Alphageo (India) Ltd Management Discussions.

The global economy


After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half

of 2018, reflecting a confluence of factors affecting major economies. Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States.

The euro area economy lost more momentum than expected

as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand.

As a result of all these contributing factors, global economic growth is now projected to slow from 3.6% in 2018 to 3.3% in 2019.

Outlook for tomorrow:

Compared to the projections for 2019, the global economy is expected to show signs of recovery and return to 3.6% growth in 2020. The projected pick up in the second half of 2019 is expected to ride on an ongoing buildup of policy stimulus in China, improvement in the global financial market sentiment, growth in the euro area and stabilisation of conditions in stressed emerging market economies such an Argentina and Turkey.

The Indian economy


Indias GDP declined for a second year in succession - from 8% in 2016-17 to 7.2% in 2017-18 to 6.8% in 2018-19. And, experts suggest that the Indian economy is on the brink of a slowdown.

This is because fiscal 2018-19 which was looked upon as a year of considerable promise did not live up to expectations.

The economy slid with every successive quarter - from 8% in Q1 to 6.5% in Q4.

Indias industrial production contracted by 0.1% in March, 2019, the lowest in 21 months, mainly due to manufacturing sector slow down. On annual basis, IIP growth slowed to three-year low of 3.6% in the 2018-19 fiscal as against 4.4% in the previous fiscal.

Despite the dulled environment, there were some positives which hold promise for a brighter tomorrow:

• A growth in tax revenues (net of states share) to 8.1 percent of GDP in 2018-19 has helped the Centre in balancing its fiscal discipline

• India moved up by 23 places in the World Banks Ease of Doing Business Index 2018 to the 77th rank.

But there is a concern. India could be heading towards an economic slowdown. The Ministry of Finance in its Monthly Economic Report of March 2019 warned that Indias economy appears to have slowed down slightly in 2018-19. The proximate factors responsible for this slowdown include declining growth of private consumption, a tepid increase in fixed investment, and muted exports.

Estimates for 2019 and beyond:

According to Moodys, the Indian economy is expected to grow at 7.3% in calendar years 2019 and 2020. The government spending announced ahead of the general elections in 2019 is expected to support near-term growth.

The International Monetary Fund (IMF) have forecast Indias GDP growth at 7.3% in 2019 (2019-20) and 7.5% in 2020. Their optimism is based on the continued recovery of investment and robust consumption amid a more expansionary stance of monetary policy and some expected impetus from fiscal policy.

Asian Development Bank and the RBI estimate GDP growth for 2019-20 at 7.2% (from the earlier projection of 7.4%) owing to the rising risks from global economic growth as well as weakening domestic investment activity.


The energy market in 2018

Global primary energy grew by 2.9% in 2018 - the fastest growth seen since 2010. This occurred despite a backdrop of modest GDP growth and strengthening energy prices.

This growth was largely driven by China, US and India which together accounted for around two thirds of the growth. Relative to recent historical averages, the most striking growth was in the US, where energy consumption increased by a whopping 3.5%, the fastest growth seen for 30 years and in sharp contrast to the trend decline seen over the previous 10 years.

The strength in energy consumption was pretty much reflected across all the fuels, most of which grew more strongly than their historical averages.

This acceleration was particularly

pronounced in natural gas demand, which increased 5.3%, one of its strongest growth rates for over 30 years, accounting for almost 45% of the entire growth in global energy consumption. Coal demand (1.4%) also increased for the second consecutive year, following three years of declines. Growth in renewable energy (14.5%) eased back slightly relative to past trends although remained by far the worlds fastest growing energy source.

Long-term outlook

The demand for energy is set to increase significantly driven by increases in prosperity in the developing world.

World GDP is expected to more than double by 2040 driven by increasing prosperity in fastgrowing developing economies. The improvement in living standards will result in an increase in energy demand, driven by India, China and other Asia which together account for two-thirds of the increase.

Despite this increase in energy demand, around two-thirds of the worlds population in 2040 will continue to live in countries where average energy consumption per head is relatively low, highlighting the need for more energy. The world will continue to electrify, with around three-quarters of the increase in primary energy absorbed by the power sector.

Moreover, there will be an interesting transition in the global pattern of energy demand in the world with the developing world increasing its role as the main market for energy consumption.

Much of the increase in energy demand is expected to be concentrated in developing Asia (India, China,

and Other Asia), where rising prosperity and improving living standards support increasing energy consumption per head.


The year 2018 turned out to be quite interesting for the oil and gas industry. As projected at the end of 2017, 2018 was said to be the year of recovery in oil and gas and it did reach a level of stability with the rising oil prices and growth of recruitment across the industry.

Demand: Oil demand provided a relatively stable backdrop, continuing to grow robustly, increasing 1.4 Mb/d in 2018. The growth in demand was dominated by the developing world, with China (0.7 Mb/d]) and India (0.3 Mb/d) accounting for almost two thirds of the global increase. But relative to the past 10 years or so, the big outlier was the US, where oil demand grew by 0.5 Mb/d in 2018, its largest increase for well over 10 years, boosted by increased demand for ethane as new production capacity came on stream.

Supply: On the supply side, global production grew by a whopping2.2 Mb/d, more than double its historical average. The vast majority of this growth was driven by US production, which grew by 2.2 Mb/d - the largest ever annual increase by a single country.

Since 2012 and the onset of the tight oil revolution, US production (including NGLs) has increased by over 7 Mb/d - broadly equivalent to Saudi Arabias crude oil exports - an astonishing increase which has transformed the structure of the US economy and global oil market dynamics. Largely as a consequence, US net oil imports shrunk to less than 3 Mb/d last year, compared with over 12 Mb/d in 2005. Russian production hit a post-Soviet record in 2018. Moreover Saudi Arabia also recorded a near record high production.

Price movement: 2018 was another rollercoaster year for oil markets, with prices starting the year on a steady upward trend, reaching the dizzying heights of US$85/bbl in October, before plunging in the final quarter to end the year at close to US$50/bbl.

The price recovery for most part of 2018 has been a result of various factors, including sustained success of the production restraint agreement between OPEC and non-OPEC countries in force since the beginning of 2017, less oil coming to market from challenged producers, and continued strong global oil demand growth.

But towards the close of 2018, worries of an economic slowdown and excess supply dragged oil prices from multi-year highs reached in October 2018.


Energy Information Administration (EIA) forecasts that crude oil production in the Organisation of the Petroleum Exporting Countries (OPEC) will average 30.3 million barrels per day (b/d) in 2019, down by 1.7 million b/d from 2018.

In 2020, EIA expects OPEC crude oil production to fall by 0.4 million b/d to an average of 29.8 million b/d. Production in Venezuela and Iran account for most of the OPEC output declines in 2019 and in 2020, but EIA expects these declines to be partially offset by production increases from other OPEC members.

EIA forecasts global oil inventories will decline by 0.2 million b/d in 2019 and then increase by 0.1 million b/d in 2020. Global demand outpaces supply in 2019 in EIAs forecast, but global liquid

fuels supply then rises by 1.9 million b/d in 2020, with 1.5 million of that growth coming from the United States. Global oil demand rises by 1.5 million b/d in 2020 in the forecast, up from expected growth of 1.4 million b/d in 2019

Crude and geopolitics: Following a year of dramatic dynamics in geopolitics, trade and economic policies, 2019 could be an eventful year.

It is expected that geopolitical conflicts in some of the worlds major resource producing regions could get more intense in 2019. As the US sanctions bite into Irans oil exports, they will put the Middle East at the forefront of these risks.

The evolving contours of the US-Russia bilateral relationship also hold the potential to impact the crude market considerably.

The traditional areas of US influence in the Middle East are being increasingly encroached upon by Russia. Clashes between the worlds largest producer of energy and the biggest consumer of crude are turning out to be in a manner not observed since the Cold War.

Long term outlook

Credible estimates suggest that oil will continue to play a significant role in the global energy system in 2040, with the level of oil demand in 2040 ranging from around 80 Mb/d to 130 Mb/d.

To meet this demand, significant levels of investment will be required. Moreover, if future investment is limited to developing existing fields and there are no investment in new production areas,

global production is expected to decline at an average rate of around 4.5% p.a. (based on International Energy Agencys (IEA) estimates), implying that global oil supply would be only around 35 Mb/d in 2040.


Natural gas is in the midst of a rapid growth phase. Since 2010, average global gas consumption has grown by 1.8% per year, making it the fastest growing energy source other than renewable power. In that time, the global gas industry has gone through a significant transformation, characterised by the North America shale boom, the rapid growth of LNG, and the development of new gas markets in Asia and the Middle East.

This growth is as a result of the multiple benefits offered by gas as a clean, abundant, flexible, and cost-effective fuel.

Global natural gas sector in 2018

2018 was a bonanza year for natural gas, with both global consumption and production increasing by over 5%, one of the strongest growth rates in either gas demand or output for over 30 years. The primary reason for this upsurge was the US, accounting for almost 40% of global demand growth and over 45% of the increase in production.

US gas production increased by 86 bcm, an increase of almost 12%, driven by shale gas plays. US gas consumption increased by 78 bcm last year - roughly the same growth as the country achieved over the previous six years. Outside of the US, the growth in global gas demand was relatively concentrated across three other countries: China (43 bcm), Russia (23 bcm) and Iran (16 bcm), which together with the US, accounted for 80% of global growth.

Global LNG supplies continued their rapid expansion last year, increasing by almost 10% (37 bcm) as a number of new liquefaction plants in Australia, US and Russia were either started or ramped up. For much of the year, the strength of Asian gas demand, led by China, was sufficient to absorb these increasing supplies.


Energy Information Administration —-—(EIA) forecasts that dry natural gas production will average 90.3 billion cubic feet per day (Bcf/d) in 2019, up 6.9 Bcf/d from 2018. EIA expects natural gas production will continue to grow in 2020 to an average of 92.2 Bcf/d.

Natural gas inventories ended March at 1.2 trillion cubic feet (Tcf), 16% lower than levels from a year earlier and 29% lower than the five-year (2014-18) average. EIA forecasts that natural gas storage injections will outpace the previous five-year average during the April-through-October injection season and that inventories

will reach 3.7 Tcf at the end of October, which would be 15% higher than October 2018 levels and about equal to the five-year average.

Long-term outlook

Natural gas is expected to grow strongly, supported by broad- based demand, plentiful low-cost supplies, and the increasing availability of gas globally, aided by the growing supplies of liquefied natural gas (LNG).

Natural gas could grow at an average rate of 1.7% p.a. - increasing nearly 50% by 2040 - the only source of energy, along with renewables, whose share in primary energy increases over to 2040.

Growth in gas demand will be widespread, increasing in almost every country and region. The increase is driven in broadly equal amounts by use in power and industry. Transport records the fastest growth, albeit with small volumes.

The increased industrial demand for gas will be largely driven by developing economies as they continue to industrialise, especially in regions with large gas resources (Middle East, Africa). Coal-to-gas switching, especially in China, also supports gas demand in industry.

Global gas production is led by the US and Middle East (Qatar and Iran) - who together account for almost 50% of the growth in gas production- supported by strong increases in output in both China and Russia.


Energy consumption in developing countries has been rising quickly and significantly faster than in developed countries.

Today, India is one of the largest consumers of energy in the world, being the third largest producer of power in the world. India is passing through the most energyintensive phase of its economic growth.

The worlds per capita energy use is 1919.4 kg of oil equivalent(kgoe) while the per capita energy use in India is 637.4 kgoe, which is only 33% of the world average.

However, India is expected to increase threefold its energy consumption by 2035 to 1,516 million tonnes of oil.


The sedimentary basins of India, onland and offshore up to the 200m isobath, have an area extent of about 1.79 million sq. km. So far, 26 basins have been recognised and they have been divided into four categories based on their degree of prospectivity as presently known. In the deep waters beyond the 200m isobath, the sedimentary area has been estimated to be about 1.35 million sq. km. The total thus works out to 3.14 million sq. km.

But the Indian hydrocarbon basins remain underexplored. Despite possessing over 3 million sq. km. of sedimentary basins, the number of exploration wells drilled in India in any year is less than 500 against several thousands of wells drilled in North America.



\indias crude oil production for 2018-19 dropped 4.15% to 34.2 million tonne (MT), compared to 35.68 MT during the financial year 2017-18.

State-run Oil and Natural Gas Corporation (ONGC) saw 5.4% \drop in its crude production during 2018-19 to 21.04 MT versus 22.25 MT during 2017-18. Some of the reasons for lower production include decline in pressure or potential in GS-4 Gas cap reservoir in Gandhar field. Oil India Ltd (OIL) saw a decline in its crude oil production by 2.46% to 3.3 MT during 2018-19 compared to 2017-18. Crude oil production /by the private sector and joint ventures was also down 1.9% between the same period.

The countrys oil consumption •^grew from 206.2 million tonnes in

2017- 18 to 211.6 million tonnes in

2018- 19 - a jump of 2.6%

With consumption growing at a

brisk pace and domestic output declining, Indias oil import dependence increased from 82.9% in 2017-18 to 83.7% in 2018-19.

According to Petroleum Planning and Analysis Cell, India spent USS 111.9 billion on oil imports in 2018-19, up from USS 87.8 billion in the previous fiscal year.

For the current fiscal (2019-20), it is projected that crude oil imports will rise to 233 million tonnes and Voreign exchange spending on it to \marginally increase to US$ 112.7 billion.


Natural gas production during 2018-19 showed a marginal increase of 0.69%. Cumulative natural gas production stood at 32873.37 million metric standard cubic meter (MMSCM), compared to 32649.31 MMSCM during the same period in 2017-18.

Natural gas production by ONGC during 2018-19 was 24674.65 MMSCM, 5.31% higher than the production during the corresponding period of the last year. Natural gas production by OIL during 2018-19 also declined 5.54% compared to the previous year. Production of natural gas by the private sector and joint ventures was lower by 13.59% during the period under review.

About the Company


Alphageo is Indias largest onland integrated seismic services player in the private sector which provides 2D and 3D seismic and related services (seismic data acquisition, processing and interpretation) for the oil and gas sector. Headquartered in Hyderabad, India, the Company possesses a rich experience across about 53 completed projects in vivid terrains and challenging working environments over 28 years.

Operational performance

Fiscal 2018-19 was a stable year for the Company. It covered 8,529 LKM in 2D Seismic survey and 215 Sq Km in 3D Seismic survey despite disruption in operations due to the early onset and late withdrawal of monsoon. The Company completed acquisition of 2,360 LKM 2D Seismic Data Acquisition from the un-appraised areas of North- East India covering parts of Assam & Arunachal Pradesh for Oil India Limited.

The Companys 17 crews were operational as on March 31,2019 on 10 projects which are expected to be completed in the current year.

Analysis of Financial Statements (based on Standalone Financial Statements)

From a financial perspective, the Companys performance took a marginal dip as revenue and profits declined marginally over the previous year. Despite this, the Company continued to strengthen its position by deleveraging its financial statements.

Statement of Profit and Loss

Inclement weather took a toll on the Companys operations at certain sites. This impacted revenue generation. Consequently, revenue declined by 5.67% from C42944 lakh in 2017-18 to C40508 lakh in 2018-19. Optimum utilisation of available funds resulted in a healthy increase in other income from C106 lakhs in 2017-18 to C505 lakhs in 2018-19.

Geophysical survey and related expenses during 2018-19 stood at C27508 lakhs (67.91% of operational income) against C27809 lakhs in 2017-18 (64.76% of operational income). The deployment of additional crew (17 against 14 in the previous year) to manage the increased work resulted in an increase in geophysical survey and related expenses. Employee benefit expenses for 2018-19 at C2149 lakhs were lower than that of 2017-18 at C2289 lakhs as certain special incentives were paid during the 2017-18.

A decline in revenue from operations impacted business profitability. EBITDA declined from C11858 lakh in 2017-18 to C10157 lakh in 2018-19 and EBITDA margin dipped from 27.61% to 25.07% for the current year.

Interest expense for 2018-19 stood at C125 lakhs against C346 lakhs in 2017-18 owing to reduced debt. Also, other borrowing costs representing loan processing,

Bank Guarantee commission etc. for 2018-19 stood at C172 lakhs against C210 lakhs in 2017-18.

Tax expense, current and deferred, decreased from C3046 lakhs in 2017-18 to C2695 lakhs in 201819. The effective tax rate stood at 35.07% of PBT for 2018-19 against 35.13% in 2017-18.

Profit after tax also declined from C5623 lakhs in 2017-18 to C4990 lakhs in 2018-19. The Earnings per share for 2018-19 stood at C78.40 per Equity Share of C10/- each against C88.80 per Equity Share in 2017-18.

Balance Sheet

The capital employed in the business increased from C34634 lakh as on March 31,2018 to C37460 lakh as on March 31,2019. This increase was primarily on account of an increase in shareholders fund - from C20587 lakh as on March 31,2018 to C24962 lakh as on March 31, 2019 - owing to plough back of year-end profit. The Equity share capital remained unchanged during the year. The Book Value per Share as on March 31,2019 stood at C392.20 against C323.46 as on

March 31,2018. Reserves and Surplus (Other Equity) increased from C19949 lakhs as on March 31, 2018 to C24325 lakhs as on March. 31,2018.

Total outside liabilities as on March 31,2019 stood at C12497 lakhs against C14046 lakhs as on March 31,2018. The debt equity ratio stood at 0.50x as on March 31, 2019 against 0.68x as on March 31,2018.

The Company enjoyed working capital limits of C12480 with banks as on March 31,2019. It utilised fund-based working capital loans of C2776 lakhs against a limit of C4000 lakhs as on March 31, 2019. Of the C8480 lakhs non-fund based limit, the Company utilised C8278 lakhs as on March 31, 2018.

The working capital position

31, 2019. Trade payables on the other hand increased from C7830 lakhs to C7042 lakhs over the same period. Moreover, cash and cash equivalents (cash in hand, balances with banks in current accounts and investment in liquid debt funds) increased from C551 lakhs as on March 31, 2018 to C8175 lakhs as on March 31, 2019.

The surplus from business operations were invested in short-term Debt Funds. For the year ended March 2019, earning from investments was C316 lakhs with an effective yield of 8.27%.

As on March 31, 2019 the cost of investment stood at C6907 lakhs.

The net Working Capital as on March 31,2019 stood at C14863 lakhs as on March 31, 2019 (current ratio at 2.20) against C8839 lakhs as on March 31, 2018 current ratio 1.64).

Significant changes i.e. change of 25% or more in the key financial ratios

In accordance with the amendments notified by SEBI in Regulation 17 of the SEBI (Listing Obligation and Disclosure Requirement) Regulation, 2015 on 9th May, 2018, the details of significant changes i.e. change of 25% or more in the key financial ratios as compared to the immediately previous financial year along with detailed explanations are reported hereunder

Particulars 2018-19 2017-18 Change(%) Reason for change
Debtors Turnover Ratio 2.25 2.43 (7.39) -
Interest Coverage Ratio 25.16 16.32 54.17 Interest declined owing to reduced debt.
Current Ratio 2.20 1.64 34.15 Working capital position improved over the previous year.
Debt-Equity Ratio 0.50 0.68 (26.47) Debt repaid during the year.
Operating Profit Margin (%) 25.07 27.61 (9.2) -
Net Profit Margin (%) 12.32 13.10 (5.95) -
Return on Net Worth (%) 21.91 32.22 (32.00) Reduced profit after tax for the current year and enhanced average networth.


Alphageo believes that its intellectual capital represents an invaluable asset. In line with this, the Company has positioned employee engagement as a key priority through its people-centric policies and initiatives.

The Companys knowledge enhancement focus has helped create an organisation which is recognised as a center of learning and excellence. It has consistently worked on, not only increasing its workforce, but ensuring that its people competencies are enhanced in line with changing business needs. As a result, the Company enjoys the support of a committed and well satisfied human capital.

These practices enable the Company to keep the attrition rate well below the industry average

The Alphageo team comprised an 223 workforce.


\At Alphageo, the internal contro procedures include internal financial controls, ensuring compliance with various policies, practices and statutes considering the organisations growth and complexity of operations. The framework constantly monitors and assesses all aspects of risks associated with current activities and corporate profile, including development risks, commercial and financial risks.

In addition, Alphageo has management reporting and internal control systems in place, that enable it to monitor performance, strategy, operations, business environment, organisation, procedures, funding, risk and internal control. The internal auditors carry out extensive audits throughout the year across all functional areas and submit their reports to the Audit Committee.

The Company has instituted a legal compliance program, supported by a robust system. The purview of this system includes various statutes, such as industrial and labour laws, taxation laws, corporate and securities laws and health, safety and environment regulations.


At Alphageo, our risk strategy is determined by a risk appetite defined for a series of risk criteria. The criteria are based on sectoral circumstances, terrain realities, liquidity available and our earnings target within accepted volatility limits. These criteria provide a reference for our operating divisions.

The Companys risk management framework encompasses strategy and operations and seeks to proactively identify, address and mitigate existing and emerging risks with a goal of making the business model emerge stronger and ensuring that profitable business growth becomes sustainable.

What are the growth prospects for the Company going forward?

The Government wishes to reduce Indias import dependence for its energy requirements by 2022. This is expected to open interesting opportunities for the Company going forward. Further, the Company is also getting into Geophysical Mapping survey for mineral exploration which will is largely aligned with its core expertise. This will not only strengthen the Companys growth prospects, it also holds promise to remove seasonality in revenue accrual.

Does the Company have the wherewithal to manage the new vertical?

While the core business operation is aligned to the seismic survey operations being carried out by the Company, the new vertical does require some change in equipment. Moreover, the reading

and analysis of the data would be different. For this the Company has tied up with global partners for gaining incisive knowledge on the subject and also striving to build its own capabilities. The fact that the Company is working on two projects in this new vertical bears testimony to its knowledge and capability.

Growing costs could impact business profitability?

The Company has always maintained a conservative approach towards cost management. While the management has ensured that the quality of work is never compromised owing to cost, it has ensured that every rupee spent is properly utilised. This is reflected in the Companys impressive EBIDTA margin over the years.

Does the Company have the financial position to fund its business growth?

The Companys financial strength is reflected in it Balance Sheet.

A sizeable cash and bank balance with a considerably low debt-equity ratio will enable the Company to adequate low-cost debt to fund its capital-intensive projects. Moreover, its working capital utilisation enables it to seamlessly manage any liquidity spike that may occur in day-to-day operations.

Excessive dependence on the Government could be detrimental to the Company growth prospects.

In a bid to reduce the nations dependence on crude oil imports, the Government initiated the OALP which has attracted a number of private players to enter into Indias hydrocarbon space. This will lead to interesting seismic survey

projects over the coming years. Alphageo being the largest and most experience seismic survey player in India should be able to capitalise on these emerging opportunities. In addition to providing healthy growth, it would diversify the Companys client basket.

How is the Company working on sustaining business through the year?

The Company has recently entered the mineral exploration space. This new opportunity segment will enable the Company to continue operations all through the year (unlike seismic survey). This should facilitate in optimising costs and sustaining the cash fl ow throughout the year.