Coastal Roadways Ltd Management Discussions.

INDIAN ECONOMY

FY 2017-18 marked a significant economic measure by the government: The Goods and Services Tax (GST) was implemented from July, 2017 as the nation moved to one nation-one tax. The transformation was huge and its impact on road transportation business was highest. While the overall economy started recovering in the 2nd half post stabilisation of the GST regime, transport sector continued to witness disruption by changes in rules especially those relating to e-way bills. GDP growth rate in FY 2017-18 was 6.7%, supported by consumption growth and government spending. With improving investments, there are signs that a recovery is underway. Industrial activity has rebounded with strong industrial production growth, led by a rise in consumption, manufacturing and electricity generation.

INDUSTRY STRUCTURE AND DEVELOPMENT

The logistics sector has seen a paradigm shift post implementation of the GST as various indirect taxes made way for the unified tax. In fact, the indirect tax regime changed the way companies strategised their supply chain operations as they did not need to worry about local taxes like Octroi. Also, with the GST, there was consolidation of warehouses across clients, resulting in fewer full truck load stock transfers, and increased direct billing from a central warehouse to the customer. This has resulted in a direct growth in lower capacity (less than 10 MT) truck load business opportunities as against movements in higher capacity vehicles (15-20 MT) which is the principle business of your company.

The last budget also allowed 100% foreign direct investment in warehousing, making it easier for foreign players to comply with the single point GST norms. The year continued to witness constant and huge inflows of funds in loss making technology based startup logistic companies which continued with their idea of disrupting the freight market with penetration pricing.

The prices of diesel, the principal cost component of road transport industry,witnessed an increase of about 16% during the FY 17-18 and is continuing the similar trajectory in the ongoing FY. The entire burden of such abnormal cost increase cannot always be fully passed on to the customers. The discounted pricing by start-ups and increasing trends of e-auction by customers continue to further dampen the freight rates. The disorganized nature of the logistics sector in India, its perception as a manpower-heavy industry and lack of adequate training institutions has led to a shortfall of skilled drivers and client service personnel.

The acquisition cost of new vehicles with upgraded BS-IV emission norms has substantially increased and it is difficult to be recovered in current scenario of declining freight rates.Removal of Commercial Tax barriers and check posts from inter state movement has definitely added some advantage but the menace of enroute RTO Check posts, unauthorized barriers, highway thefts continue to impact the industry.

BUSINESS STRATEGY & OPPORTUNITIES

The Union Budget 2018-19 bears positive signs for the overall business community - especially the Micro, Small and Medium Enterprises (MSMEs), which comprises approximately 99 per cent of the businesses filing tax returns in India. This Budget witnessed an all-time high allocation of funds. The Finance Minister has emphasised on the development of infrastructure by stressing the need for over INR 50 lakh crore in investment to connect and integrate the country with a comprehensive network of roads, railways, airports, ports and inland waterways. Increased allocation in the development of road network including the Bharatmala Pariyojana would enable the creation of seamless connectivity to remote areas and country borders, improving the safety and reducing the cost of transportation while also allowing business activities to flourish in such areas.

Various policies announced for the agriculture and farm sector including fisheries would have a positive impact on the transport and logistics businesses. Operation Green proposed in the Budget would promote Farmer Producer Organisations that would include agricultural logistics like cold chains and warehouses. In summary, policies and initiatives announced in the Union Budget 2018-19, along with various other continuing investments and reforms are critical to Indias competitiveness. An effective implementation of infrastructure initiatives could potentially catapult India at much higher rank in the global marketplace.

While in the initial phase of implementation, goods transport companies were kept under compulsory reverse charge model with no input tax credits under GST. However, subsequent amendments allowed the companies to select reverse or forward charge option. Due to continued changes and instability of the new system your company preferred to operate under reverse charge model. With gradual stabilisation and based on the learnings developed, your company has opted for the forward charge mechanism wef 1st April 2018 and has been able to pass on some of the cost benefits to its customers to ensure their retention and to be cost competitive.

Your company had timely realized the importance of digitization and its fleet is already equipped with GPS and RFIDs. Client servicing, fleet allocation, documentation services using online platforms and mobile applications are also being evaluated and would soon be implemented.

OUTLOOK

Your Company continues with its plans to

• Consolidate its activities relating to logistics and to create a strong base of operations.

• Devise strategies to bring operational efficiency, cost effective services and to face economic slowdown and competition.

• Fine tune the operating structure, and improve the customer focus and increase the Companys competitive advantage. The new structure usher an era of efficiency and growth.

Your company will continue to focus on its key businesses by exploiting its core competence. In order to be a leading edge Company, a well-crafted strategy has been adopted entailing capitalizing on the strong brand equity, optimising costs and improving operational efficiencies at all the levels. These endeavors should facilitate superior margins, despite the forecast of a challenging business environment in the immediate future.

The company expects a growth of around 5-10% with better economic conditions and with the positive impact with implementation of GST. It aims to sustain the growth momentum of its road business and focus on the dedicated container service model. It also aims to get growth from existing clients who are ramping up capacity as well as tap new customers and new segments.

Your Company is also in process of developing required infrastructure viz. warehouses, transshipment hubs, logistic parks etc required for multimodal transportation, composite supply chain solutions including end to end logistic services and has also initiated process of alliance with strategic partners by making joint venture agreements. However changes due to implementation of new GST regime has affected the selection of locations and there has been delay in implementation of the same resulting into termination of one such proposed arrangement.

RISKS AND CONCERNS

In todays highly unpredictable business environment, it is vital to take a holistic view of risk and compliance. Like any other Company having national business interests, your company is also exposed to business risks, which may be internal as well as external. To ensure our long-term corporate success, it is essential that risks are identified, analyzed and then mitigated by means of appropriate control measures. A strong and independent Internal Audit function at the corporate level carries out risk focused audits enabling identification of areas where risk management processes may need to be improved.

Here are some of the key risks faced by the Company and actions deployed for mitigation.

Industry Risks

• Economic Slowdown may affect Companys performance.

• Over dependence on one line of business can threaten viability in the event of a sectoral downturn.

• Efficiency in Internal Systems and Procedures.

Your company offers logistic and road transportation services to a diverse range of industries. It keeps a close watch on the economic environment and timely actions are accordingly taken. These measures help us mitigate the cyclical risks. Also, our internal systems and processes are constantly reviewed and revamped as per industry best practices.

Underutilization of Assets and Infrastructure

• The underutilization of assets and resources, resulting in an adverse impact on profitability in competitive or recessionary market and poor economic conditions.

The systems are being streamlined and integrated across all the branches for effective matching of availability of any underutilized asset/ resources, primarily vehicles at one branch with corresponding requirements for the same by another branch.

Legal Risks

• Threat of damage and loss of cargodue to accidents and hijacking of trucks.

• Risk of pilferage leading to shortages in delivery of cargo.

All the vehicles of the company are comprehensively insured for damages arising out of accidents. The entire fleet of Companys owned vehicles is fitted with modern technology tracking tools like GPS in vehicles to ensure safety of vehicle and cargo. Locks and seals secure trucks before dispatch that can only be broken at the point of unloading. Verification of truck drivers is a necessary compliance and trucks are engaged from reliable market sources.

HR Risks

• Failure to attract & retain talent may adversely affect the Companys performance.

• Failure to implement an effective succession planning for key positions.

• Failure to continuously update employees skills sets in line with current and future requirements.

Attrition trends are analyzed on annual basis and course correction is taken accordingly. The retention ratio of your companys employee is very high due to continued focus of the management in continued engagements and confidence building measures.

Quality Risks

l Poor service may increase competition risk.

Your Company continuously upgrades its services through technology upgradation, business process re-engineering and by imparting training to its employees at all levels on regular basis.

Liquidity Risks

• A delay in receivables could stretch the Companys working capital resources.

In your Company, the continuous endeavor is to shift towards shorter transaction cycles. The Company has an in built process of credit approval and monitoring with a pre-defined responsibility and accountability at various levels.

Competition Risks

• Unhealthy price cuts and discounts by niche players at state and zonal levels for short haul movements who enjoy cost advantage due to lack of regulatory compliances.

• Increasing trends of e-auctions and entry of start-ups andlarge MNC Logistic companies with huge resources and latest technologies into the business may reduce the business share of the company.

Your Company continues to follow suitable strategies to positively modify its risk profile by eliminating and significantly reducing key business risks and developing and implementing strategies to achieve that maximum possible degree of insulation from broad macroeconomics risks. Timely technology upgradation and proper training of manpower is done to further minimize such risks.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The Company has an internal control system commensurate with its size and nature of business and to meet the following objectives:

• Efficient utilisation and protection of resources.

• Compliance of statutory and internal policies and procedures.

• Completeness, accuracy, promptness of the reports generated for all the transactions in the Company.

FINANCIAL RESULTS AND COMPANYS OPERATIONS

The company has adopted Ind-AS for preparation of its accounts for FY 2017-18 as morefully described in the Notes on Accounts. During the year under review, your Company witnessed a marginal fall of about 3% in its turnover which recorded at Rs 5462 lacs as against Rs 5629 lacs in the previous year.Thiswas primarily on account of adjustment in freight rates by customers while the physical volumes remained constant. The domestic truck freight market has become highly competitive with entry of truck-aggregators and start-up companies backed with huge foreign investments and high end technology platforms. Despite abnormal increase in fuel prices leading to a jerk in operating costs, the company could manage to report positive profits.

Borrowings from institutional lenders for fleet acquisition were serviced with commitment. The Net worth of your company has been recorded at Rs 1234 lacs as against Rs 1211 lacs in the previous financial year.

No material changes and commitments have occurred after the close of the financial year till the date of this Report, which affect the financial position of the Company.

HUMAN RESOURCE MANAGEMENT

Your Company believes that constant training and development, and continuous learning, is necessary for ensuring retention of the best talent besides providing the Company a sustainable platform for growth in the business environment.

Training programmes have been devised to develop cross-functional skills. The objective is to provide your Companys people with an opportunity to address areas, not only relevant to their job profile, but also for their all round development. The Company employs 56 persons.

OVERVIEW

Large numbers of players, international as well as local, are setting up their shops in Logistics and hope to get a share of this emerging new economy business.

Your company has an edge over other players, by virtue of having strong information technology back-up and better understanding of Indian roads, local laws, customer needs etc. Your Company, being a pioneer and trendsetter in road transport and logistic industry, will always play a vital role in this industry.