technofab engineering ltd Management discussions

OVERVIEW OF THE INDUSTRY

The engineering and construction industry saw overall market growth despite cost pressures, labour shortages, and trends toward fixed-bid projects. We originally forecasted this trend would persist into 2020 and 2021, but the COVID-19 pandemic caused a shift in project timelines and a drop in the sectors labour and employment.

COVID-19 IMPACT

In 2020, the global economic sky was overcast with COVID-19. By end-March 2021, the virus had resulted in over 128 million infections and over 2.8 million mortalities worldwide. The year 2021 has commenced with both hope and fear - several parts of the world are locking down and bracing against new waves of infections and speedily communicable mutations. At the same time, the approval of several vaccines has spurred vaccination drives worldwide, albeit at different speeds. Nearly 600 million of vaccine doses have already been administered (March 31, 2021), World trade declined by around 8.5 per cent, with the contraction in services trade outpacing the fall in merchandise trade.

With gradual lifting of restrictions and reopening of the economy, the pace of contraction moderated in Q2 and GDP returned to positive terrain in Q3 of 2020-21. Sensing the recovery gaining traction, equity markets became ebullient, with the BSE Sensex staging a V-shaped recovery and rising over 91 per cent by end-March 2021 from the lows of March 2020, buoyed by strong corporate performance in Q2 and Q3 of 2020-21, the roll-out of a massive vaccine programme, fiscal and monetary stimulus in place and surges of capital inflows. The prospects for the Indian economy though impacted by the second wave, remain resilient, the gathering momentum of activity in several sectors of the economy till March,

The Union Budget 2021-22 has emphasised on, among others, infrastructure development along with enhancing credit flow to allied sectors and improvement in supply chains.

The Union Budget 2021-22 has Government plan to expend Rs. 1.97 lakh crore in next 5 years for PLI schemes in 13 Sectors, Rs. 1,10,055 crore for Railways of which Rs. 1,07,100 crore is for capital expenditure.

Under Power Sector, 139 Giga Watts of installed capacity and 1.41 lakh circuit km of transmission lines added, and additional 2.8 crore households connected in past 6 years

• Consumers to have alternatives to choose the Distribution Company for enhancing competitiveness

• Rs. 3,05,984 crore over 5 years for a revamped, reforms-based and result-linked new power distribution sector scheme

• A comprehensive National Hydrogen Energy Mission 2021-22 to be launched

Key points of Annual Documents released by Economic Survey of India includes Strategy to face the pandemic, four pillar strategy, Economic Recovery etc.

A V-shaped recovery is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline as:

• It is supported by the initiation of a mega vaccination drive with hopes of a robust recovery in the services sector and prospects for robust growth in consumption and investment.

• V-shaped recovery is due to resurgence in high frequency indicators such as power demand, rail freight, E-Way bills, Goods and Services Tax (GST) collection, steel consumption, etc.

• The fundamentals of the economy remain strong as gradual scaling back of lockdowns along with the support of Aatmanirbhar Bharat Mission_have placed the economy firmly on the path of revival.

This path would entail a growth in real Gross Domestic Product (GDP) by 2.4% over the absolute level of 2019-20 - implying that the economy would take two years to reach and go past the pre-pandemic level.

There is an estimated GDP growth by 15.4% which is in line with International Monetary Fund.

OVERVIEW OF BUSINESS

Currently, the Indian EPC sector, with its rising prominence and changing dynamics, has more than 150 participants and a multitude of stakeholders. Players have carved out a niche for themselves and have developed their reputation, based on their sector focus.

However, the scenario in this industry has changed in the last few years. This sector is facing a significant liquidity crunch. The recent financial turmoil and the rupee depreciation have added to the uncertainty faced by the industry. The sector is also facing difficulties in relation to issues pertaining to project take-off, particularly those relating to land acquisition and environmental clearances, delay due to regulatory changes etc. With such delays and uncertainty in the construction commencement, EPC pricing loses its validity. Furthermore, cash stress situation, weakening financial strength of both contractors and developers along with volatility in material price has made project execution difficult. Other problem is unrealistic bids by new entrants in the industry and also by the established players due to which several projects get are stuck off in between.

Technofab Engineering with a track record of 50 years is one of Indias premier engineering and construction companies specialized in providing complete engineering, procurement and construction (EPC) services in various sectors. It has completed more than 150 Projects on turnkey EPC basis out of which 82 Projects involve 40000MW installed power where we have done various Balance-of-Plant Systems in fuel oil, fire protection, piping and water/waste water.

It has a diversified blue chip customer list and is recognised by virtually all leading consultants. Since 1993 it has extended its operations to the African continent having successfully executed several turnkey assignments in Seychelles, Bhutan, Kenya, Zambia, Ghana, Zimbabwe, Liberia and Ethiopia.

BUSINESS STRUCTURE

The Company serves customers, domestic as well as overseas, who operate in diverse sectors like Power, Industrial, Oil & Gas, Electrical, Water and Infrastructure Sectors in India, Africa & Asia Pacific Regions through Turnkey EPC Contracts for a wide spectrum of packages. The business opportunities are linked with investments taking place in these sectors.

Companys success has been built around its core competence of providing turnkey composite EPC services covering all aspect of Civil Engineering, Electrical Engineering, Mechanical

Engineering and Instrumentation Engineering. All recent diversification has been achieved around this core competence and no unrelated diversification is planned unless there is a strong strategic fit. Due to the multifaceted services being offered by the company, the company is able to provide EPC services to virtually all infrastructure industrial sector and it is no longer dependent on the thermal power sector as was the case a few years ago. In order to spread the company geographically, company targeted the overseas market and the success of these endeavours have enabled the company to grow in a profitable manner.

The Company intends to continue with this market diversification strategy as it is an effective antidote to the business cycle in some geography. In order to sustain a singular objective of profitable growth the Company has made imperative to redouble our marketing efforts as the strike rate is expected to go down.

POWER SECTOR

Indias power sector has undergone a significant change, and this has redefined the industry outlook. Demand for electricity is seeing a steady growth with a pick-up in the economy, especially manufacturing activity, as well as favourable government policy. The government has implemented various progressive measures to maximise power generation capacity and improve distribution. Government initiatives like 24x7 power, power to all households and UDAY, which has improved viability of discoms to buy more power to serve more customers and the CEC initiatives that include linking of deviation settlement mechanism (DSM) prices to DAM prices at the exchange average clearing price, have helped the sector witness robust growth. The Company sees big opportunity in this Sector.

WATER SECTOR

This sector encompasses several elements viz. pumping and distribution, treatment of raw and waste water including recycling and desalination. It covers urban and rural water supply, industrial water, sewage treatment and industrial waste water treatment.

The water sector therefore has the greatest long-term potential. Seeing the huge investments domestically, the Company is well placed to secure significant new business in this sector for several consecutive years.

The urban population in India, which stood at 377 million in 2011, is expected to grow by 404 million to become 781 million by 2050 (World Urbanisation Prospects, 2014). Many Indian cities get their water supply from sources far away at high costs including for energy used for pumping water to these cities. Cities with larger populations generally rely more on surface water than the groundwater. In cities, where groundwater is the source of water supply, aquifers are getting depleted due to over extraction. At the same time, sanitation has not kept pace with water supply in the country.

Human health and economic prosperity are very much dependent on clean water supply and good sanitation as on other factors. Hence, it is important to look at how pollution of water sources, especially from sewage, affects water quality and water security.

In recent years the Company has identified water and waste water treatment as a focus area. As per the Govt. efforts to rejuvenate water bodies, in order that they are able to provide fresh potable water to the public (ever increasing) considerable investment is being directed to provision of proper treatment and disposal of waste water/sewage /drainage. Towards this end, Government has also availed of line of credits from the World Bank. Leveraging existing experience in water and waste water infrastructure, the Company is bidding for several treatment plants, both on its own, and where pre-qualification requirements do not permit it to bid on its own then the Company is forging tie ups on a case by case basis.

ELECTRICAL SECTOR

This sector provides multiple opportunities. The most important ones are those emerging from rural electrification which aims at getting grid electricity to all except those villages which are too remote to be connected to the grid. This is already the source of the Companys major business and will amply provide further opportunities. Apart from above, the Government has come out with certain schemes which provides ample opportunities to the Company like Deen Dayal Upadhyaya Gram Jyoti Yojana, The DDUGJY scheme, The Saubhagya Scheme or Pradhan Mantri Sahaj Bijli Har Ghar Yojana, Integrated Power Development Scheme. Further the Company is also exploring opportunities in the AIS/GIS Substation Space.

The modernization and expansion of the Indian Railways opens up an entirely new, though related, sector. While opportunities will emerge in many types of project work, the Company will mainly target the railway electrification business. Industrial electrification is another area, though largely a small niche covering those customers who seek a single turnkey EPC solution for their electrification needs.

INDUSTRIAL SECTOR

A sector where the Company has traditionally secured and executed a fairly large volume of business in last 9 years, lately it has not been providing any significant opportunities, on account of the economic slowdown.

INTERNATIONAL BUSINESS

Internationally, the Company continues to focus on Sub-Saharan Africa and South Asia and mainly pursues projects funded by multilateral funding bodies like World Bank, African Development Bank, Asian Bank, EXIM Bank, etc. By their very nature, such projects are in the social sector and cover areas like Water and Sanitation, Electricity Distribution, etc. Such projects are largely in Africa and to an extent in South Asia and Asia Pacific Region. So far the Company is executing/has executed projects in 12 countries in Africa, Viz. Kenya, Seychelles, Tanzania, Ethiopia, Malawi, Zambia, Ghana, Zimbabwe, Mozambique, Rwanda, Uganda, Liberia, etc. apart from two countries in Asia Pacific Region i.e., Fiji & Bhutan. Sub-Saharan Africa alone provides good opportunities not only in the countries that Company has already worked in but also in the remaining over two dozen countries.

COMPARISON OF PERFORMANCE FOR THE FINANCIAL YEAR ENDED MARCH 31, 2021 VISA-VIS FINANCIAL YEAR ENDED MARCH 31, 2020

The Company has under-performed in terms of income with a drop by 56.99%. The Company has incurred a loss of Rs. 128.00 Crore which turned its net worth negative. The Company couldnt achieve its bench mark turnover due to various reasons already discussed in the Directors Report. A huge part of the loss is due to termination of few projects and invocation of Bank Guarantees etc. as already mentioned in the Exceptional items in the Notes to the attached Balance Sheet. In the current financial year, the Company could not fully service its projects due to non-tie-up of enhanced working capital facilities with the banks and resultantly the Company could not meet the funding requirements for projects by providing material and payment for services therefore the scheduled project execution timelines could not be met and the project execution was delayed substantially which resulted into termination and invocation Bank Guarantees.

Rs. In Crore

Particulars	FY 20-21	FY 19-20	% Variation
Total Income	37.80	61.89	-56.99%
PBDIT (After Exceptional Items, if any)	-112.62	-186.02	-39.46%
Interest and Financial Charges	12.38	33.14	-62.46%
Depreciation	3.0	6.77	-55.69%
Profit Before Tax	-128.00	-225.94	-43.35%
Profit After Tax	-128.00	-240.54	-46.79%
EPS	-122.02	-229.3	432.14%

PERFORMANCE: SEGMENTWISE -GEOGRAPHICAL BREAKUP

While considering the revenue from different verticals, the Company treats all its operations as a single vertical. However, for the benefit of investors, the contribution of individual sectors to revenue and its comparison with previous years is given below:

SECTOR	FY 2018-19	FY 2019-20	FY2020-21
Conventional Power	1.24%	11.91%	-
Water & Waste Water Treatment	54.69%	45.18%	38.95%
Industrial & Infrastructure Sectors	0.5%	-	-
Electrical sub-stations & Distribution	43.57%	42.91%	37.25%
Agricultural	-	-	23.80%
TOTAL	100%	100%

As can be seen in the above table that there is a continuous churning in the relative contribution of individual sector. 22.07 % of the total turnover is from overseas projects.

ORDER BOOK AND THE YEAR AHEAD

The Companys Order backlog position on March 31, 2021 is approximately INR 600 Cr. Further, due to the fact that the Company is undergoing a loan restructuring process from various consortium member banks, it is not currently bidding for any new projects till such time the restructuring process is complete. The Companys focus in the coming year will be to close existing projects, collect outstanding payments from Customers, reduce Banks exposure by returning various Bank Guarantees after closure of various projects and at the same time reduce its operational costs by reducing manpower and other overhead costs.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company management recognises the necessity, and has had in place adequate systems of internal controls. It is firmly believed that a strong internal control system with flexibility is imperative to realize Companys vision. Accordingly the company always gives priority to it to achieve the following objectives :-

1. Efficiency of operation

2. Accuracy and promptness of financial reporting

3. Safeguard of Company assets

4. Compliance with laid down policies and procedures.

5. Compliance with rule and regulations.

The Company has a reasonably robust Internal audit team which reports to the Audit Committee of the Board and a formal Risk Management Policy is in place.

HUMAN RESOURCE DEVELOPMENT AND INDUSTRIAL RELATIONS

As on 31 March 2021, the company has 97 employees in its family excluding the employees of its Contractors and suppliers.

The Company follows a philosophy whereby employee empowerment is a key area of focus. The Company strongly values the individuality of its employees, which ultimately results in a management, operations and training philosophy distinct from that of our competitors. The Company has a number of ongoing initiatives related to employee development. Apart from various training programmes relating to the needs of the Company, there are initiatives to identify and groom future leaders.

Industrial and employee relations with the Company remain cordial throughout the year. It has been with the fulfilment of our market commitments, prompt communication, and participation in social activities and to provide challenging and safe working atmosphere in the company, wherein every employee can develop his own strength and deliver his expertise in the interest of the Company.

The Board of Directors on record thanks to all of the employees for their valuable contribution towards the growth of the company. Technofab Engineering encourages its team members to go beyond the scope of their work, undertake voluntary projects that enable to learn and contribute innovative ideas in meeting goals of the company.

CONTINGENT LIABILITY

The Contingent Liability is primarily on account of Bank Guarantees given by the Company to its Clients at the time of award of the project which continue to remain valid till completion of the project as per the terms of the agreement with the Client.

FORWARD LOOKING STATEMENTS

Statements in this Management Discussion and Analysis of Financial Conditions and Results of Operations of the Company describing the Companys objectives, expectations or predictions may be forward looking within the meaning of applicable securities laws and regulations. Forward looking statements are based on certain assumptions and expectations of the future events.

The Company cannot guarantee that these assumptions and expectations are accurate or will be realised. The Company assumes no responsibility to publicly amend, modify or revise forward looking statements, on the basis of any subsequent developments, information or events. Actual results may differ materially from those expressed in the statements. Important factors that could influence the Companys operations include interconnect usage charges, determination of tariff and such other charges and levies by the regulatory authority, changes in government regulations, tax laws, economic developments within the country and such other factors globally.

The financial statements are prepared under historical cost convention, on accrual basis of accounting, and in accordance with the provisions of the Companies Act, 2013 (the Act) and comply with the Accounting Standards notified under Section 133 of the Act. The management of Technofab Engineering Limited has used estimates and judgments relating to the financial statements on a prudent and reasonable basis, in order that the financial statements reflect, in a true and fair manner, the state of affairs for the year.