a2z infra engineering ltd Management discussions

ECONOMY OVERVIEW GLOBAL ECONOMY

The global economy is expected to grow at a slower pace in 2023 and 2024 than in 2022. The IMF has forecast global growth of 2.8% in 2023 and 3.0% in 2024, down from 3.4% in 2022. There are a number of factors that are contributing to the slowdown in global growth. These include (i) The war in Ukraine, which has disrupted trade and investment and led to higher energy and food prices; (ii) The tightening of monetary policy in major economies, which is designed to cool inflation but is also likely to weigh on economic activity; (iii) The slowdown in China, the worlds second-largest economy.

Despite the slowdown, there are some bright spots in the global economy. The United States is expected to continue to grow at a healthy pace, and emerging markets and developing economies are expected to grow at a faster pace than advanced economies. Inflation is also expected to remain elevated in 2023 and 2024. The IMF has forecast inflation of 6.6% in advanced economies and 8.7% in emerging markets and developing economies in 2023.

The main risks to the global economic outlook are: (i) A prolonged war in Ukraine, which could lead to a further escalation of energy and food prices and a more pronounced slowdown in global growth; (ii) A more aggressive tightening of monetary policy in major economies, which could lead to a recession; (iii) A sharp slowdown in China, which could have a significant impact on global trade and investment.¹

INDIAN ECONOMY

The global economy has faced multiple crises over the past two years, including liquidity troubles caused by global bank crises. These uncertainties have led to a lack of confidence among consumers and businesses, which has impacted economic growth. The World Bank is concerned that this could result in a "lost decade" of economic growth. However, despite this, many market analysts believe that India could see significant growth over the next few years.

Recent data revisions suggest that Indias economy has fared better than previously thought, and the IMF expects India to grow at an average rate of 6.1% over the next five years. While the global economy continues to struggle, Indias economy is expected to grow at a moderate pace of 6.0% to 6.5% in FY 2023-24. Investments are expected to play a significant role in driving sustainable growth, and favorable demographics could support this growth in the medium term. While the world has learned to live with the pandemic, geopolitical crises, supply chain reorientations, global inflation, and tight monetary policy conditions could still impact the economic outlook. Overall, the outlook for the Indian economy remains positive.

The 2023 Union budget focused on balancing development needs with fiscal responsibility by providing significant financing for capital investments. The Government has announced 33% higher capital outlay of INR 10 Lakh Crore, constituting 3.3% of the overall GDP, to significantly boost the infrastructure development. Similarly, the highest ever capex outlay of INR 2.4 Lakh Crore has been planned for Railways. Large investments have been announced across sectors ranging from transportation, urban Infra, green energy, affordable housing, social infrastructure, highways, etc.

INDUSTRY OVERVIEW

ENGINEERING PROCUREMENT & CONSTRUCTION (EPC) INDUSTRY

GLOBAL EPC INDUSTRY- OUTLOOK AND TRENDS

The Engineering, Procurement, and Construction (EPC) Market is Segmented by Generation (Thermal, Hydroelectric, Nuclear, and Renewables), Transmission and Distribution (T&D), and Geography (North America, Europe, Asia-Pacific, South America, and Middle-East and Africa). The report offers the market size and forecasts in revenue (USD Billion) for all the above segments, except Power Transmission and Distribution (T&D) for which only qualitative analysis will be provided.² The Power Engineering, Procurement, and Construction (EPC) Market size is expected to grow from USD 696.00 billion in 2023 to USD 883.65 billion by 2028, at a CAGR of 4.89% during the forecast period (2023-2028).

The market was negatively impacted by COVID-19 in 2020. Presently the market has now reached pre-pandemic levels.

Over the long term, factors such as the increases in electricity generation and energy consumption demand and changing power generation industry dynamics are expected to drive demand for the power EPC market. Moreover, investments in the power sector, including increased government spending on renewable energy, are further expected to boost the market.

On the other hand, the phasing out of coal-based power plants, which account for a major share in power generation around the globe, and volatile crude oil prices leading to delays in several upstream projects are expected to hinder the growth of the power EPC market.

Nevertheless, new and efficient technologies like supercritical and ultra-supercritical coal power plants and government initiatives to increase renewable energys share are expected to create several opportunities for the power EPC market in the future.

Asia-Pacific is expected to be the largest market during the forecast period, owing to the high urbanization growth rate and growing electricity demand, mainly from China and India.

EPC - Industry Scenario

EPC is a form of contract used to undertake the construction of power generation, transmission, and distribution projects on large-scale and complex energy infrastructure projects. EPC stands for engineering, procurement, and commissioning. Engineering and procurement involve detailed engineering design of a project and procuring all the equipment and raw materials necessary. Construction is related to delivering a functional facility to the client. The Engineering, Procurement, and Construction (EPC) market is segmented by power generation, power transmission and distribution (T&D), and geography. By power generation, the market is segmented into thermal, hydroelectric, nuclear, and renewables. For power transmission and distribution (T&D) only qualitative analysis is provided.

Renewable Energy Segment expected to be the Fastest-growing Market Segment

Renewable energy sources have developed significantly in recent years. Global renewable generation capacity accounted for 3,064 gigawatts (GW) by the end of 2021, increasing the stock of renewable power by 9.1%, the fastest year-on-year growth since the 1970s. The global renewable energy generation capacity, excluding large hydropower, Solar PV, and wind, are the major contributor to two-thirds of renewables growth. China alone accounts for almost half of the global increase in renewable electricity in 2021, followed by the United States, the European Union, and India.

According to the International Renewable Energy Agency (IRENA), the global renewable energy share is expected to reach 30% by 2030 and increase to 50% by 2050. Increasing energy efficiency and improved energy access is expected to advance renewables share in the global energy mix by up to 36%. According to IEA, by 2050, solar PV, wind, and bioenergy are estimated to produce approximately 80% of the global electricity generation.

Moreover, favorable government policies, the declining price of solar modules and wind turbines, and agreements to reduce the increasing carbon footprint globally are a few prominent factors supporting the market to grow both in developed and emerging economy regions, which is likely to drive the global renewable EPC market in coming future.

Furthermore, wind energy is the largest segment in the global renewable power market. In 2021, 93.6 GW of new wind power capacity was added globally, only 1.8% lower than 2020s record year. The overall growth of the number of wind turbine installations made during 2006-2021 was primarily driven by declining costs, due to improved materials and design, and favorable government policies for wind power in countries such as China, the United States, Denmark, Germany, the United Kingdom, and India.

The global total wind energy capacity is now up to 837 GW. Europe, Latin America, Africa & Middle East had record years for new onshore installations, but the total onshore wind installations in 2021 were still 18% lower than the previous year. Moreover, China constructed up 80% of its offshore wind capacity in 2021, bringing its cumulative offshore wind installations to 27.7 GW.

The increasing investments in wind power projects have been providing a significant boost to the growth of the wind power market globally. As per Wind Europe statistics, Europe invested EUR 41.4 billion in new wind farms in 2021. The investments cover 24.6 GW of new capacity, a record for new capacity financed in a single year. Most of the new wind farms financed were onshore with an installed capacity of 19.8 GW.

Besides, the cost of generating wind energy declined in the past decade. The leading cause behind the declining price was the use of taller and larger-sized wind turbines. In recent years, the wind industry developed more reliable and lightweight materials, such as composites of fiberglass and other polymers. The earlier wind industry mainly used steel to build large towers, but now wind towers are made of steel and concrete, which allows the manufacturers to build large towers.

On the other hand, solar is the fastest-growing segment in the global renewable power EPC market. Solar is one of the renewable energy sources that has developed significantly over the last four years, with nearly 100 GW of solar power addition each year. Favorable government policies, the declining price of solar modules, and agreements to reduce the increasing carbon footprint globally are a few prominent factors that supported the market to grow both in developed and emerging economy regions.

Therefore, with increased investments in renewable energy and awareness of its advantages over fossil fuels, coupled with upcoming projects, renewable energy is expected to be the fastest-growing market segment over the forecast period.

Asia-Pacific Expected to Dominate the Market

Asia-Pacific is home to more than 50% of the global population and 60% of the large cities. The continent will face increasing demand for power in the future as millions of new customers are gaining access to electricity with rapid population growth and industrialization. For instance, according to the BP Statistical Review of World Energy 2022, the primary energy consumption in the region increased from 220,48 exajoules in 2013 to 272.45 exajoules in 2021.

China dominates the power EPC market in the region, and the energy sector is moving in a new direction by transitioning toward cleaner and sustainable energy sources to reduce carbon emission and achieve net zero carbon emission by 2060.

As of 2021, China has the largest renewable installed capacity globally. According to Chinas National Energy Administration, the countrys renewable installed capacity will reach 1.063 terawatts by the end of 2021, accounting for about 44.8% of the total installed generation capacity. China set a target for about 1.2 terawatts of renewable installed capacity by 2030, which it is expected to comfortably reach, directly aiding the renewable power EPC markets growth in the nation.

For instance, in 2022, the government of China planned to build 450 GW of solar and wind energy power plants in the Gobi desert regions to achieve the renewable energy target by 2030.

Thailand is witnessing an increasing demand for energy due to economic growth. According to the BP Statistical Review of World Energy 2022, the primary energy consumption increased from 4.51 exajoules in 2010 to about 5.11 exajoules in 2021. Thailand heavily relies on LNG imports for the countrys energy needs. Due to the war between Russia and Ukraine, the government has slashed LNG imports, putting its energy security at risk.

Therefore, based on factors like expansions and upgrades and increased power demand, the Asia-Pacific region is expected to dominate the power EPC market.

EPC – Indian Scenario

As per a report published by rating agency CRISIL, diversified engineering, procurement, and construction (EPC) companies will see strong double digit revenue growth of 17-20% in fiscal 2024 compared with 13-15% estimated this fiscal year 2023. According to the rating agency, with commodity prices easing, profitability is seen improving and reaching pre-pandemic levels of 10-10.5% in next fiscal compared with 9-9.5% this fiscal. With order books healthy and recovery in profitability, debt metrics of EPC companies will improve next fiscal, indicates a CRISIL Ratings study of 180 diversified EPC companies with aggregate revenue of 2.33 lakh crore.

Revenue growth of EPC players is driven by the growth in capital outlay of Centre, public sector undertakings and states in the infrastructure segments and the corresponding construction intensity in each of infrastructure segments.

As per recent budget, capital spending by Centre and public sector undertakings are expected to increase. Thrust on infrastructure has increased with investments in roads and railways expected to grow next fiscal at 21% and 15% on year, respectively, supported by Centre and state government capital outlay. This, along with healthy execution, will lead to higher revenue growth of 17-20% for diversified EPC companies next fiscal.

Roads and railways, which are key focus areas of investments by the government, will continue to outperform other EPC segments. With infrastructure investments continuing to grow and focus on National Infrastructure Pipeline (NIP) through investments in various sectors like roads (contributing 23% of NIP), railways (16%), power (22%), irrigation (9%), EPC companies are seeing healthy order inflows.

As a result, their orderbook to revenue ratio is expected to remain healthy at 3.5-4.0 times over the medium term, leading to better revenue visibility. Higher revenue growth and softening commodity prices will help operating profitability recover to pre-pandemic level next fiscal. Prices of key inputs such as steel, which have fallen ~22% from their peak in March 2022, should decline another 9-11% next fiscal. This moderating price trajectory for steel and other commodities will support recovery in operating profitability. According to the rating agency, the pace of investments under the NIP and any stretch in working capital on account of delay in payments from state counterparties would bear watching.

Telecom Sector – Industry & Indian Scenario

The India Telecom Market size is expected to grow from USD 44.43 billion in 2023 to USD 69.62 billion by 2028, at a CAGR of 9.40% during the five years period (2023-2028). According to the IBEF, India has the worlds second-largest telecom market. The total subscriber base, wireless subscriptions, and wired internet subscriptions have increased steadily. As of April 2022, teledensity stood at 84.88%, total broadband subscriptions increased to 788.77 million, and the overall subscriber base stood at 1.16 billion.³ In the first quarter of FY22, total wireless data usage in India increased by 16.54% quarterly to 32,397 petabytes (PB). In the third quarter of FY21, 3G and 4G data usage contributed 1.78% and 97.74%, respectively, to total wireless data usage. In the same quarter, the share of 2G data use was 0.48%.

The Department of Telecommunications (DoT) in India released the draught Telecom Bill 2022, which intends to alter the relationship between the government and the telecom industry. The main idea is to combine three acts (the Indian Telegraph Act 1885, the Indian Wireless Telegraphy Act 1933, and the Telegraph Wires (Unlawful Protection) Act 1950) into one. The telecom sector in India is expanding due to increasing end-user applications and growth in markets like IoT, cloud, data centres, and 5G. The country is also witnessing an increase in internet consumption. Market players are developing new internet plans to fulfil the growing demand for internet services and grab a more significant portion of the market.

Every industry was affected by the COVID-19 outbreak. The telecom industry was significantly impacted, as it is essential for medical, government, and private-sector commercial activities to operate seamlessly. For instance, reliable, high-speed internet access is critical in ensuring that hospitals and medical institutions access worldwide information networks and resources needed to combat the virus. Broadband access is also vital for educational institutions and enterprises to continue providing essential services.

The coronaviruss unexpected disruption of typical business operations prompted enterprises to operate remotely. This transition increased the demand for stronger network connectivity and internet availability, particularly in isolated or rural locations. Thus, the telecom (wireless and wireline) industry is attempting to provide better internet infrastructure to its clients. Even after the pandemic, the market is gaining traction across the country.

WASTE MANAGEMENT INDUSTRY Waste Management - Indian Scenario⁴

The India Waste Management Market size is estimated at USD 32.09 billion in 2023, and is expected to reach USD 35.87 billion by 2028, growing at a CAGR of 2.25% during the period 2023-2028.

The Indian waste management market is witnessing a healthy growth rate, owing to the high population density and increased industrial activity, which is generating high amounts of wastes, both hazardous and non-hazardous. Circular economy concept is relatively new to India. However, the concept is gaining prominence. The Indian waste management industry offers huge potential, as only 30% of the 75% recyclable waste is being recycled currently. Shortage of proper policies for collection, disposal, and recycling and the lack of efficient infrastructure are few of the many reasons leading to poor waste management in the country. Many startups are coming up with innovative ideas to manage wastes, as well as convert them into valuable resources. However, India requires a fair amount of knowledge to tackle the challenges plaguing this industry.

The Increasing Number of Landfills - major problem in India

Landfill is one of the most popular methods of waste disposal in India, as more than 50% of the total solid waste generated is untreated and dumped into landfills, primarily due to inefficient waste management systems in India. Private players are receiving huge impetus, especially the municipal authorities of West Bengal, Karnataka, and Haryana, wherein waste management is not up to the mark, due to inadequate planning and lower spending than desired by the respective state governments. Hence, the government is closely supervising the market condition and extending support to the industry players, with relaxation of investment norms, while providing monetary incentives. We are one of the finest players in Waste Management in India.

Indian Waste Management Industry Trends

The market studied is fragmented, with many players aiming to mitigate waste generation, as well as recycle and reuse the waste in the most effective way possible. Numerous start-ups are focusing on developing innovative approaches for waste disposal in an environment-friendly manner.

FACILITY MANAGEMENT SERVICES (FMS) INDUSTRY FMS - Industry Scenario

As per a 2022 report of Fortune Business Insights, the global facility management market is estimated to grow from USD 1,291.6 billion in 2023 to USD 2,031.4 billion by 2030, growing at a CAGR of 6.7% during the forecasted period.

As per the report, the International Facility Management Association (IFMA) has defined Facility Management as integrating a physical work place with an organizations people and work, which includes tasks such as equipment maintenance; space planning; and portfolio forecasting. Emergency preparation & business continuity, environmental sustainability, human aspects, communication, project management, quality, real estate & property management, leadership & strategy, and others are all part of these services.

In other words, this sector is defined as providing maintenance assistance, user management, and project management. As a fallout of initial upsurge in urbanization and industrialization, this sector has risen substantially, over the last two decades.

Some Global Trends in FMS:

Increase in usage of Facility Management Services by Governments to boost market during pandemic.

Growing demand for cloud-based facilities management systems to fuel the market.

Upsurge in infrastructural investments to boost the market sentiments.

Limited use of technology and inadequate optimization practices, at present, to hinder markets growth.

FMS - Indian Scenario

The Indian Facility Management Market is estimated to be worth around USD 127.92 billion, and it is expected to reach USD 1,527.60 billion over the next five years period, at a CAGR of 7.37%. ⁵ FM encompasses all aspects of managing a building, an organizations infrastructure, and the overall coordination of the workplace. This system streamlines processes and standardizes services for an organization.

The Indian Facility Management Market is segmented by Facility Management Type (Hard Services and Soft Services), Sector Type (Unorganized and Organized), End User (Commercial, Industrial, and Infrastructure), and Geography (North, West, South, and East). Regarding sophistication and development, India is one of the largest markets for outsourced facility management services. Small local companies focus on single contracts and single-service solutions, while the regions FM business operates with integrated contracts given by significant vendors from different continents. Given the changing dynamics in the region, there are more chances to combine facility management and corporate real estate in novel ways.

The public sector clients are eager to reduce the number of suppliers and decrease costs. Therefore, bundled service contracts are expected to profit from the budget cuts, keeping with the ongoing efforts of many government agencies to streamline their operations. As the need for total facility management (TFM) grows, public sector firms in the region are progressively outsourcing all "non-core business activities" to a single service provider, allowing them to focus more on their core businesses.

The COVID-19 pandemic had a mixed economic impact on FM companies in India. Limiting peoples movement resulted in declining project work and activity at several customer locations. The pandemic lockdowns harmed significant companies in the market, including BVG, CBRE Group, and others.

Indian Facility Management Market Trends

Soft Services to Drive the Market Growth

The primary categories of soft services are cleaning, recycling, security, pest control, handyman services, grounds maintenance, and waste management. Based on the increasing complexity of projects in Delhi, Hyderabad, and other cities, FM firms have determined that high-level cleaning services represent a growth opportunity for their business.

Internet of Things (IoT) adoption quickly emerges as a major driver in FM soft services. IoT enables improved decision-making and work process optimization across various industry sectors by providing a continuous, real-time data stream. The demand for outsourcing services is growing, and businesses are emphasizing individualized services with added value, such as risk management that is reliable and efficient and manages local labor laws.

The COVID-19 outbreak has sparked changes in how facilities and services are run. The future of organizations will demand careful thought and tailored plans. Therefore, the role of FM service providers may also change to one that is more strategic and long-term in character.

BUSINESS SEGMENT REVIEW Company overview

A2Z Group was established in 2002 as a Facility Management Services company and has over the years grown into a leading player in the Engineering & Infrastructure Services sector with presence across multiple sub-sectors. A2Z Infra Engineering is the listed entity and flagship company of A2Z Group. It primarily operates in the Engineering Procurement & Construction (EPC) sector for Infrastructure projects, specializing in Power Transmission & Distribution and Telecom Infrastructure Development projects. The Group has cultivated professional expertise and established a proven track-record in this space, which is the main business segment currently. In Facility Management Services, the Group provides housekeeping, security, hospitality, workforce contracting, maintenance and related services. Over the years, the Group has also expanded successfully into other adjacent businesses such as the high growth solid waste management. The solid waste management services to urban local bodies cover Collection & Transportation (C&T) and Processing of waste. The Group has been successful in developing synergies between each of the business segments. These products and supply of ancillary service and equipment needs of its other businesses are the other businesses that the Group operates. The Groups business portfolio is organized into three Strategic Business Units (SBUs) – Engineering Services (ES), Facility Management Services (FMS) and Municipal Solid Waste (MSW). The ES segment primarily constitutes the entire infrastructure EPC business and MSW segment includes the solid waste management offering.

Business segments Engineering Services

Under this business vertical, your Company mainly works on the turnkey projects providing services ranging from testing, integrated design, construction, installation, and erection to the commissioning. We offer customized solutions catering to the needs of domestic and global patrons. Our team members leverage their knowledge, expertise, and industrial experience in developing innovative as well as energy saving solutions that aim at minimizing the T&D losses to prevent the depletion and deterioration of the environment.

Over the years, the Company has across group entities delivered multitude of projects in this space with operational challenges such as inclement weather and extremities, complex topography, short timelines, and multi-location delivery. The major areas addressed by the Company in the Power T&D sector include rural electrification, railway overhead electrification, reduction of AT&C losses, feeder renovation, underground cabling, feeder segregation, installing High Voltage Distribution System ("HVDS") and Low Voltage Distribution System ("LVDS") distribution lines and transmission lines.

The Company has its overseas presence in Nepal, Uganda and Tanzania.

We have completed projects in various states of India including Jammu & Kashmir, Rajasthan, Orissa, Bihar, Arunachal Pradesh, Jharkhand, Kerala, Chhattisgarh, Haryana, Uttar Pradesh and Himachal Pradesh.

In the Telecom space, the ES SBU focuses on EPC and maintenance mandates for OFC networks. It provides turnkey offerings covering all services for OFC network implementations including Project Management, Materials Planning, Technical Site Survey, Logistics Management, Network Implementation and Integration, Supply and Installation of Equipment and Telecom Infrastructure Operation & Maintenance Services.

Update:

The ES SBU contributed 19.9% of the total operating revenue in FY2022-23. This number was 38.3% in the previous financial year.

The Company continued to de-focus from this business, however, it was open to pursuing profitable new projects and committed to completing the existing ones.

The Company will engage in the business of Fixed Asset Management through Operations & Maintenance (O&M) services of the installed NFS Optical Fibre Cable (OFC), that will provide it with a regular stream of revenues without the same level of capital intensity.

Solid Waste Management

The MSW SBU works with the local civic administration to maintain cleanliness and sanitation in major cities. As part of the offering portfolio, it offers comprehensive services for collection, transportation, treatment, and disposal of solid waste. The SBU has expanded handsomely in the recent past by winning tenders that offer multiple decade long concession periods/ contracts to provide MSW services for many cities. Given the long term contracts and continued investments by the Government in Clean India mission, not only does the business have very high growth potential but also stickiness and longevity. The mandates are won by the SBU not only based on competitive pricing, but also because of the technology used in collection, treatment and disposal through scientific methods.

Update:

The segment continued its growth trajectory and delivered a 15.5% increase in top-line over last year. The segment profits were declined significantly by 94.1% thus decreasing the profitability from 6.3% in FY2021-22 to 0.4% in FY2022-23.

The key customers that the Company caters to include local bodies in cities such as Aligarh, South Delhi, Haldwani, Jaunpur and Rishikesh.

Facility Management

The Company provides various solutions for Facility Management, ranging from the identification of an asset to its maintenance across various durations from short-term to mid-term to throughout its life. Our team of professionals provides world class and innovative services in cost-effective manner by leveraging state-of-the-art tools and techniques. Our patrons include aboriginal and global MNCs, Indian Companies, PSUs and Government sector.

We have also been providing facility management services to Indian Railways in various fields. Our services include:

CTS (Clean Train Station Scheme).

High-pressure mechanized cleaning during the limited period of the trains stopover at the junction.

Intensive Rake Cleaning. This service involves a detailed cleaning of the train with specialized equipment.

On Board Housekeeping Service (OBHS).

We take care of hospitality and hygiene of the travellers during their train journey. Our housekeeping personnel are onboarding the train to provide hospitality services during the entire journey.

Update:

The FMS segment revenue was increased significantly with

18.8% increase as compared to the previous year, the profitability of the segment increased significantly from 1.6% to 16.6%. On an absolute basis the segment profit increased by 1,165.5%.

The segments contribution to the total revenue of the Company jumped from 42.6% to 51.1%.

FINANCIAL REVIEW

The consolidated Turnover of the Company for the current financial year is INR 34,944.16 Lakh as against INR 35,332.50 Lakh in the previous year. This translates into a de-growth of 1.10%, due to Engineering Services segment. The ES segment contributed the most to the decline with a fall from INR 13,531 lakhs to INR 6,941 lakhs, a 48.7% drop. The FMS business registered an increase of 18.8% and the MSW business saw a decline of 15.5% over the same period.

During the year under review, the Groups Operating Profit (EBITDA before Other Income) was a loss of INR 141 lakhs against the loss of INR 14,853 lakhs in FY2021-22. The direct costs related to raw materials and employees were rationalized to improve profitability, however, the other expenses decreased by 70.1%, thus resulting in a Operating EBITDA profit. Consolidated PBT before Exceptional Items saw an increase in profit by 107.1% from loss of INR 16,784 lakhs to profit of INR 1,190 lakhs. In the current financial year, the Company recorded an Exceptional loss of only INR 12,204 lakhs because gains from One Time Settlements with banks of INR 2,775.44 lakhs and liabilities written back of INR 9,598.99 lakhs were offset by the investments written-off to the tune of INR 9,058 lakhs, unbilled written-off for INR 2,500.24 lakhs, Loans and advances provision for INR 6,891.55 lakhs and Capital assets impaired for INR 6,128.77 lakhs. This number for the previous financial year was gain of INR 527 lakhs. Hence, the net PBT loss decreased by 39.9% from INR 17,669 lakhs to INR 10,618 lakhs. The net loss for the year under review was INR 12,605 lakhs vs. INR 17,980 lakhs in FY2021-22, a change of 29.9%.

CHANGES IN KEY FINANCIAL RATIOS

Parameter	FY 2021-22	FY 2022-23	Change	Explanation
Current ratio	0.81	0.79	-2.78%	No Major Variance
Debt-equity ratio	2.42	8.23	240.04%	Due to loss in current year majorly on account of provision for investments and impairment of CWIP.
Debt service coverage ratio	-1.97	-2.23	13.41%	No Major Variance
Return on equity ratio	-74.31%	-127.85%	72.04%	Due to loss in current year majorly on account of provision for investments and impairment of CWIP.
Inventory turnover ratio	33.01	29.33	-11.13%	No Major Variance
Trade receivables turnover ratio	0.50	0.84	67.22%	Due to realisation of Trade receivables in the current year
Trade payables turnover ratio	0.33	0.30	-9.34%	No Major Variance
Net capital turnover ratio	-1.59	-1.86	17.20%	No Major Variance
Net profit ratio	-0.51	-0.36	-29.11%	Due to loss in current year majorly on account of provision for investments and impairment of CWIP.
Return on capital employed	-0.28	-0.27	-1.80%	No Major Variance
Return on Investment (%)	100.00%	100.00%	0.00%	No Major Variance

 

Business SWOT Analysis
Strengths	Weakness
Diversified business portfolio.	High levels of debt.
Differentiated organizational capabilities across business segments through technology and processes. Illustrious track record created over 15+ years	Over-reliance on B2G business. High working capital and labour intensity of businesses.
Fungibility of resources across segments
Sizeable trained and skilled workforce
Innovation capabilities
Opportunities	Threats
Shift from Work from Home to Flexi-work model increasing the demand for Office space and increasing share of Grade A properties would result in greater demand for professional FMS companies.	Delays in 5G rollout and upgrade of existing infrastructure due to stressed balance sheets of Telecom companies.
Awareness of the need for sanitization and other safety precautions in the light of pandemic resulting in demand for professional FMS companies. Increasing power generation capacity in traditional and renewable sector.	Repeated failures in nursing SEBs back to financial health may result in stoppage of investments in power generation, transmission, and distribution infrastructure.
5G rollout in telecom sector.
Cleanliness, sanitation, and basic facilities focus of the Government initiatives such as toilets, housing, piped water, Swachh Bharat Abhiyaan and broadband connectivity in all villages.
Private involvement in railways, airports and other government- controlled infrastructure may increase demand for professional FMS players.
Increasing trend of Government also tendering for outsourcing its FMS needs.

ENTERPRISE RISK MANAGEMENT

The Company has established a robust Risk Management framework within the enterprise. This risk management framework helps to manage risks at various levels across the Company and ensures that the systems are reviewed periodically to align them with current internal and external environment. The Companys risk management framework covers identification, assessment, and mitigation of risks. It encompasses and is integrated with the Groups business processes across planning, execution, and review activities. The framework focuses on prioritizing risks based on their probability and severity of impact. Some of the enterprise-level risks identified by the Company and the mitigation measures being implemented are:

1. Macro-economic Risks:

Macro-economic risks include the linkage of overall economic activity with the demand within an industry, cost of capital link to policy interest rates, and Government spending and policies in response to the macro situation that also affect an industry.

Risk mitigation:

A key approach to mitigate macro-economic risks is through diversification of markets, whether geographical or industry segments. This is one of the key reasons behind Companys pursuit of international expansion in emerging markets such as India. Similarly, the Company has presence in many states within India. It is present in multiple industry segments with diverse market dynamics to minimize the impact of demand slump in a single industry segment on the overall performance. The reduction in cost of capital is an ongoing focus area of the Company where it has adopted a multifold approach of reduction in debt through repayment and/or onetime settlements with banks, sourcing long-term capital, and reducing the need for capital by entering into partnerships, strategic or equity. These initiatives mitigate the risk from increase in interest rates.

2. Customer Concentration Risks

The concentration of the Companys business being sourced from a single customer or a specific customer segment, for e.g., State Electricity Boards, can affect the overall performance majorly when that customer or segment sees a loss of business. There can be negative effects other than loss of business, such as, delays in receiving payments, demands for excessive attention of management bandwidth which takes focus away from growth initiatives, and adverse tilt in balance of power that may affect profitability.

Risk mitigation

Expanding the customer base across different segments is the most important method of reducing customer concentration risk. A specific initiative that the Company is focusing on – is to bring more focus on the Facility Management Business where private sector clients can balance the over-reliance on public sector/ government.

3. Working Capital Risks

The EPC business of the Company require immediate access to substantial fund allocation at the time of execution. Hence, availability of adequate working capital lines to fund such projects at the time of need is decisive to ensure timely and within budget project execution. Any delay in securing working capital may impact project viability. It is an important factor even for other businesses but more so for the EPC business.

Risk mitigation

The key mitigation measures adopted by the Company to address this risk include diversification away from EPC projects to reduce the need for working capital and its immediacy, launching services/ solutions that generate regular cash flow for the Company, and working with banks and other institutions to have working capital lines available.

4. Execution Risk

The projects undertaken by the Group, especially in the EPC space, are complex and long duration projects with a need for specialized workforce and high levels of coordination. In addition, there are dependencies on availability of raw materials, regulatory clearances, and client inputs. Any project execution will therefore face risks from multiple aspects and result in delays or cost escalations that affect profitability and in some cases viability of the project. Another key execution risk is related to deficiency in performance on account of quality or other issues with the delivery. The Company could also face financial penalties due to any delayed or deficient execution.

Risk mitigation

The primary mitigation approach for execution risks is to purchase adequate professional liability insurance cover. In addition to this, strengthening the Project Management and Standard Operating Procedures (SOP) and Quality Manuals for project delivery are the most critical. The Company has also implemented a periodic reviews and control measures to keep project execution in check. The Company is also focusing away from EPC projects where the execution risk is relatively higher. The risk may be mitigated also by sharing it through partnerships.

5. Talent Risks

Given the nature of services business, the Company relies heavily on its workforce to generate revenues. Hence, any shortfall or flaws in availability of quality managerial, skilled and unskilled workforce in adequate numbers puts its financial performance at risk. Project executions depend on availability of the right personnel and issues with the execution may result in financial penalties.

Risk mitigation

The Company has put in place a strong leadership team that is aided by its Human Resources (HR) team to put in place the best-in-class people processes that cover sourcing, retention, career development, training, and employee engagement. The Companys makes a reasonable attempt to match its compensation with the industry standards or beat them. It works with multiple partners to source skilled and unskilled labour for project delivery.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

The business portfolio of the Company dictates that it works with a mix of managerial, skilled, and unskilled human resources. These groups have a diverse set of aspirations and needs that makes the work of the Human Resource team challenging. The Company effectively tackles this challenge through active formulation of a gamut of HR policies and defining practices that work towards the objectives of: a. Maintaining a healthy, safe, and productive work environment for all; b. Attracting and retaining the brightest skilled practitioners across levels; c. Developing and maintaining organizational capabilities through skill and competency development; d. Driving a performance driven culture; e. Recognizing and rewarding performance in a fair manner across the organization.

A key element beyond the policies and HR practices that helps the Company connect with each employee is maintaining continuous and transparent communication with employees, which helps in building trust and commitment. As on 31^st March, 2023, the total employee base of the Group was 6839 employees, including 1636 trained technical employees. The gross recruitment figure in FY2022-23 for the Group was 5390 employees.

CORPORATE SOCIAL RESPONSIBILITY

As the Company has incurred losses over the last few years, based on the provisions in the Section 135 of Companies Act 2013, it is exempted from the mandate of spending 2% of its profits on Corporate Social Responsibility (CSR) activities. However, given the operations of the group companies are oriented towards social and infrastructure development, diligent delivery of its commitments itself will bring about a lot of social benefits to the society. In addition to this, the Group also contributes as a responsible corporate citizen by engaging in many initiatives through its CSR program. Adopting a concept of shared growth, A2Z Infraservices Ltd. & Ecogreen Envirotech Solutions Limited, material subsidiaries of the company, has focused its CSR efforts primarily in the field of children welfare. Through sustainable measures, actively contribute to the Social, Economic and Environmental Development of the community in which we operate, ensuring participation from the community and thereby create value for the nation. The Group is aware of its role as a responsible corporate citizen and is further committed to do its fair share after it starts making profits.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The internal control framework adopted by the Company is designed for robustness to ensure business operations are conducted in a compliant and efficient manner across the Group. It incorporates controls that make sure the activities of the Company are in alignment with the stated goals and plans, protect its assets, prevent fraud, and capture and report financial transactions and data in a timely, accurate and complete manner. The Group reviews these policies and procedures periodically and makes changes in line with the business and regulatory requirements, and in line with the global best practices. Stringent and regular internal and statutory audits are conducted by auditors to check compliance. The Audit Committee, on a quarterly and annual basis, reviews such non-compliances, and also the adequacy and effectiveness of the internal controls being exercised. The management team implements the changes mandated by the Audit Committee after such reviews.

OUTLOOK

As the economy shall continue to grow, albeit at a slower pace, the likelihood of Companys business performing better going forward remains, especially with the key segments of Facility Management Services and Municipal Solid Waste showing greater traction. Overall, outlook for Infrastructure sector is positive but current geo-political uncertainties, high inflation and interest rates, and tighter monetary policies across large economies do present unfavourable headwinds in the short term. We are carefully evaluating profitable opportunities in Facility Management and Municipal Waste Management business verticals. Our inherently strong, legacy business of EPC projects is working towards delivering the existing projects and exploring profitably feasible business opportunities. In order to strengthen our financial position, we are striving hard to reduce the debt to a sustainable level by making amicable settlement arrangements with our lenders. Simultaneously, we are also working towards completing old projects and thereby returning the Bank Guarantees (BGs). The Company hopes to deliver business growth and emerge stronger from the challenges and look ahead to brighter times.

FORWARD LOOKING STATEMENTS

Statements in the Management Discussion & Analysis Report detailing the Companys objectives, projections, estimates, expectations or predictions may be forward looking statements within the meaning of applicable securities laws and regulations. These statements being based on certain assumptions and expectations of future event, actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting domestic demand supply conditions, finish goods prices, changes in Government Regulations and Tax regime etc. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of subsequent developments, information or events.