asahi infrastructure projects ltd Management discussions

INDIAN INFRASTRUCTURE OVERVIEW:

Indian Infrastructure overview: - Infrastructure investment has traditionally been associated with public sector monopolies largely due to high cost of implementation. However, the sector is experiencing an exemplary shift, as the government is taking measures to encourage private investment on PPP (Public Private Partnership) model. This should make the infrastructure sector economically vibrant and competitive. As per the 12th FYP midterm appraisal, the overall private sector investment share is likely to be 36% during the Plan period.

Further, according to the 12th FYP midterm appraisal, infrastructure investment is likely to close to 8% of the GDP which is consistently below the original target of 9% which is requirement to sustain 8-9% GDP growth. The overall target for the plan period via an investment of about Rs.23.22 trillion will remain unaltered even though the sectoral allocation might change.

As per the estimates for the 12th FYP, the investment in infrastructure is expectedly double to Rs. 46.30 trillion compared to the 11th FYP. It is estimated to reach 10% of the GDP over the entire Plan period except the terminal year 2017 when it is expected to touch 11% of the GDP.

The housing finance market has witnessed a gradual decline in the off-take as a result of rising property prices and interest rates in the economy, in spite of higher disposable incomes, continued fiscal incentives on interest and principal repayments and increased urbanization.

Though the housing shortage continues to be high in the country and especially in rural areas, it is expected that the demand for housing and home loans in urban areas will continue to rise faster as a result of the increased urbanization in the country. Not only have the metro cities witnessed rising population but even Tier I and Tier II cities have been experiencing similar trends of increasing population and demand for housing. With investments flowing into urban infrastructure, this trend can only intensify in the times to come. The demand for housing will therefore continue to grow in the medium to long term.

Opportunities & Threats:-The gap between the demand and supply of housing continues to be of great opportunity for infrastructure companies. Investment in housing is a prioritized item on the national agenda as it contributes in the countrys GDP growth, directly and indirectly. Most builders are trying to woo investors with interesting features. Closed-circuit television earthquake proofing is expected as standard features in most up market blocks. Some of the residential projects boast of air-conditioning, club and recreational facilities and modular kitchens. Tax incentives have increased and so have salaries. So for the first time, the salaried Indian has been able to leverage current earnings to buy a future asset. The average age of a new homeowner is now 32 years compared with 45 years a decade ago. There is also an overall transparency in the sector which was hitherto missing and as banks and financial institutions are lending heavily both to the investor and the developer. Relaxation of FDI ceiling has meant more foreign investment in the sector. New technology has meant faster and better completion of projects.

There are, however, a number of factors that can spoil the party. Land costs, which are a major constituent of housing costs in metros; have risen much faster than property prices. To offset this, developers are moving to smaller cities where prices are also rising. This would affect some of the smaller players, and experts feel that in time there would be a shakeout with private equity deals and joint ventures.

Listing out the challenges for the real estate market in India, a report by Price Waterhouse Coopers said that the Indian governments tax policy was not in tandem with the liberalization initiatives being undertaken in the sector. According to it, "There are no substantial tax incentives for real estate development except in the limited circumstances. Even in these situations, the tax incentive windows have a short life left.

RISK: - Infrastructure projects in emerging economies like India are perceived as vulnerable to risks and efforts must be made to introduce greater clarity in policy to reassure investors. Infrastructure projects in developing countries like India are perceived as highly vulnerable to risks which constrains financing. The aim of the policy makers should be to reduce perceived risks by introducing greater policy clarity and, at the same time, providing an environment that will reassure investors. Some of the notable risks that need to be reckoned with arise during the period of construction, leading to time and cost over-runs. They also included operational risks and market risks besides interest rate, foreign exchange, payment, regulatory and political risks.

The Planning Commission has pegged investment of USD 1 trillion in the infrastructure sector during the 12th Five Year Plan period that will commence from April, of which half is targeted to come from private sector. The Government of India along with RBI, the Central Bank of India are taking number of steps to promote funding in the infrastructure sector. Funding is the major problem for infrastructure financing and there are other issues which aggravate the problems of raising funds. These include legal disputes regarding land acquisition, delay in getting other clearances (leading to time and cost overruns) and linkages (coal, power, water) among other

Internal Control System & Their Adequacy: - A comprehensive system of internal controls exist in the company to safeguard the assets against loss from any unauthorized use or disposition and to ensure proper authorization of transactions are recorded and reported suitably. The Company maintains a system of internal control designed to provide a high degree of effectiveness and efficiency of operations, accuracy and promptness of financial reporting and observance with laws and regulations.

Human Resources: - As the construction industry is expanding rapidly, the demand for talented and experienced manpower is also going up rapidly. Our Company has well qualified and experienced staff. There was no industrial arrest during the year