Filtra Consultants & Engineers Ltd Management Discussions.

A. INDUSTRY STRUCTURE AND DEVELOPMENT

Global Economy:

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of year 2018, reflecting a confluence of factors affecting major economies. Global growth is now projected to slow from 3.6 percent in 2018 to 3 percent in 2019, before returning to 3.6 percent in 2020 or 2021. The global economy is facing a confluence of risks, which could severely disrupt economic activity and inflict significant damage on longer-term development prospects. These risks include an escalation of trade disputes, an abrupt tightening of global financial conditions and intensifying climate risks. There was a significant rise in trade tensions among the worlds largest economies, with a steep rise in the number of disputes raised under the dispute settlement mechanism of the World Trade Organization. The trade dispute between USA and China is the biggest trade dispute.

Developed economies expanded at a steady pace of 2.2 per cent, and growth rates in many countries have risen close to their potential, while unemployment rates in several developed economies have dropped to historical lows. While unemployment rates are at historical lows in several developed economies, many individuals, notably those with low incomes, have seen little or no growth in disposable income for the last decade. Among the developing economies, the regions of East and South Asia remain on a relatively strong growth trajectory, expanding by approx 5.5 per cent in 2019. Beneath the strong global headline figures, however, economic progress has been highly uneven across regions.

Indian Economy:

As per the World Bank reports Indias economy grew by 7.2 per cent in 2018-19 in contrast to the recent Indian Central Statistical Office (CSO) estimate of only 6.8 per cent growth during the period. It is forecasted that Indias GDP to grow at 7% in 2019-20 due to growth of investment & consumption Service exports enhanced. Report of the World Economic Outlook (WEO) of International Monetary Fund (IMF) has projected Indias GDP to grow even higher at 7.3 percent in 2019. India will retain its top spot as the fastest growing major economy. It would be helped by a "more accommodative monetary policy" and low inflation. On the external front, current account deficit (CAD) increased from 1.9 per cent of GDP in 2017-18 to 2.6 per cent in April-December 2018. The widening of the CAD was largely on account of a higher trade deficit driven by rise in international crude oil prices (Indian basket). The trade deficit increased from US$ 162.1 billion in 2017-18 to US$ 184 billion 218-19.

Net Foreign Direct Investment (FDI) inflows grew by 14.2 per cent in 2018-19. Among the top sectors attracting FDI equity inflows, services, automobiles and chemicals were the major categories. By and large, FDI inflows have been growing at a high rate since 2015-16. This pick up indicates the improvement in confidence of the foreign investors in the Indian economy.

Indian banking sector has been dealing with twin balance sheet problem, which refers to stressed, corporate and bank balance sheets. The increase in Non-Performing Assets (NPA) of banks led to stress on balance sheets of banks, with the Public Sector Banks (PSBs) taking in more stress.

There was a significant decline in food prices in 2018-19 as indicated by nearly zero per cent consumer food price inflation in 2018-19 with price contraction straight for five months in the year. The CPI inflation has consistently declined from 5.9% in FY2015 to 4.9% in FY2016, 4.5% in FY2017, 3.6% in FY2018 and further down to 3.4% in FY2019. The Wholesale Price Index (WPI)-based inflation, base year 2011-12, increased to 3.2% in March 2019.

Global Water treatment industry:

According to a report by Future Market Insights, the global water treatment market will increase at a compound annual growth rate (CAGR) of 7.4 percent during the period 2017–2027, to reach $88B in 2027. The water treatment market is viewed as a high-value market and has been found to be highly competitive consisting of a fair share of players operating in organized and fragmented market sectors. The level of acceptance for water treatment and its usage differs from various end-user requirements, which include industrial process and the usage of water in the residential, commercial and municipal sectors. To achieve the desired quality, water treatment systems often consist of three stages: pretreatment, treatment and tertiary/sludge water treatment. Enforcement of guidelines and management standards are expected to contribute to market growth.

Increasing awareness about conserving water, investments by governments and private enterprises in the industrial sector have helped the developing regions of Asia, Africa and Latin America. Stringent regulations for dealing with high industrial effluents to natural water bodies, increased rate of human sewage and increasing concern about depleting water resources is expected to drive the water treatment market. However, investors in the water treatment market face a number of barriers as the market is typically capital-intensive and ridden with uncertainties with regards to returns on investment. Thus, high capital investment, followed by a slow rate of return and a prolonged period of payback, is likely to restrict investments in the water treatment market. However, the market participants of the global water treatment market have emphasized on providing cost-effective water treatment solutions to end users.

Factors such as water scarcity, government rules for water disposal, and cost of water treatment are propelling the market growth. Besides, Growth in urbanization and population provides the opportunities to wastewater technologies for municipal water treatment. However, deficiencies of essential knowledge, awareness about technologies, and strict government norms on wastewater disposal are hampering the market growth.

Indian Water treatment Industry:

The water business in India has turned into a multibillion dollar industry as rising water shortages and pollution drive more and more companies to enter the fray with innovative technology, solutions and management expertise. Though there is no official figure available, industry estimates put the total worth of the water business in India to be close to $5 billion.

There is now a healthy demand for setting up desalination plants in India. These projects are coming up in several coastal cities. Chennai is leading with two big desalination plants already set up and plans afoot for more to follow. Mumbai is also looking to set up a desalination plant as are some cities in Gujarat. On the industrial and commercial side, the demand for process water treatment and wastewater treatment is rising as companies see a rise in water requirement with demand for their goods rising in the wake of a buoyant economy.

In the household sector, domestic water treatment is a rapidly growing industry. There are now several local and foreign manufactures of home-based water treatment and purification systems, a testimony to the fact that the Indian consumer is getting increasingly conscious of the ill-effects of drinking polluted water. Since most of the water utilities in Indian cities have old water pipeline infrastructure, people are not taking chances with their health and are investing in water treatment systems. This has led to unprecedented competition in the market as several established players jostle for market share with new entrants and small and regional players make a dent in the unorganised market. The sale of bottled and mineral water is also on the rise as more customers reach for a safe option to quench their thirst instead of relying on local water sources while travelling outside their homes and cities.

Official data show that the average annual per capita water availability in 2001 was approx 1,820 cubic metres and the government estimates that this may reduce to 1,341 cubic metres by 2025 and 1,140 cubic metres by 2050. The reducing per capita availability of water and deteriorating water quality has forced the country to look for sustainable and effective water technologies to provide clean and quality water. Thus, now-a-days, water management is becoming an inherent part of planning and development and Government spending on water Management is increasing.

The water and wastewater treatment market in India is in the growth phase and has immense untapped potential.

B. OPPORTUNITIES AND THREATS

Opportunities:

India has been facing considerable challenges in addressing safe drinking water requirements for the last few decades. Poor quality of water supplied by the civic authorities still remains a challenge in the country that has the second largest population across the globe. In India, Diarrhoea, a disease resulting from consumption of contaminated water, is the cause of about 13% deaths among children below 5 years of age. These factors are buoying the demand for water purifiers in India. Water purifier is no longer a high-end electronic product, limited to affluent households as it is available at lower prices and has started to penetrate into the countrys middle income group as well as rural households over the last five years. Water purifier manufacturers are also developing and positioning products to target the middle income and rural households. With more than 20 metros expected to mushroom by 2032, the water stress will only increase, creating huge demand for water and wastewater treatment systems in the Indian municipal segment.

The market is expected to be driven by rising product awareness across urban as well as rural centers and Government policy. High metal content in water sources in States such as West Bengal, Bihar, Rajasthan, Orissa, Tamil Nadu, Andhra Pradesh is further augmenting the water purifier demand in various Tier II and Tier III cities across these States. Till recently, rural markets in India werent on the radars of purifier companies, predominantly due to vast presence of low income consumer in rural pockets coupled with weak sales and distribution networks of the companies in these areas. However, various companies with innovative low-cost products are now aggressively targeting the countrys rural market, particularly in offline water purifier segment. Further, the municipalities and industries are continuously investing substantial money in water and wastewater improvement, creating ample opportunities for water and wastewater treatment equipment technology in India.

Threats:

The chance of intentional contamination of water by undesirable person is a strong possibility in present times. Water infrastructure can be targeted directly or water can be contaminated through the introduction of poison or disease causing agents. The damage is aimed at inflicting human casualties, rendering water unusable, or destroying purification and supply infrastructure. Although, massive casualties from attacking water systems are difficult to produce, yet the risk of societal disruptions, disarray and panic are high. Water contamination can disrupt the entire supply of purified water which can be of following types:

• Chemical contamination

• Biological contamination

• Radiological contamination

• Nuclear contamination

C. SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE

The Company deals in only water treatment equipments. Therefore there are no different segments or products of the Company.

D. OUTLOOK

Global Outlook:

Rapidly diminishing fresh water resources, increasing industrial activity, inefficient irrigation practices in agriculture, growing world population and stringent legislation on used waste discharge are driving the market for wastewater treatment technologies worldwide. However, the market faces certain drawbacks, such as the lack of awareness of appropriate water treatment techniques and significant overhead costs. These factors may act as a roadblock to the growth of the market.

Taking just the technology into account, dissolved solids removal hold the largest share of the water treatment technologies market, with municipal water treatment being the largest end-user industry. In terms of growth, food & beverage industry, Pharma Industry and pulp & paper industry would fuel the amount of growth in the demand for water treatment technologies in the region.

In North America, United States occupies the highest market share, in the value. Asian Countries like China and India due to their large population show exciting prospect for future market for wastewater treatment industry establishments, and is expected to lead the market through 2022.

Indian Outlook:

With Indias high population growth and intensifying water consumption, per capita availability of water has declined steadily over the years. There is an urgent need to generate water from all available alternate sources including recycling, reuse, recharging, and storages. There is increased awareness among the Indian Environment and Pollution Control Boards and the norms are getting stricter by the day. Desalination of seawater, water treatment and usage of recycled water for the industries is being tapped into by a few States which is providing a sustainable solution to the water issues.

Although there has been increased focus on water treatment over the last few years, there is still a big gap between generation and treatment which needs to be addressed on priority with policy actions.

E. RISKS AND CONCERNS

• Changes in economic and relevant regulatory policies, lower GDP growth, scaling back of government initiatives and termination of government contracts with little or no prior notice, insufficiency of funds and the reluctance of government departments to make quick decisions may adversely impact opportunities from a specific country or region.

• Disruptive geopolitical scenario (includes political shifts, such as major policy changes, coups, revolutions and wars) and changes in governments or unstable political regimes in the geographies where the Company is present, can delay project execution.

• Rising competition from other global players and also un- organized sectors in the Industry may compel the Company to lower prices to win contracts and maintain market share. This may lead to substantial margin pressure.

• Poor credit worthiness of customers can cause multiple setbacks in the midst of an order execution and lead to project delays.

• Inconsistent commodity supply and price volatility of specific commodities/raw materials could affect project cost and gross margins.

• FILTRA depends on vendors for supply of key products. Therefore, it is exposed to uncertainty in the quality of their services, equipment and supply including timely delivery. This can cause operational delays and increased costs.

F. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Board and the Audit Committee are responsible for maintaining and reviewing the risk management framework and internal control processes and policies. The Board assesses and approves its overall risk appetite, monitors the risk exposure and sets limits, which are periodically reviewed. The Companys management systems, organizational structures, processes, standards, code of conduct and behaviors together form a system of internal control that governs how it conducts its businesses and manages associated risks.

The effectiveness of the internal control mechanism is reviewed by an independent professional Internal Auditor and by the Statutory Auditors. The Audit Committee of the Board periodically reviews the functioning of the internal audit and the implementation of the recommended measures to improve the internal control mechanism.

G. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

The year 2018-19 has shown marginal increase in top line whereas bottom line has been declined. The sales of the Company increased from Rs. 52.59 Crores to Rs. 53.42 Crores, registering a growth of 0.57%. EBT has been reduced by 11.52% in F.Y. 2018-19 and was at Rs. 2.65 Crores as against Rs. 2.99 Crores in previous year. Net profits after tax of the Company stood at Rs. 1.84 Crores in the F.Y. 2018-19 as against Rs. 2.19 Crores in the F.Y. 2017-18, recording a decrease of 16.04%.

H. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

The Company promotes positive workplace environment through its policies and best practices for all its employees. The Company policy prohibits harassment of any kind, including harassment based on age, race, religion, caste, creed, colour, sex, marital status or any other basis protected by law. During the year, the Companys Internal Complaints Committee did not receive any complaint. Total number of employees on pay roll as on March 31, 2019 were 63.

Health, Safety and Environment:

The Company takes timely measures to protect the health and safety of its employees and minimize pollution to preserve the internal as well as the surrounding environment. The Company also conducts safety induction trainings for its employees and workers to make them aware of the system, site safety rules and the procedure to report any incident to their supervisors. The training programmes also give them an overview of the dos and donts during emergency situations.

I. Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor, including:

Sr. No. Particulars 2017-18 2018-19 Changes (in%)
1 Debtors Turnover ratio 7.45 6.8 8.72
2 Inventory Turnover ratio 4.5 3.41 24.22
3 Interest Coverage Ratio 602.46 324.21 46.19
4 Current Ratio 1.97 1.61 18.27
5 Debt Equity Ratio* NA NA NA
6 Operating Profit Margin (%) 5.69 4.96 12.83
7 Net Profit Margin (%) 4.17 3.44 17.51

* Not Applicable as the Company does not have any Debt

• Interest Coverage Ratio: The interest ratio has declined from 602.46 in FY 2017-18 to 324.21 in Financial Year 2018-19 on account of Tax assessment dues.

J. Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof.

Sr. No. Particulars 2017-18 2018-19 Changes (in%)
1 Return on Net Worth 31.98 22.37 30.05

• Return on Net Worth: The return on Net Worth declined from 31.98 in Financial Year 2017-18 to 22.37 in Financial Year 2018-19, this decline was due to decrease in net profit from Rs. 219.11 in Lakhs to Rs. 183.97 in Lakhs and due to distribution of interim dividend during the financial year 2018-19.