BGR Energy Systems Ltd Management Discussions.
MANAGEMENT DISCUSSION & ANALYSIS
OPERATIONAL PERFORMANCE HIGHLIGHTS OF FY 2018-19
During the year the company has successfully completed the synchronisation of both the units of 2 X 660 MW, Unit # 3 & 4 IB TPS, Jharsuguda, Odisha Power Generation Corporation Ltd. (OPGCL). Of the NTPC Projects, trial operation of 72 hours in full load on UNIT 2 - NTPC SOLAPUR - 2 X 660 MW was successfully achieved during the year. The Company is currently executing three major projects viz., Vijayawada Dr. NTTPS Stage V, (1 x 800 MW) (Unit # 8) for APGENCO, 1 x 800 MW North Chennai - TANGEDCO and 3 x 660 MW NUPPL, Ghathampur, UP and they have also reached major milestones. The bOp EPC and Construction segment has achieved turnover of 2935 crores and the Capital Goods Segment achieved turnover of 295 crores.
Air Fin Cooler Division (AFC) has delivered a time critical order for BPCL for supply of AirFin Coolers and thus earned good appreciation from the customer. This achievement was well recognized in the Indian oil refining sector. During the year AFC division intensified its efforts in international markets and achieved significant breakthrough.
Environmental Engineering Division (EED) has achieved an all time high order booking of 477 Crores and turnover of 258 Crores. During the year EED has completed CPU PG Test for BHEL Bokaro project and EED Factory has processed and sold 1600 tonnes of Water Treatment Vessels. EED has successfully executed DA Export order to BASF Cherry Malaysia.
Oil and Gas Equipment Division (OGED) received prestigious EPC orders from ONGC and IOCL. The order booking for the year was 123 Crores.
Electrical Project Division (EPD) successfully commissioned three 400/230KV sub-stations and 230/110KV AIS sub-station in the FY2018-19. EPD has secured orders aggregating to 362 Crores for transmission lines and GIS sub-stations.
Power is a key component in the Infrastructural arana space crucial for the economic growth. Indias power sector is one of the most diversified in the world. Sources of power generation range from conventional and renewable sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. In May 2018, India ranked 4th in the Asia Pacific region out of 25 nations on an index that measures their overall power.
With an upturn in the GDP after a long hiatus thanks to certain positive policy initiatives of the Central Government, it is expected that there will be a rising demand for goods and services that could see an upward movement in the demand for electricity. Already plans are in place by various Utilities mainly in the Central sector for implementation of long delayed power projects in the coming 2 years. How much and how fast these will translate as a market/ business opportunity for the company needs to be evaluated and orders secured in the following months.
Water conservation and re-use of water being a priority of central government, an order passed by CPCB has requested major industries and municipalities to treat the sewage water for reuse & make it suitable for industrial use with suitable technology. This treated water should be supplied to nearby industrial areas instead of fresh water presently supplied to them. This is expected to open up large business opportunities in waste water treatment business.
PROSPECTS IN DOMESTIC AND INTERNATIONAL MARKETS
AFC Divisions focus will be on identifying and executing high margin orders with shorter lead time, focus on higher MOC where profitability is better and building a competitive edge through value engineering, cost reduction initiative as well as automation in manufacturing sector. AFC will specialy focus on replacement business and retrofit business in Indian market, which will provide substantial margin. AFC is also focusing on newer territory like Saudi Arabia and Russia.
The Governments thrust on drinking water sector offers encouraging prospects and the Company is geared up to secure sizeable water projects and STP in the municipal sector in domestic market. 3-4 large desalination plants of high order value in South and Western parts of India are expected to be finalised in FY 2019-20. Smart City mission, recycling of STP and water initiatives by Government envisages a capital out lay of around 35000 Crores in the next 3 years. In the FY 2019-20 WTP market would be a focus segment for booking orders.
In Oil and Gas, in the Upstream and Midstream sector, Ministry of Petroleum and Natural Gas recently awarded blocks through Open Acreage Licensing Policy for enhancing domestic exploration and production of Oil and Gas to leading exploration companies. This policy opened a huge market potential for OGED to supply process packages and also to spread its foot prints in high value EPC projects. In the Downstream (Refinery) sector, Oil PSUs have already initiated their projects under their expansion policy and BS VI up-gradation policy. Also PSUs are coming up with bio-refinery projects which are a new market potential in O&G sector. OGED is actively adding new oil and gas process products and packages into its portfolio. There is continuous effort to improve manufacturing process and techniques to suit these new products/ packages .OGED is enhancing the project management capabilities in executing high value EPC contracts. Also focusing in downstream sector to fabricate and supply core equipment and modules of SRU and CCR units. To achieve this OGED is in the process of having strategic tie-ups with process licensing companies in the gas processing and refinery sectors.
As Indias annual GDP is estimated to grow at the rate of around 7% over the next 10 years, the demand for electricity will also increase. This, in turn, requires increase in the present electricity generation capacity from around 344 GW in 2018 to over 800 GW by 2032 to meet the increasing demand. The increase in capacity should equally match with upgradation and enhancement of Generation, Transmission as well as Distribution (T&D) segment of power system. Thus, there is a need of huge investment of about US $ 300 billion over the next 3-4 years. It is estimated that the elasticity of GDP vis-a-vis electricity generated in India is currently 0.8. That is for every 1% growth in GDP there has to be 0.8% growth in electricity generated.
As per the CEA Report - 20 year (2016-2036) Perspective Transmission Plan Report, massive transmission corridor will be needed towards Northern and Southern regions in the next 20 years. This will warrant capacity addition in generation as well as transmission by about 4 to 5 times the present capacity. Government of India is giving focused thrust on development of Power Sector. Your company is making concerted efforts for increasing its market share in T&D segment by working closely with all State and Central Utilities in the country including Nuclear Power Corporation of India
As part of BGR ASCEND 2025 and strategy plan, the Company identified Civil construction, Road and Urban infrastuctire as key growth areas in the short to medium term. It is noteworthy that by 2025, Construction industry in India is expected to grow over 7% each year and emerge as the third largest globally.
The Road Sector is anticipated to witness an investment of Rs 83,000 Cr in the current FY 2019-20. The length of National Highways is expected to increase from 97,000 KMs to 2,00,000 KMs and an outlay of 5.35 Lakh Crores is planned for Bharatmala Schemes. In Metro Rail sector the expansion of Chennai Metro Rail in phase 2 is likely to gather momentum soon. Considering these potential prospects, your Company believes that given its proven track record, it will be able to secure some large contracts in these sectors.
FINANCIAL PERFORMANCE (STANDALONE)
|DESCRIPTION||Unit||FY 17-18||FY 18-19|
|Income from Operations||Crores||3299||3229|
|Return on Net worth||%||2.3||2.1|
|Employee Cost to Turnover||%||6.4||7.0|
|Overheads Cost to Turnover||%||6.2||1.95|
|Interest Cost to Turnover||%||8.8||8.4|
|Debtors Turnover (Excluding Retention)||Days||306||289|
|Interest Coverage Ratio||Times||1.25||1.15|
|Debt Equity Ratio||Times||1.71||1.63|
The Operating margin for the year 2018-19 was lower due to Product mix. There is no significant changes in other key financial ratios as compared with previous year.
Due to the implementation of Ind AS115 with effect from April 01,2018, the method of revenue recognition was changed. As per Ind AS115, provisions are created for contract assets ( 14.61 Crores), revenue recognitions were recomputed and opening reserves were restated ( 13.95 Crores). Opening balance was restated in line with Ind AS 8, for fraud committed in earlier year and identified in current yearC 11.74 Crores). The reduction in Return on Net worth is due to lower Net profit margin.
STRENGTH AND OPPORTUNITIES
I. Track record of successful execution of large turnkey EPC, BoP and LSTK contracts
II. In-house design and engineering capability
III. In-house capability to undertake and execute BoP packages.
IV. Capability to manage multiple projects simultaneously
V. P rofessional management and expertise in project management
VI. Cost Competitiveness
VII. Well experienced and motivated employees with a good balance of young talent and experienced leadership team.
VIII. The company is well placed to undertake large EPC/BoP/ LSTK contracts based on customer requirements, both within India and Overseas.
INTERNAL CONTROL SYSTEMS AND AUDIT
As part of the audit system, the company has in-house experienced system auditor and works auditor. For each division an external firm of auditors carries out internal audit. For the Power Projects division, for each project, a separate external audit firm carries out internal audit on a monthly basis. The detailed audit plan is well documented and audit scope is reviewed every year to include key processes that need improvements and address new compliance requirements. The detailed audit plan approved by the Audit Committee is rolled out at the beginning of each year. In addition, all payments to vendors are subjected to pre-audit by an external audit team. The statutory auditors carry out the required audit and compliance checks and review the control systems. The Chairman of audit committee, key project personnel and the finance team review the audit reports of the internal auditors, pre auditors and in-house auditors in detail every quarter and a time bound action plan is initiated to address the key audit issues that need improvement and resolution.
A summary of key audit observations, action taken to fix the gaps and the status is reviewed by the Audit Committee members in the quarterly audit committee meeting. The present internal control and audit systems are considered to be adequate.
The business of the Company encompasses design at offices, manufacturing at factories and project sites, civil and mechanical construction, erection and commissioning of equipments / packages. The company has a well-documented Standard Operating Systems and Procedures (SOSP). The SOSP mandates concerned officers of the company to review, identify and take timely steps to manage these risks on an ongoing basis. A detailed review and up gradation of the existing SOSP was undertaken during the year. Delegation of Authority is reviewed each year to ensure that the adequate controls are in place and required flexibility is available for effective operations at work site and the commitments made to customers and vendors are met on time. Periodic review of procedural checks and balances are undertaken with a view to improve operational controls and productivity matrix. An experienced team of contract specialists in the Company review all contractual documents with the customers and the vendors in detail to ensure that all risks associated with the terms of contract are fully understood, documented and reviewed for ensuring effective implementation of the contracts.
The Companys activities are exposed to various financial risks like market risk, foreign exchange risk, credit risk and liquidity risk. These financial risks have a bearing on the operating profit of the Company. The Companys Senior Management oversees the management and mitigative measures of these risks. The Audit Committee regularly reviews the effectiveness of the risk identification and mitigative process and the steps taken by the Company to identify, address and mitigate key operating, compliance and financial risks on a timely manner.
HUMAN RESOURCE DEVELOPMENT
The company provides an environment where people can grow and are enabled and empowered to deliver sustainable organizational performance. We have made good progress towards achieving a number of key HRD priorities. One of these is process based approach, which has a profound impact on how we deliver our HR services to the stakeholders. During the year, the company carried out the re-engineering of HR processes and successfully implemented the changes in SAP. While manpower optimization is key for any EPC player, it gains more importance in the current scenario in power industry. The company carried out the manpower optimization exercise which this has resulted in better utilization of manpower and talent across the company.
The Companys focused efforts on learning and development over the last few years has yielded good results. Accordingly, 90 programmes were organised and 18,000 man-hours of training imparted. Committed and capable leaders, along with a skilled and motivated workforce, are critical for our company, even more so during times of significant downturn in the economy and need for transfomational change. The Company is building leadership skills and investing in future leaders through the HiPo scheme, along with Individual development plans is being worked out.
During the year the company recruited key talents for present and future business diversifications. As a morale building exercise the company conducted sports and games at Head office and project sites. The Company is committed to identify and reward the exceptional performance by the employees. Employees, who made outstanding contributions were honoured with Star Performer Award.
The manpower strength of the Company as on March 31,2019 was 2003.
ENVIRONMENT, HEALTH AND SAFETY, (EHS)
The Company treats EHS as its core to carry on and grow the business on a sustained basis. The Company has adopted a structured approach towards implementation of EHS policy and plans to integrate EHS with critical operating processes so as to continually improve the environment in which the Company operates as well as the safety and health of all employees, workmen, general public and the society. The Company established EHS structure for developing, implementing and improving EHS Management Systems. These systems are so designed to imbibe and enhance safety culture and to mitigate high potential risks among the employees and contractors through appropriate intervention and guidance.
During FY 2018-19, the Company took up many EHS initiatives viz., monitoring and control of air, noise and water pollution, fitness of all employees premedical screening, regular health awareness camps, blood donation, AIDS awareness at project sites, safety orientation to all new employees and contractors men before engaging at work, hazard identification and risk assessment for all critical activities, safety evaluation of contractors and adoption of EHS code of Practices by contractor, enhancement of behavior based safety programs, on spot motivation to safety conscious worker and recognition of best EHS performance by contractor.