.

This e-learning platform has provided us numerous benefits that contribute to accessible, flexible, and engaging learning experiences designed with an intent to raise international quality standards while safe execution of works.

The department has adopted agile HR methodologies, such as flexibility, collaboration, and iterative approaches in the areas of performance management, talent acquisition, and employee development. The organization has moved away from traditional annual performance reviews and embraced continuous performance management. This approach involves regular check-ins, feedback, and review of goal-setting throughout the year to provide ongoing support and development opportunities for employees.

3.10. Internal Control and Its Adequacy

The Company has an internal control mechanism, which is aligned with its evolving needs. It operates through ERP system - SAP and has implemented adequate internal controls. Internal Financial Controls means the policies and procedures adopted by the Company to ensure the following: orderly and efficient conduct of its business, including adherence to Company?s policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. Internal Controls are a key pillar of Corporate Governance.

The Company has well-placed function-wise detailed internal control system, which ensures that all assets are safeguarded and protected and that the transactions are authorized, recorded and reported correctly. The Company?s internal financial control framework commensurate with the size and operations of the business and is in line with requirements of the Companies Act, 2013. The Management have approved, adopted and implemented various policies, documents/standard operating procedures which assist the various departments of the Company in ensuring accountability, accuracy, controls and transparency within the organization. The Audit Committee periodically reviews the adequacy of the internal control systems and provides direction and guidance.

The internal audit plan is approved by Audit Committee which covers more than 80% of expected annual business every year. The Audit Plan includes a combination of audit of internal control systems and operational audits. Audit of internal control system focuses on the adequacy of internal controls in the Company and also the reporting system in various functional areas like Procurement, Project execution & Billing, Construction Equipment and vehicles, accounts, human resource, administration and other departments. The audit of information technology general control (ITGC) is also done every year.

The findings of the Internal Audit and Internal Control system are shared by internal auditors with the Audit Committee by way of presentation. The Audit Committee has expressed its satisfaction with the adequacy of the Internal Control systems and procedures of the Company for monitoring these systems.

Whistle-blower mechanism, an important element of the internal control system, encourages the directors and employees to report genuine concerns, misconduct, or fraud without any fear of unfair treatment or punishment with direct access to the Chairman of the Audit Committee in appropriate and exceptional cases.

4. FINANCIAL OVERVIEW

4.1. Standalone Financial Overview

Revenue from Operations

During the Fiscal 2023, on Standalone basis, your Company registered revenue from operations of Rs. 6,372.35 Crore as against Rs. 4,644.64 Crore in Fiscal 2022, an increase of ~39% mainly due to an increase in revenue from contracts with customers on account of improvement in overall business environment and with lesser impact of the COVID-19 pandemic.

Other Income

Other income for the Fiscal 2023 stood at Rs.105.68 Crore as compared to Rs. 145.65 Crore in Fiscal 2022, with decrease of 47%, primarily reduction in interest income on loans given to Subsidiary & Joint venture and write back of old balances.

Cost and Expenses

Cost of Material Consumed and Construction Expenses increased by 45% to Rs. 5,524.72 Crore in Fiscal 2023 from Rs. 3,801.14 Crore in Fiscal 2022 primarily on account of more execution resulting in increased turnover, this cost has proportionately increased further. It is also increased marginally due to inflation/price rise impact.

Employee Benefit Expenses

Employee Benefit Expenses increased by 5.72% to Rs.191.48 Crore in Fiscal 2023 from Rs.181.11 Crore in Fiscal 2022 primarily on account of recruitment of qualified staff has been made for new Projects and also on account of increments to staff.

Other Expenses

Other expenses increased by ~15% in Fiscal 2023 as compared to the previous financial year These expenses mainly comprise of rent, rates and taxes, insurance, repairs and maintenance, traveling and conveyance, legal & professional expenses etc.

Depreciation

The depreciation increased by 6.50% to Rs.74.24 Crore in Fiscal 2023 from Rs.69.71 Crore in Fiscal 2022, mainly due to addition in Fixed Assets. The depreciation has been provided on the written down value method, as per the useful lives specified in Schedule II to the Companies Act, 2013, or based on the useful life determined by technical evaluation carried out by the management?s expert.

Finance Costs

Finance costs increased from Rs.85.62 Crore in Fiscal 2022 to Rs.140.98 Crore in Fiscal 2023. The finance cost comprises of interest on term loan, working capital loan, bank guarantee charges and other borrowing costs. The major reasons for increase are Interest on working capital loans availed from banks and interest bearing mobilisation advances received from clients.

4.2. Consolidated Financial Overview

Revenue from Operations

During the Fiscal 2023, on a consolidated basis, your Company registered revenue from operations of Rs.8,100.48 Crore as against Rs.5,945.80 Crore in Fiscal 2022, an increase of 36%, mainly due to an increase in revenue from contracts with customers on account of improvement in overall business environment and increase in toll collection.

Other Income

Other income for the Fiscal 2023 stood at Rs.134.64 Crore as compared to Rs.201.42 Crore in Fiscal 2022, a decrease of ~33%. It primarily constitutes interest income on fixed deposits, interest income from Subsidiary & Joint venture, claims receipt and write back of old balances at projects.

Cost and Expenses

Cost of Material Consumed and Construction Expenses increased by ~50% to Rs.5561.36 Crore in Fiscal 2023 from Rs.3,710.43 Crore in Fiscal 2022. This cost has proportionately increased further. It is also increased marginally due to inflation/ price rise impact.

Employee Benefit Expenses

Employee Benefit Expenses increased by 9.5% to Rs.387.82 Crore in Fiscal 2023 from Rs.354.14 Crore in Fiscal 2022 primarily on account of increased manpower for new Projects and increments to staff.

Other Expenses

Other expenses decreased by ~26% in Fiscal 2023 as compared to the previous financial year. The other expenses mainly comprise of rent, rates and taxes, insurance, repairs and maintenance, traveling and conveyance, legal & professional expenses, donation etc.

Depreciation

Depreciation increased marginally by 1% to Rs.341.08 Crore in Fiscal 2023 from Rs.338.23 Crore in Fiscal 2022 primarily on account of increase in depreciation of toll projects due to increase in toll collection.

Finance Costs

Finance costs increased by ~10% from Rs.1,003.75 Crore in Fiscal 2022 to Rs.1,103.83 Crore in Fiscal 2023 due to higher utilization of working capital and equipment loans due to more execution.

The finance cost comprises of interest on term loan, working capital loan, bank guarantee charges and other borrowing costs and unwinding of discount on financials liabilities.

4.5. Disclosure of Accounting Treatment