IVRCL Ltd Management Discussions.
The Indian economy has faced some headwinds in the year under review. Nevertheless it continues to receive global attention because it is one of the brighter hopes of the world.
The Infrastructure Industry is a key sector in a developing economy. It gives very large employment running into crores of people and also has a multiplier effect on other economic sectors. It continues to be under a slowdown due to a variety of reasons. The Government has new intitiatives which should reverse the trend and sectors like Roads and Metro Railways are in focus. Large schemes have been announced for River transport upgradation and a Bullet Train is proposed between Mumbai and Ahmedabad with Japanese support.
The problems of the infrastructure which have been adequately written about and highlighted earlier are being addressed by the Central Government. New funding mechanisms under Smart City and NMCG have started being implemented. In the Roads BOOT as a method of awarding jobs has been stopped and new orders are based on the cash contract system / EPC system or Hybrid - Annuity.
In our country, nearly 226 million people do not have access to safe drinking water and more than 100 million people live in places where water is severely polluted. About 54% of India faces high to extremely high water stress. When the annual per capita of renewable freshwater in a country or a region falls below 1700 cubic metre, it is held to be a situation of water stress. According to recent studies, per capita availability of water is likely to fall down to 1140 cum. in 2050 suggesting that we are heading towards a serious water crisis, if timely steps are not taken to tackle it. Once surface water is exhausted, people dig to find more water. Groundwater levels across 4,000 wells have receded by 54% in the last seven years.
Falling groundwater levels shows that water is moving further away from the surface and becoming less accessible.
Over the years, increasing population, growing industrialization, expanding agriculture and rising standards of living have pushed up the demand for water. Efforts have been made to collect water by building dams and reservoirs and creating ground water structures such as wells. Recycling and desalination of water are other options but the cost involved is very high.
VERTICAL-WISE PERFORMANCE WATER
The water sector has seen a significant downturn in the last few years. The many projects required to make water available to all, have not yet been ordered. Under the new and more comprehensive AMRUT scheme many new Water and Sewage Treatment schemes are planned and tenders will be forthcoming in 2019-20. For the Ganga cleanup investments have started under the Namami Ganga scheme.
In the Water segment, your company has completed 25,000 km of pipeline installation, 1300 MLD of WTP and 100 MLD of
Desalination Water Supply (the first and largest of its kind in India) and continues to march as a leader in this sector.
A selective list of projects completed in Water Sector during the year includes:
1. Chambal - Bhilwara Water Supply Project Phase-
II: Work of Cluster Scheme of 205 Villages of Asind Tehsilalong with Augmentation of UWSS of Asind Town from Haripura Chouraha Headworks under Chambal- Bhilwara Water Supply Project Phase-II, Operation & Maintenance for 10 years on single responsibility turnkey basis. Value Rs. 249 Cr.
The government has unveiled a plan to provide water for all. Signs of water industry order revival are coming in from some of the recently elected state governments. The central government proposes to treat polluted water (sewage) for cities on Ganga basin through schemes like Clean Ganga. AMRUT (Atal Mission for Rejuvenation and Urban Transformation) Scheme aims at doing the same for the other cities of India not on the Ganga or Yamuna basin. With these plans getting implemented, the sector will see better years.
The agriculture sector gives livelihood to 45% of our population but contributes only 16% to our GDP. One way to increase the incomes of the agrarian population is to convert poor precipitation rain-fed areas to one where an assured supply of water is available, through irrigation schemes.
Of the 140 million hectares (mh) of net cultivated area in India, only around 60mh are irrigated. For Indian agriculture to grow around 4% per year, it needs to increase the area irrigated, introduce new high-yield technology and expand cultivable land. Emphasis on aquifer mapping, watershed development, involvement of NGOs, and efficiency in developing irrigation capacity and all other measures using water more judiciously. This will require substantial investments in this sector to achieve these goals.
Your company has completed several large lift irrigation projects - 2300 km of Canals, 2.5 million cum/hr of pumping, 476.8 MW total pump capability and 104 km of tunnels (4-18 m dia.) as of March 2015. Your company continues to forge ahead with these strong pre-qualifications.
BUILDINGS & INDUSTRIAL STRUCTURES
Rapid urbanization has emerged as an undeniable global trend which India too is now following. It demands todays city leaders to make tough decisions about infrastructure that will impact generations to come. With 410 million city dwellers, India has the worlds second largest urban population. It is estimated that by 2030, about 600 million people will reside in cities in India and account for 70% of Indian GDP, according to a McKinsey report. As more and more people migrate from rural to urban areas, the existing urban cities would soon be crunched on resources and infrastructure.
Dnn/M4 OH! Q 31
The central government has announced various mega schemes aimed at transforming urban India - 100 Smart Cities, the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) for 500 cities, and Housing-for-All by 2022. These projects envision smart cities as part of a sustainable society in which people live, work and play in safety and comfort while also coexisting in harmony with the environment.
The last few years did not see any significant downturn as Buildings are a key requirement for economic growth. The market, however, has been very competitive. Demands on material availability have also become a major concern, for instance, sand is now very difficult to get.
Your company continued its trend and market presence. As of Mar 31, 2018, about 51.6 million sft have been constructed using 1.8 million cum of concrete, 30,600 MT of structural steel, and 3.43 lac mtrs of piling (500-1600 mm dia). There would be a well-known building complex by IVRCL in most of the cities in India.
A selective list of major completed works in Buildings & Industrial Structures (B&IS) during the year includes:
1. Tata Institute of Fundamental Research Building
: Construction of Research & Technical Block, service buildings including Electrical, Air-conditioning and Development works such as Roads, SWD, Substation, UG Tank, Septic Tank, Guard House, Compound wall, Street Light, Borewell etc. for TIFR, Value Rs. 49 Cr.
2. Bangalore Metro Rail Project : Construction of Two Elevated Metro Stations Viz. R.V.Road Terminal and Jayanagar Reach - 4 for Bangalore Metro Rail Project, Phase-I Rs.91.10 Crores
With increasing needs for urbanization and all-round development, this sector will see sustained investment. The new building complexes will also be well integrated with climate control, recyclable building materials, CCTVs and smart controls. Given its pre-qualification, your company is well poised to capitalize these opportunities.
Your company concentrates on Power Transmission Lines and Rural Electrification. The central government is planning to award transmission projects worth Rs 1 lakh crore in a years time, thus giving a good push to the expanding electricity transmission across the country.
Your company has got 7 lac BPL connections provided, 11000 villages electrified, 1460 km of transmission line (132, 220, 400 & 765 KV) erected, and 60 track kms of traction and OHE works done as of March 31, 2018. These match the industry best.
A selective list of major completed works in Buildings & Industrial Structures (B&IS) during the year includes:
1. 765 KV S/C Angul Pooling Station - Jharsuguda
Pooling Station Transmission Line : Supply & Services Contract for Tower Package - P213 - TW01 for 765 KV
S/C Angul Pooling Station - Jharsuguda Pooling Station Transmission Line (Line-1) (Part-I) associated with Part-A (System Strengthening in Orissa) of Transmission System for Phase-I Generation Projects in Orissa for PGCIL - Value - Value - Rs.119 Cr..
It is no secret that big economies poised for rapid growth need robust infrastructure, with roads forming a major part of it. India has the second highest road network in the world, spanning over 4.7 million km carrying over 60% of the countrys total freight traffic and about 85% of the passenger traffic. However, only half of the country is paved, and less than a quarter of the national highways meet required standards. While road freight volume and the number of road vehicles have been growing at a compounded annual growth rate of 9.1% and 10.8% respectively, the growth rate of length of roads lags behind at 4%.
Indian rail network is the 4th longest and the most heavily used system in the world. The present suburban railway services in India are limited and are operational only in the metros. The sector needs speedy investments which have not been forthcoming in the last ten years.
On the Transportation front, your company has completed 3402 lane km of Highways, 75 km of railway track, and 1963 lane km of highway concession projects under operation and development .
In the last three years the national Road building programs under NHAI has revived after resolving legacy problems. There is a fillip to Road building and completion is upwards of 25 km per day. EPC Cash contracts or the Hybrid Annuity Model (HAM) are now the chosen payment methods.
The government has announced the National Highway Development Programme, aiming to upgrade 54,000 kilometres of highways. On the rail network front, the government aims to build 25,000 kilometres of new lines by 2020, as against about 2500 kilometres added between 2006 and 2014. Recent announcements by the government showing a quantum rise in transportation infrastructure do provide us good hope of the sector getting improved in the coming years.
Your company continues to leverage its strong pre-qualification for bagging and executing the upcoming projects in the transportation sector
The Mining industry in India is a major economic activity which contributes significantly to the economy of India. In recent years, it has been facing issues of large-scale displacements, resistance of locals, human rights issues like indentured labour and environmental issues like pollution, deforestation and dangers to animal habitats.
Your company has been treading carefully in the mining sector and has a sophisticated and prestigious project.
Malanjkhand Underground Project, Madhya Pradesh:
The project aims to develop an underground mine and it is planned to extract 5 Million TPA of copper ore in Malanjkhand, Balaghat, Madhya Pradesh. It involves sinking 4 vertical shafts to depths ranging from 665m to 695m, for lifting ore, carrying men & material and for ventilation. A total of 2 Declines at 1 in 7 gradients, reaching up to a depth of 660m have to be constructed.
The excavation of declines, drives, crosscuts, passes, raises etc. would go to a total length of 55.40 km. The project would use sophisticated mining machinery - two Friction Winders of capacity 4500 kW & one Service Winder of capacity 2300 kW for hoisting of 100 workers as a part of the job.
India has vast minerals potential with mining leases granted for longer durations of 20 to 30 years. The demand for various metals and minerals will grow substantially over the next 15 years. The power and cement industries also aid growth in the metals and mining sector. The economy growth of more than 7% in the years to come will provide a major thrust to the demand of minerals like coal and iron ore.
Transmission Line Tower (TLT) , Nagpur
Your companys TLT factory and business at Butibori, Nagpur, Maharashtra manufactures and supplies Transmission Towers. With a manufacturing capacity area of 23 acres and an installed capacity of 36,000 MT per annum, it is a vital support for the EPC Transmission Line business. It is certified by International Standards Certifications Pty. Ltd (ISC) for Integrated Management System (IMS). Of late, the factory caters to other EPC players in the transmission sector as a quality vendor.
The end use sector has seen a slowdown in its fortunes in 2018-19 due a paucity of new orders for Transmission Lines. Nevertheless the business has stood on its feet as a standalone merchant producer and clocked 11700 t in 2017-18 . All key blue chip EPC customers in the field are its customers. It is expected that in FY 2019-20 the flow of orders to the large EPC players in the industry will revive , leading to more orders to this business unit.
IVRCL TECHNICAL SERVICES & SOLUTIONS
The industry customers are now trying to find newer ways for efficient and effective use of their assets constructed under EPC orders. As a policy, government customers are now combining capex (EPC) orders with O&M (Operations & Maintenance). The O&M could typically be for five years. This is being felt in all the companys business sectors of Water, Irrigation, Power, Transportation and Mining.
Your company has noticed this trend and entered into value added services, including O&M three years back. In the first phase, the O&M business will focus on the existing EPC lines of business, and leverage the companys pre-qualification and
technical manpower talent.
India has a severe shortage of trained technical talent. This service division will provide gainful employment and meaningful work to thousands of qualified youngsters across the country. The companys training capabilities will be deployed to bring raw recruits quickly to the desired competence level. The first set of services relate to the Water sector.
The offerings of IVRCL Technical Services and Solutions include:
Retrofit & Revamp
Plant Performance Audits
Asset performance & efficiency in a cost-effective manner is instrumental in running a business profitably over time. Every aspect of Assets undertaken by IVRCL Technical Services and Solutions is handled by highly trained and seasoned industry professionals.
An outsourced O&M allows the customer to :
Reduce operational cost and improve systems and processes
Have access to a large team of experienced engineers and technicians spread across the country
Increased Assets Turnover & life
RISKS AND CONCERNS
In view of the current environment and the CDR/SDR packages and having been referred to the NCLT subsequently , IVRCL has enhanced its focus on risk management. Project execution overview has been significantly strengthened by adding more experienced and senior persons to the PMC (Project Monitoring Cell). Reviews are conducted regularly to understand the cost profile of the original bid and the effect of time on costs.
Risks are also faced in the new jobs which have to be bid for and the market is very price competitive. IVRCL has put in place much stronger cost review mechanisms for jobs to be bid and has increased the benchmark rate at which the job will be bid for.
The concerns for the company are the delay in sorting out the cases pending for extra claims, delays with some of the jobs relating to the land acquisition and environmental clearances, and very slow progress on arbitration. The concern is also that customers who delay from their side have no decision-making powers at the Executive levels to pass on the compensation for this.
INTERNAL CONTROL SYSTEMS AND ADEQUACY
IVRCL continues to maintain an effective system of internal control for facilitating accurate, reliable and speedy compilation of financial information, safeguarding the assets and interests of the company and ensuring compliance with all laws and regulations.
The companys internal control systems are commensurate with the nature of its business and the size and complexity of its operations, which provide, among other things, reasonable assurance of authorization, recording and reporting of the transactions of its operations in all material respects and of providing protection against significant misuse or loss of the assets of the company.
The internal control system is managed through a continuous internal audit , which is empowered to examine the adequacy and compliance of systems and processes with the policies, plans and statutory requirements. The internal audit team also conducts regular audits across the companys operations in all key business areas .
All significant audit observations and follow-up actions are reported to the Audit Committee along with Internal Audit Reports and Management responses/replies thereon. The minutes of the Audit Committee are reviewed by the Board for its suggestions / recommendations to further improve the internal control system. The Audit Committee periodically reviews audit plans, observations and recommendations of the Internal Auditors with reference to significant risk areas and adequacy of internal controls.
OPPORTUNITIES & THREATS
IVRCL has assiduously built an enviable list of pre-qualifications across several areas of competence in the EPC domain over the past two decades. The infrastructure sector with its low growth in the last few years has been in a conservation mode and has focused more on its survival and not so much on growth. The opportunities that will arise relate to fresh investments being proposed all over the country. All of these will ask for new technologies like new methods of sewage treatment, urban transportation and long-distance rail transport. It will also require new methods of project execution and techniques such as the use of prefabricated elements.
The much greater concern being there for the environment, opportunities would arise in remediation works such as treating lakes, dredging rivers and restoring water bodies. In urban solid waste management, there will be many opportunities to collect and segregate waste, process waste and generate energy from waste. With the rising pressure of population in cities and the shortage of public space, software and IT hardware with sensors will be used to improve public asset use such as in parking management, delivery of citizen services, traffic management and so on.
The threats that would prevail relate more to the individual company and its ability to handle the municipality and the Government customer expectations. At the outset, the financial and bidding capability norms could get tougher. The large opportunities and the active government interest combined together is likely to bring in global players to India and they would probably be allowed to use their foreign pre-qualifications. The customers would also expect timely execution and would not be considerate for time extensions. In general, these customers might also be reducing the planned execution time for various tenders.
The Government proposes to use new techniques like Swiss Challenge, which allows a company with new capabilities and technologies to offer a solution and this will enable new parties and competitors to enter the fray and set a benchmark.
Last but not the least, the market is expected to continue being price competitive. Design for frugal material usage, strong cost skills for procurement and good contracting skills are required to ensure the promised profits.
HUMAN RESOURCE MANAGEMENT
IVRCL has a proud record of people retention and its brand equity with the customers has risen because of this. Almost 50% of the employees, out of a total headcount of 913 (Mar 31, 2019), are Engineers. The current focus of the company is to improve productivity at each project site and in each central function, to that effect; the manpower deployment has been carried out based on competency rating programmes, transfers, re-skilling and re-training. The more frequent and dynamic reviews are carried out to see the competence deployed in a given situation and when the human resource becomes surplus in a given project. As a result of this, the company has retained and kept the faith of a good number of long-serving employees, who are the vital connection to the customers.
The company has had a prolonged period of Debt Restructuring and is under the IBC as a company for Resolution .
The passage of the IBC (Insolvency & Bankruptcy Code) has been a major change in the environment for the company.
The environment for Civil & Contracting companies has become more clear and positive.
The NHAI, Metro Construction and Electrical Transmission to name three sectors are progressing well. There is a cautious upturn in all other areas of Contracting. However, since NCLT has ordered the company to be liquidated as a going concern, the future depends on the outcome of the liquidation process.