A2Z Infra Engineering Ltd Management Discussions.

1. Economic overview

a. Global economy

While the global economy started the year 2018 on a positive note, by the end second half of the year the pace started flagging and concerns of further slowdown emerged. Some major factors that effected this change in outlook were USA-China trade friction, pullback of loose monetary policy by major central banks especially US Federal Reserve, tighter credit policies in China, structural stresses in other major developing countries, volatility in financial and energy markets, etc.

The global economic activity was estimated to have grown at 3% in 2018 as against 3.1% in the previous year. Both the blocs, i.e. advanced economies and emerging economies saw the growth momentum flagging. The former grew by 2.1% in 2018 from 2.3% levels in 2017, in spite of USA growing by 2.9% vs. 2.2% in 2017. This was on account of the Euro zones slower pace of growth at 1.8% vis-a-vis 2.4% in 2017 and Japans growth declining from 1.9% to 0.8%. Similarly, emerging markets and developing economies also showed deceleration in growth from 4.5% to 4.3% in the 2017 to 2018 period. Argentinian and Turkish economies saw a steep decline in intensity of economic activity due to major macroeconomic stresses. China slowed marginally from 6.8% to 6.6% due to internal realignments and trade tensions.

The year 2019 is expected to witness further deepening of the downward risks and the outlook is much bleaker. Even though the central banks have started responding to growth concerns by halting the monetary easing rollback, and in some cases reducing lending rates, the negative impact on trade and manufacturing that started in 2018 is expected to worsen in 2019 roiling the business and consumer confidence worldwide. The effect of fiscal booster shot to the USA economy is also expected to wear-off. The World Bank has projected the global economy growth in 2019 as 2.6% in its Global Economic Prospects report of June 2019. This includes the advanced economy blocs growth of 1.7% and emerging economies growing at 4%.

b. Indian economy

The Indian economy faced a double impact of global slowdown in the second half of 2018, which affected it in the form of volatile FOREX markets, higher oil prices and decline in exports, and internal stresses from collapse in rural demand, agricultural distress and liquidity crisis due to stress in financial sector. Starting the first quarter with a YOY growth of 8.1%, the economy rapidly slowed to much lower levels of 5.8% growth in the fourth quarter of FY2018-19. The full year growth was at 6.8% in FY2018-19 as compared to 7.2% in the previous financial year.

While the election spending was expected to give a short boost to the economy in Q1 of FY2019-20, continued impact of muted bank credit growth, restrained money flow linked to concerns in the real estate and NBFC sectors, declining consumer spends even in urban markets, and gloomy outlook of exports linked with global trade has meant that even the most optimistic projections for the FY2019-20 do not expect the Indian economy to grow more than 7%. The Reserve Bank of India, effected its fourth continuous reduction in repo rate in its monetary policy review of August 2019 bringing the repo rate down to 5.4% from 6.5% in August 2018. It also lowered its GDP growth projection for FY2019-20 to 6.9% from the 7% projected in June 2019 review meeting, with risks weighing on the downward side.

2. Industry overview

Infrastructure

The Government of India has set itself an ambitious target of achieving a US$ 5 trillion economy by FY2024-25. As one of the fastest growing emerging economies, India needs to build and upgrade its infrastructure at an exponential rate to be able to achieve the overall economic growth target. It is one of the limiting factors that inhibits Indias gross domestic product (GDP) growth in reaching its true potential. The Niti Aayog in its fifteen year vision document has outlined the priority areas and Infrastructure sector is one of the key areas of intervention by the government. The importance placed by it on the sector is visible in the speech by Honorable Prime Minister Shree Narendra Modi where he put forth an estimate of INR 100 lakh crore investment in infrastructure during his second 5-year term.

Major declarations by the government on infrastructure sector focused on transportation, power, housing, water resources, sanitation and cleanliness sub-sectors are as follows:

1. Formation of Ministry of Jal Shakti by merging Ministry of Water Resources, River Development & Ganga Rejuvenation and Ministry of Drinking Water and Sanitation to focus on integrated water management to achieve the target of piped water supply to all households by 2024 under the Jal Jeevan Mission. The 2019-20 budget allocated INR 10,000 crore for National Rural Drinking Water Mission, nearly double than FY2018-19.

2. Railways allocated INR 94,071 crore (US$ 14.11 billion) in 2019-20 budget. Estimated INR 50 lakh crore investment needed in railway infrastructure from 2018 to 2030.

3. Multi-modal terminals at Sahibganj and Haldia and a navigational lock at Farakka to be commissioned by 2019-20 to enhance navigational capacity of Ganga in order to increase the cargo volume on it by four times in next four years

4. Upgrade of 1.25 lakh kilometers of road over the next five years under Pradhan Mantri Gram Sadak Yojna

(PMGSY) III at an estimated cost of INR 80,250 crore. The allocation in 2019-20 budget increased to INR 19,000 crore from INR 15,500 crore in the previous year.

5. Overall budgetary allocations for the entire transportation sector for 2019-20 was INR 83,000 crore as against INR 78,626 crore in the previous year.

6. For the Housing for All mission, over 81 lakh houses with an investment of about INR 4.83 lakh crore sanctioned under Pradhan Mantri Awas Yojana (Urban). Similarly, 1.95 crore houses are proposed to be provided to eligible beneficiaries under Pradhan Mantri Awas Yojana (Rural) in addition to the 1.54 crore rural homes already constructed.

7. Smart City mission allotted INR 6,450 crore in FY2019- 20 budget as against INR 6,169 crore in FY2018-19 budget. Total estimated outlay for the mission was INR 2.04 lakh crore.

8. INR 2,650 crore for the urban areas and INR 12,644 crore for the rural areas under Swachh Bharat Mission. Target to achieve 100% Open Defecation Free India by October 2019.

a. Engineering Procurement & Construction (EPC)

The EPC market in India was projected to growing at a CAGR of 20% over the last 5 years. This was on the back of increased infrastructure spending by the Government. The nearly 150 players in this sector address major opportunity segments such as Power, Roads & Bridges, Telecommunications, Railways, Irrigation & Watershed, Water Supply & Sanitation, Ports & Inland Water Transport, Oil & Gas, Mass Rapid Transport Systems (MRTS), Airports and Storage.

The Gross Fixed Capital Formation (GFCF) is a measure of overall investment in productive assets by the private and public sector. GFCF in FY2018- 19 was INR 45.48 lakh crore vs. INR 41.37 lakh crore in the previous year, a growth of 9.9%. India Ratings released a projection for GFCF growth in FY2019-20 as 9.2%. Within this, the budgeted growth in capital expenditure by the central government was a little less than 7% to INR 3.38 lakh crore. The government prefers EPC model for projects not executed in PPP mode and with requirement of a faster turnaround. EPC contracts may be on offer also from PSUs which have been assigned as the implementation agency for government projects.

Power

In its Strategy document for New India @ 75, the government has set a target of providing 24x7 electricity to all and add 175GW of renewable energy generation capacity by 2022 to reduce the emission intensity of the GDP. The 175GW was distributed as 100GW of solar energy, 60GW of wind power, 10GW of biomass and 5GW of small hydro. The countrys total installed capacity for power generation was 360.5 GW as on 31st July 2019, with renewables including hydro accounting for 34.9% and nuclear contributing 1.9% of the total capacity. Distribution of the renewable installed capacity excluding large hydro power projects, as on 31st March 2019, was 45.9% from Wind, 36.3% from Solar, 11.7% from Bio-mass and balance from Small Hydro and Waste-to-Energy units. The gross electricity generated in India was 1,561.1 TWh in FY2018-19. India is the third largest producer and consumer of electricity. However, its per capita energy consumption (including electricity) at ~625.6 kilogram of oil equivalent (kgoe) is much lower than the world average of 1860 kgoe and US and Chinas per capita energy consumption of 6800 kgoe and 2170 kgoe, respectively.

Through its two energy access schemes, viz. Deen Dayal Upadhayay Gram Jyoti Yojana (DDUGJY) and SAUBHAGYA, the central government achieved 100% electrification of all villages and households respectively within the targeted time frames. It has also rolled out the Integrated Power Development Scheme (IPDS) to overhaul power supply systems at the city level. Indian Railways has also decided to electrify its complete Broad Gauge network and hence, demand for electricity and electrification is expected to rise.

Telecom

Indian telecom market is the second largest in terms of subscriber base. The total number of telecom subscribers as on June 2019 were 1.187 billion, including wireless telecom subscriber base of 1.165 billion. The overall tele-density for the country was 90.11 with the urban tele-density at 160.78 and rural number at 56.99. The subscriber base is now expanding at a slow pace after seeing a reduction in the first quarter of FY2018-19. However, the wireless broadband subscriber base has seen fast expansion from 429.22 million to 576.17 million from June 2018 to June 2019 whereas wired broadband has grown only by 2.9% to touch 18.42 million subscribers in the same period. This growth of wireless subscription was driven by the crash in mobile data costs after entry of Reliance Jio, which has become a leader in the market within a couple of years. It is also launching its Jio GigaFibre home broadband product in the year 2019-20 to disrupt the broadband and cable TV distribution markets.

Major opportunity areas for the Telecom EPC players are as follows:

BharatNet: This project involves connecting all the 2.5 lakh gram panchayats with an optic fiber network to provide broadband connectivity. It is being implemented in two phases, where Phase 1 of connecting 1 lakh gram panchayats was completed by December 2017. The latest status as on July 4, 2019 showed that a total of 345,779 Km of optical fiber cable was laid to connect a total of 131,392 gram panchayats, out of which 120,562 were made service ready. The total cost of both phases of BharatNet was estimated to be Rs 45,000 crore. A total of 2 lakh gram panchayats are targeted to be connected by March 2020.

Others: Smart City projects, connectivity for remote parts of North East India, Andaman & Nicobar Islands and Lakshadweep Islands, Rail Wi-Fi etc.

b. Facility Management Services (FMS)

The imperative to provide quality and clean physical infrastructure that aids in employee or customer satisfaction and efficient operations management is leading to increasing spends on Facility Management Services by various customer segments. This demand driver along with overall economic growth is leading to expansion of demand for professional FMS services in commercial properties such as offices, malls, railway stations, airports, residential complexes, hotels, hospitals, etc. Demand for organized FMS players is also seen in some newer areas such as beach cleaning, park management, sports facilities, etc. The service offerings include use of skilled, semi-skilled and unskilled manpower for hospitality, housekeeping, security, and technical maintenance services.

In the last one decade, the value of outsourced Facilities Management Services in India was USD 825 million. Only 35% of the total demand is currently outsourced. Globally, the FMS space was expected to reach USD 2.17 trillion by 2025, growing at a rate of 14% CAGR. An industry estimate for the Indian FMS market size was an estimated Rs 58,500 crore and an expected CAGR of 25%. The industry is seeing a shift towards automated services and technology driven services platforms with buzz around Building Information Modelling (BIM) and Computer Assisted Facilities Management (CAFM) catching on.

c. Municipal Solid Waste Management (MSW)

The increasing population and urbanization pose an enormous challenge for urban local bodies because of the large quantity of waste generated. Given the size of population in India and high population density, the scale of waste management problem is huge. As per published statistics, on an average 1.5 lakh MT of solid waste is generated in India on a daily basis. Out of this most of the waste is dumped in landfills. The total waste generated includes 26,000 MT of plastic waste, 19,650 MT of hazardous waste, and 5,480 MT of e-waste. This problem is expected to escalate as India was expected to add 22 crore new urban residents from 2011 to 2031. The solid waste generated is projected to increase to 16.5 crore MT by 2031 and to 43.6 crore MT by 2050.

Indian governments Union Ministry of Environment, Forests and Climate Change (MoEF&CC) taking cognizance of the problem had revised Solid Waste Management guidelines in 2016. Segregation of waste at source, collect-back scheme for packaging waste, and processing of bio-degradable waste into compost/bio-methanation at source were some of the major changes included in the guidelines. In addition to this, the government is promoting modern solid waste management practices to be adopted by urban local bodies through its Smart Cities and Swachh Bharat programs. Along with the scale of challenge in handling huge volumes of solid waste and these initiatives by the Government have created an attractive window of opportunity for the nascent private MSW sector. The private players provide support for collection, transportation, segregation, treatment, recycling, and disposal of garbage.

3. 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 and renewable power generation as waste-to-energy projects. 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. With constant innovations, A2Z Group has also productized many of the elements of its service offerings and launched environment friendly products such as ‘Magic Genie Homes Services, ‘Magic Genie Eco Tech Smart Green Toilet, ‘Magic Bricks, ‘SafaiMitra, bus shelter-cum-toilet and ‘Magic e-Cycle. 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 four Strategic Business Units (SBUs) - Engineering Services (ES), Facility Management Services (FMS), Waste-to-Energy Power Generation Projects (PGP) and Municipal Solid Waste (MSW). The ES segment primarily constitutes the entire infrastructure EPC business and MSW segment includes the solid waste management offering. The Group has expanded into international markets in South Asia, Middle East, and Africa in the recent past.

Business segments

1. Engineering Services (ES)

ES has contributed the highest to the Group revenue traditionally and in FY2018-19 its share increased from 46.6% in the previous year to 57.5%. Because of the legacy issues faced by the segment due to market disruptions prior to 2015, the Group had focused only on execution of old projects up till previous financial year. However, with these issues resolved to a large extent and growing market opportunity, the Group was successful in bagging profitable projects in the reported fiscal. The unexecuted order book from this segment at the end of FY2018-19 is INR 879.14 crores. Within the ES segment, the Group catered to two major industry segments - Power Transmission & Distribution (T&D) EPC and Telecom Infrastructure EPC, and has added new offering of urban infrastructure projects such as Sewage Network & Treatment Plants and focusing on solar EPC with long term O&M. It is also pursuing other opportunities such as Gas Distribution Networks, Smart Cities and Metro projects in select cities. As a line extension and a conscious strategy to build predictable revenue stream with good profitability, the Group has resolved to pursue the Operations & Maintenance (O&M) opportunity in an aggressive manner going forward.

a. Power Transmission & Distribution (T&D) EPC

The Group proven capabilities in the T&D EPC segment and specializes in a wide gamut of offerings, such as:

• Substations & Switchyards up to 765 kV

• Transmission lines up to 765 kV

• 11 / 33 kV distribution lines comprising of Feeder Renovation Projects

• High Voltage Distribution System, AT&C Loss Reduction, Tube Well Connection, Segregation of Domestic and Agriculture load, Augmentation of Lines, Providing Laying of HT & LT Aerial Bunched Cables and Offering BPL Connections

• Railway Overhead Electrification

• Operation and Maintenance of Electrical Utilities

• System integration for IT projects under R- APDRP

• Smart metering and SCADA Syatems

With recovery of Infrastructure Sector and focus on increasing power generation capacity, expanding accessibility to electricity, and electrification of railway lines, the business prospects for this sub-segment are extremely bright. Past issues of unviable projects due to paucity of funds, delayed payments, and operational problems have been addressed by completing old projects to ensure good track record and winning projects with secured funding and good payment terms has helped it achieve reasonably attractive growth in the reported financial year. The Group also diversified its geographical reach by entering into international markets.

After bagging a USD 24.6 million contract from the Rural Energy Agency of Tanzania, the Group was successful in winning another international bid of Nepal Electricity Authority, a Government of Nepal Undertaking for execution of the design, supply, installation/erection, testing and commissioning 0f 11/0.4 kV distribution system in Nepal for an aggregate of USD 11.65 million and NPR 160.03 million including custom duty and VAT. This translates to an equivalent of roughly INR 94.9 crore in aggregate. In India, the Group received an order from the Damodar Valley Corporation for an aggregate amount of INR 12.4 crore against design, engineering, supply, erection, testing and commissioning works for installation of two SOMVA, 220/33KV Power Transformers and associated infrastructure at the Kalyaneswari Substation of DVC in West Bengal.

b. Telecom Infrastructure EPC

With a strong presence in the Telecom infrastructure projects, the Group has executed many projects to supply and lay Optical Fiber Cables (OFC) on EPC basis and delivers maintenance services of the OFC networks under Annual Maintenance Contracts (AMC) mandates. The offerings under this segment are as follows:

• Material Planning & Project Management

• Radio Frequency Engineering Services

• Engineering Construction & Infrastructure Services

• Optical Fiber Cable NLD / Access Networking Construction & Maintenance

• Network Integration

• Telecom Infrastructure Operation & Maintenance Services

The BharatNet project to deliver internet connectivity through broadband access to villages, Smart Cities project, and projects for private telecom providers are the major opportunity areas for the Group.

2. Facility Management Services (FMS)

The Group caters to the facility management and maintenance needs of commercial and retail spaces including offices, railways stations, railway coaches, airports, ports, malls, etc. It has nearly two decades of experience in this space and has advanced capabilities in providing end-to-end services including soft, security, housekeeping, and technical. The Group is well positioned to target emerging opportunities in FMS services for large gated residential complexes, beaches, educational institutions, etc.

During the fiscal 2018-19, the FMS segment consolidated revenue was flattish and contributed 30.08% of the Group revenue. In this period, it bagged a four year contract from Central Railways, Pune

Division for mechanized cleaning, watering of trains including cleaning of depot premises and provision of onboard housekeeping services with linen distribution in trains of Pune Coaching Depots, Pune division. The total contract value is estimated to be INR 67.8 crores. However, the major expansion efforts in this segment were hobbled due to the focus of the Group on financial stress and issues in other SBUs, but with these issues resolved to a major extent, it is now well positioned to swell the revenue from FMS SBU.

The Groups B2C efforts within this segment are progressing at a reasonable pace with its line of innovative products and services such as ‘Magic Genie Eco Tech Smart Green Toilet, ‘Magic Genie Home Services, etc. These offerings are targeted at individual customers and SMEs, who demand a high quality housekeeping solution.

3. Municipal Solid Waste (MSW)

MSW segment is the fastest growing segment for the Group. In FY2018-19, it delivered a top-line growth of 57.6% and increased its contribution to the Group revenue from 7.9% in FY2017-18 to 10.1% in FY2018- 19. The competitive assessment of urban local bodies under Swachh Bharat scheme of the Central Government has pushed them to tap private players to assist them in managing the enormous amounts of solid waste generated in cities. The Group offers Collection & Transportation and Treatment & Disposal (or recycling) services to handle the municipal solid waste. Continued emphasis on cleanliness and sanitation by the central government will consistently propel this segment to deliver handsomely in terms of financial performance. The focus for the Group will be the Collection & Transportation projects as it has strong capabilities in manpower handling and vehicle management.

In addition to the SWM services, the Groups ‘Magic Brick product provides a viable solution to achieve nearly 100% processing of solid waste by converting non-recyclable waste into bricks or blocks that may be used in construction projects. Similarly, organic wet waste is converted into compost for use in agriculture and Refuse Derived Fuel to be utilized by Waste-to- Energy plants. The Group has also used technology innovatively in its services, and developed a direct-to- customer smartphone app based service offering called the ‘SafaiMitra for direct collection of waste from households and offices.

4. Waste-to-Energy - Power Generation Projects (PGP)

In the PGP segment, the Group had established four power generation plants based on waste-to-energy process in Punjab and Uttar Pradesh of 15 MW rated capacity each. These plants were not operative because of the quality of RDF, which was not as per the requirement. The Group decided to convert the multifuel or multi-input power generation plants to only solid waste based power plants, and is expected to complete one of the plants in Punjab in FY2019-20 and has already started the process in other plants as well. While the segment recorded a small revenue of INR 87 lakh, the management has taken the impact of impairment of capital assets of INR 42 crore as an exceptional item in FY2018-19 financials.

5. Financial Review

The Groups operating revenues for the FY2018-19 on a consolidated basis were INR 869 crores as against INR 709 crores in FY2017-18. This translates into a growth of 22.7%. This was mainly on account of 51.5% increase in the ES segment revenue, where the Group was able to secure attractive projects not encumbered with issues faced in the past. The MSW business, which remains a key focus area, continued to grow in the year under review at a pace of 57.6% on a YOY basis. The PGP business also saw restart of a small trickle in revenue of INR 87 lakh in the reported year.

During the year under review, the Groups operating profits (EBITDA before Other Income) were INR 59 crore vs. loss of INR 25 crore in the previous year. This turnaround was on account of growth in revenue, improved revenue quality, rationalization of fixed costs and control of manpower costs. The Group was able to reduce its finance costs from INR 206 crore in FY 201718 to INR 60 crore in FY 2018-19 because of reduction in loans at Company level as well as group level. The net Exceptional Items gain from these one-time settlements, revaluation of its stake in an associate after loss of control and other reasons meant that the Group posted a net profit of INR 289 crore as against a net loss of INR 87 crore in the preceding year. Other Exceptional Items related to charge for capital asset impairment, write-off of excess contract revenue vis-avis billing, and write-off of receivables and advances.

Key Changes in Financial Ratios

Parameter FY 2018-19 FY 2017-18 Change Explanation
Debtor Turnover (Days) 475 681 -30.2% Improved collection and write-off of INR 189 crore of trade receivables
Inventory Turnover 43 20 114.5% Change in revenue mix and higher sales
Interest Coverage Ratio 1.49 -14.06 110.6% Lower interest outgo because of one-time settlement of outstanding debt and lower interest recognition due to classification as NPA
Current Ratio 1.03 0.95 8.7% -
Debt Equity Ratio 0.63 3.39 -81.4% Reduction in debt from one-time settlement of outstanding debts
EBITDA margin % 8.7% 2.4% 261.7% Sales growth, improvement in project profitability and rationalization of fixed costs
Net Profit Margin % 32.3% -11.6% 378.0% Sales growth, improvement in project profitability, rationalization of fixed costs, lower interest outgo and exceptional gains mainly from one-time settlement of outstanding debts
Return on Net Worth % 41.8% -36.6% 214.2% Sales growth, improvement in project profitability, rationalization of fixed costs, lower interest outgo and exceptional gains mainly from one-time settlement of outstanding debts

5. Business SWOT

Strengths Weakness
• Diversified business portfolio with services targeting varied segments of the broader Infrastructure sector • High debt levels impeding further liquidity and growth capital for the group
• Deep expertise and track record of 15+ years in all its core segments, especially EPC, FMS & MSW • Concentration in high capital intensive and labour intensive service offerings
• Innovation capabilities visible in its roll-out of products such as Magic E-Cycle, Magic Bricks, SafaiMitra, bus shelter-cum-toilet etc. • Delay in few projects hampering recovery of certain business segments
• Ability to leverage synergies between different business segments, for e.g. fungibility of workforce between FMS and MSW segments • Due to stress in banking sector working capital availability is limited in sector.
Opportunities Threats
• Growing need for quality infrastructure and governments emphasis on investing in the sector to improve Ease of Living • Continued economic slowdown and precarious financial situation of most SEBs.
• Continued focus on increasing power generation capacity in traditional and renewable sector • Stressed telecom sector in India with practically a freeze on capital investment
• Emphasis on cleanliness and sanitation through the successful campaign of Swachh Bharat is pushing urban local bodies to utilize private players for MSW services • Liquidity constraints and lack of rate reduction transmission
• Lack of large, organized players in the FMS space and steady growth in Grade A commercial spaces across the country that will lead to demand for a professional FMS agency Litigation on projects: In many cases State Electricity Board delays payments and arranging of ROW, in such cases EPC contractors are forced to go for litigation.
• Government also opening up its offices for maintenance by private FMS players
• Expansion & expertise in sewage/water distribution projects which is focus area of Government of India

6. Risks & Concerns

Managing business uncertainties that manifest themselves as various risks is a key strategic function of the management at the Group. The nature of these risks is diverse, especially because of the Groups presence in multiple different business lines. The comprehensive risk management framework that it deploys identifies these risks, assesses them, categorizes them and addresses them by deploying effective mitigation strategies for similar risks. Some of the major category of risks that affects the Groups businesses and corresponding mitigation measures are as under:

1. Economic & Political Risks

The broader economic scenario as represented through metrics such as global and countrys GDP growth rates, fiscal deficits, inflation, interest rates, etc. and any adverse economic shocks have a direct impact on the demand for the Groups services. In addition to these, any changes in the laws and regulations affecting the Groups area of operations, and changing priorities of development programs and budgetary allocations at all levels of governance linked to or independent of any political changes also impact the performance of the Group. Interest rates in the economy are of specific and important concern for the Group as it has high levels of debt on its balance sheet.

Risk mitigation

These risks are mainly external and a part of the environment that the Group operates in, giving negligible scope for it to influence any of the factors.

• The primary mitigation strategy is to spread the risk through diversification. The Group not only has a diversified portfolio of offerings. It has also expanded its geographical footprint within India and across the borders into international markets in Middle East, Africa and South Asia. At a comparatively micro level, it has relied upon innovations to tap newer customer segments by adapting its product and service offerings.

• The Group has been making serious efforts to deleverage and improve project profitability to minimize the impact of interest rate and financial viability risks.

• To mitigate business risks from changes in leadership or direction at customers end, the Group has endeavored to ensure a spotless track record in terms of execution in order to remain a preferred vendor for the services it offers.

2. Dependency Risks

The Group relies heavily on B2G business and consequently has concentrated exposure to customer segments which have long payment cycles and liquidity constraints, such as State Electricity Boards. Delay in payments can impact the cash flow planning of the Group and increase the need for working capital, hence, lead to higher financing costs. There is another significant risk from concentration which may severely affect the financial performance of the Group, i.e. slowdown in business of a specific segment due to market conditions or any other reasons.

Risk mitigation

• Diversification of the customer segments by adding B2B and B2C customer segments with better cash flow predictability. In addition to this, increasing the service offerings and focusing on those which will attract the B2B and B2C segments.

3. Working Capital Risks

Most of the Groups business segments need timely availability of funds for smooth project execution within budget and on-time. Because of the capital intensive nature of the business, any delay in securing adequate working capital may impact the delivery commitments and financial performance of the Group.

Risk mitigation

• By increasing focus on steady cash flow businesses that will provide funds for capital intensive businesses from internal accruals.

• By focusing on acquiring projects which are less capital intensive or have a positive cash flow with the client providing advances.

• By securing adequate working capital lines of credit from banks/ Financial Institutions in advance.

4. Execution & Talent Risks

The Group primarily relies on businesses that have long term projects and complex deliveries. There are huge number of factors and dependencies involved in operations to successfully meet customer commitments, and it is probable that there may be disruptions in supplies of inputs, availability of skilled manpower, delivery slippages, etc. These issues may lead to breach of delivery commitments in terms of time, quality, or cost and escalate into a customer dispute.

Risk mitigation

• The Group has adequate professional liability insurance cover to cover any charge arising out of performance risks.

• It has also implemented the best-in-class quality and operations management processes to minimize the risk of performance failure and absorb the impacts of any delays due to resource availability.

• The Group has a robust HR function that ensures availability of right managerial and skilled/unskilled workforce for the projects either from external sources or internal transfers.

• HR team also conducts regular and need- based training programs to develop internal resources to make them project-ready.

• At times when the risks of a project are too high, the Group also enters into partnerships with other players who can contribute their expertise and also share the risks.

7. Human Resources

As a company in the Services sector, the Group recognizes its employees as the key element of its business on which its success relies. In order to enable them to perform their best, the Group has cultivated a healthy, empowering, and encouraging environment at the workplace. As its business mix needs contribution from all its managerial, skilled and unskilled human resources, the Group has adopted a philosophy of positive communication and harmonious relations with and among its employees.

The management has devised a Performance Management and Learning & Development systems to provide a comprehensive career progression support and invest in advancement of its employees. Given the technical nature of services provided by the Group, there are extra focus on improving the competence levels through advanced technical training to its staff. Similarly, customer interfacing skills related training are offered to staff who are in delivery roles across businesses. The HR systems also include a fair reward and recognition policy to further motivate the outperformers across departments.

As on 31st March 2019, the total employee strength of the Group was 13477 employees, of which 1424 were trained technical employees. The gross recruitment figure across the Group was 5484 employees.

8. Corporate Social Responsibility

The Group operates in sectors that are directly linked to the Quality of Life and Ease of Living, hence it contributes indirectly to the societys well-being. Over and above these contributions, the Group engages in some direct activities in a limited way to support variety of social causes even though Corporate Social Responsibility (CSR) mandate under Section 135 was not applicable.

The Groups flagship CSR program is called ‘Sahyog where it seeks collaborate with its stakeholders and larger community to leave a much healthier environment for the future generations. It has taken several initiatives over the years within this program that are directed towards creating awareness on environmental issues to encourage sustainable development and sanitation. It has also adopted maintenance of several parks, playgrounds, and zebra crossings to assist the municipal corporations in improving civic amenities.

The Municipal Solid Waste management business of the Group in addition to its Collection & Transportation (C&T) mandates also actively conducts additional C&T drives on special occasions and also spreads awareness by creating and distributing communication materials through various media to share information, guidelines and awareness about sanitation and cleanliness. These efforts are made over and above the performance required under its C&T contracts. It also works towards contributing to social development of villages near its project areas and of Project Affected Persons (PAP).

9. Internal Control Systems

The Companys internal control systems have been designed based on an expansive framework to address multiple objectives of ensuring legal compliance, alignment of actual performance with plan, timely deliveries and smooth operations flow, protection from fraud, theft and sabotage, and accurate and complete log of all transactions and related financial impact. This framework covers policies, processes, information systems, assets, and human resources of the organization to have complete coverage of all the elements of the organization. The controls and systems have been defined as part of the Standard Operating Procedures in alignment with the globally accepted quality standards.

Periodic reviews of these policies and procedures is conducted and modifications implemented to comply with changing business objectives and regulatory needs, or to correct any oversights and failures. The Audit Committee is the primary forum for such reviews that meets every quarter. A key input to these reviews are the reports from exhaustive and regular internal and statutory audits conducted by internal and external auditors.

10. Outlook

The Group sees huge opportunities in all the segments of its business mix, especially after recovery in the EPC business under ES Segment. After putting the past issues behind, the Group is now geared up to take on EPC projects and expand the ES business earnestly. It is also going to increasingly focus on the Operations & Maintenance (O&M) opportunity in managing the assets, such as the ones it helps erect through its EPC offering. This business opportunity offers long term contracts with steady revenues and predictable margins. In addition, a new offering around water and sewage pipelines has opened a high potential business segment for the Group because of governments stated objective of providing drinking water to all the households in the country and its focus on water conservation through Jal Shakti Abhiyan with multiple interventions that would also include urban waste water reuse. Similarly, its C&T offering under the MSW segment continues to be a major growth area due to continued government focus on improving cleanliness and sanitation by introducing modern practices to tackle urban solid waste problem. In the FMS business segment, apart from the steady flow of commercial and retail properties that would need its services, the emerging opportunities in cleaning of beaches, railway stations, coach factories, sports facilities, private education institutions, etc. offer scope for high growth in the coming years. With the conversion of one of its multi-fuel power generation plant to solid waste based power plant, and expected conversion of the other in FY2019-20, the PGP business is also expected to perform better in subsequent years.

The Group has managed to restructure its debt obligations and bring down the outstanding debts through one-time settlements to manageable levels. It will continue this effort to further improve the financial viability of the business. With business growth and the debt restructuring initiative, it expects to deliver robust financial performance going forward.

11. 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 publically amend, modify or revise any forward looking statements on the basis of subsequent developments, information or events.