HEC Infra Projects Ltd Management Discussions.

A) Overview of Economy:

The Indian economy grew a Rs 4.2 per cent in 2019-20, lower than the 6.1 percent figure registered in 2018-19, as the Covid-19 pandemic adversely impacted economic activity in the last month of the fiscal year, especially manufacturing and construction. The full-year GDP growth is the lowest India has registered in 11 years.

The Central Statistics Office had earlier forecast that the economy would grow a Rs 5 per cent in 2019-20. In the January-March quarter, GDP grew a Rs 3.1 per cent as agains Rs 5.7 per cent in the corresponding year-ago period. These are the first set of GDP numbers showing the impact of the Covid-19 pandemic and the nationwide lockdown, which came into effect from 25th March.

Economists expect a massive contraction in the first quarter of 2020-21 due to the two-month lockdown, which is likely to pull down the full-year growth to a 5-7 per cent contraction. The Reserve Bank of Indias monetary policy committee refrained from providing any growth projections for the first time in its history, citing the huge uncertainties around the pandemic and its impact on various sectors.

B) Overview of EPC Electro-Mechanical Sector:

Indias engineering sector is divided into two major segments - heavy engineering and light engineering. The turnover of capital goods industry in India is expected to grow to RS 8.05 lakh crore (US$ 115.17 billion) by 2025. Comparative advantage vis-a-vis peers in terms of manufacturing cost, market knowledge, technology and creativity has been the driving force behind engineering export from India. Engineering export reached US$ 76.26 billion in FY20 and US$ 2.31 billion in FY21 (till April 2020). Index of industrial production (IIP) for electrical equipment industry stood a Rs 105.5 in FY20. Export of telecom instruments increased from US$ 2.58 billion in 2018-19 to US$ 4.68 billion in 2019-20.

As per Mr Piyush Goyal, Minister for Commerce and Industry and Railways, the Government will make all efforts to ensure that the export of engineering goods reach US$ 200 billion by 2030.

The Government has also announced to invest RS 100 lakh crore (US$ 1.5 trillion) in infrastructure over the next five years.

Companies engaged in the engineering sector are virtually on a roll. Capacity creation in sectors like infrastructure, power, mining, oil & gas, refinery, steel, automotive, and consumer durables have been driving the demand in the engineering sector. Separately, the approval of significant number of Special Economic Zones (SEZs) across the country and the development of the Delhi-Mumbai Industrial Corridor (DMIC) across seven states is expected to further bolster the engineering sector.

The Government has proposed granting of loans up to RS 1 crore (US$ 0.15 million) for MSMEs within 59 minutes through a committed online portal. Under the Interest Subvention Scheme for MSMEs, RS 350 crore (US$ 52.50 million) was allocated for FY20. With 100 per cent Foreign Direct Investment (FDI) allowed through the automatic route and initiatives like Make in India, major international players have entered the Indian engineering sector due to significant growth opportunities available. FDI inflow in Indias miscellaneous mechanical and engineering industries stood at around US$ 3.64 billion during April 2000 to March 2020 according to the data released by Department for Promotion of Industry and Internal Trade (DPIIT).

C) Engineering Services:

HEC is a leading EPC player in the field of Electro-Mechanical, Solar Projects, Lighting and ELV System. It offers integrated solutions and end-to-end services ranging from design, supply, installation and commissioning of overhead transmission lines, substations, underground cable lying, Switchyard, distribution networks, power quality improvement projects, infrastructure electrification, solar PV plants, battery energy storage system and mini / micro grid projects.

i. TRANSMISSION PROJECTS:

HEC has providing EPC solution in providing transmission Projects and having core strength of handling engineering solutions in EPC projects from procurement to construction services. The areas of service in Transmission project is of Switchyard, Overhead Transmission Line, and cable laying. The Companys substation business focuses on providing turnkey solutions for extra high voltage air insulated / gas insulated substations for utilities and power plants, EHV cable & communication backbone networks and complete electrical & instrumentation solutions for various infrastructure projects. The Company has a wide experience for execution of projects on Turnkey basis for Switchyard up to 220 KV, Overhear transmission line up to 220 KV, and underground cable laying up to 66 KV, Air insulated substations up to 220KV, Smart distribution sub-station and SCADA systems.

During the year company has received Transmission work of Gas Insulated Substation for Gujarat Power Corporation Limited and Supply, Installation, testing and commissioning of Switchyard for Concord Biotech Limited and Virgo Aluminium Limited.

ii. WATER PUMPING STATIONS:

HEC has the ability to provide turnkey projects to clients who are seeking single company approach to project design and implementation. Our vast knowledge and experience in the water pumping station link us to the best resourced companies in the world capable of implementing complete package projects. The Company executes various projects on turnkey basis involving mechanical, electrical instrumentations in government, private and industrial pumping schemes. The Company has in house manufacturing (by way of manufacturing by sister concern companies) of HT panels, LT panels and Distribution Boards (DB) which gives added advantage to end clients. We have executed pumping projects which includes HT Motors up to 6.6 KV along with PLC, SCADA & Automation systems.

During the year the company has received and executed work for various projects for Ahmedabad Municipal Corporation and Gujarat Water Supply and Sewerage Board.

iii. SOLAR:

HEC provides end to end solution EPC (Engineering procurement and construction) in PV solar plants. Installation of medium/large scale grid solar power plants. The Company provides services starting from designing stage till Operations and Maintenance of Projects , guiding customers in government policy issues, land procurement issues, provide the project reports for and approvals for solar plants. HEC also provides roof top solar solutions in Solar PV solution with and without battery backup. We have also provide solutions for specific requirements for any type of roof top such as flat concrete rooftop, metallic rooftop, inclined and tiled rooftop.

The Company has executed Rooftop projects for more than 1MW and Solar Park up to 5 MW till the 31st March, 2020.

iv. LIGHTING:

The Company provides EPC for both indoor and outdoor lighting solutions. Airports, hotels, industrial plants, Hospitals etc. are the sectors in which the company has provided the lighting solutions. The Company has an EPC team which is highly efficient and capable for indoor and outdoor jobs, especially in the field of outdoor lighting. We provide all types of outdoor lighting options including Solar Lighting, Smart Street Lighting, Industrial Plant Lighting, River Front Lighting, Highway Lighting, etc. During the year under review,

During the year under review, the company has received and execute work for supply, installation, testing and commissioning project of lighting for MS Khurana, Tirupati Sarjan Limited and Ranjit Buildcon Limited and J Kumar Infra Projects Limited etc.

v. ELV (Extra Low Voltage) SYSTEMS:

The Company provides ELV Systems to complete the building under EPC Contracts. We have a vast experience in Supply and install complete electrical infrastructure and systems to the highest standard-right down to the system which operates on extra low voltage (ELV) such as CCTV, Access Control, Fire Detection/ alarm, Data Networks, EPBAX, Background Music System and Voice Evacuation System, HVAC work, Building Management System and TV Distribution.

During the year, the company received and executed project of Tirupati Sarjan Limited for IIT Gandhinagar and Ranjit Buildcon Limited for metro Stations.

D) Risk & Concern:

The Company recognizes that risk is inherent in every business activity. Effectively managing these risks is key to achieving our strategic objectives and the long-term sustainable growth of the business. At industries, risk management encompasses an organized and coherent process of identifying, assessing and managing the existing and potential risks in a planned manner. The Company has framed a comprehensive Risk Management Policy which inter-alia lays down detailed process and policies in the various facets of the risk management function.

The management strives hard to balance business risks and opportunities and analyses potentially negative or positive outcomes. The risk management function is integral to the company and its objectives includes ensuring that critical risk are identified continuously, monitored and managed effectively in order to protect the companys business.

However, the changes in the tax laws, Government policies and regulatory requirement might affect the companys business. Uncontrolled variation in price of input materials could impact the companys profitability to the extent that the same are not absorbed by the market through price increase and / or could have a negative impact on the demand in the market.

E) Internal Control System and their adequacy:

The Company has adequate internal control systems appropriate for the business commensurate with the size and nature of its business having regard to efficiency of operations and for compliance with applicable laws. The primary objective of the internal control system is to ensure that all its assets are safeguarded and protected and prevent any revenue leakage and losses to the Company. The Company has proper system of Identification, treatment and mitigation of risk time to time. The controls are reviewed periodically and strengthened in view of changed processes, systems and regulations. In addition, the external auditor and internal auditors of the company carries out periodical review of the functioning and suggest changes if required.

The Audit Committee of the Board meets periodically to review various aspects of performance of the Company and also reviews the adequacy and effectiveness of the internal control system and suggests improvement for strengthening them from time to time. External Auditor also attends the Meeting and conveys their views on the business process and also of the policies of financial disclosures. When found necessary, the Committee also gives suggestions on this matter.

F) Human Resource & Safety:

Our Company believes that the human capital is key to bring in progress. The Company believes in maintain cordial relation with its employees which is one of the key pillars of the Companys business. The Companys HR policies and practices are built on core values of Integrity, Passion, Speed, and Commitment. The Companys focus is on recruitment of good talent and retention of the talent pool. The Company is hopeful and confident of achieving the same to be able to deliver results and value for our shareholders. As on 31st March, 2020, the total employees on the Companys rolls stood a Rs 57.

G) Financial Performance:

During the financial year 2019-20, Total Revenue declined by 66 % to RS 4008.54 Lakhs. Profit before tax and Profit after tax also declined to RS 74. 91 Lakhs and RS 53.81 Lakhs respectively.

Particulars

For the year ended on

31st March, 2020 31st March, 2019
Revenue from Operations 3923.03 8008.26
Other Income 85.50 100.49
Total Revenue 4008.54 8108.75
Purchase of Stock-in-Trade 2560.31 5317.89
Changes in Inventories of Finished Goods, WIP and Stock-in-Trade (637.44) (262.74)
Employee Benefit Expenses 402.02 476.47
Other Expenses 1284.45 1888.42
Total Expenditure 3609.35 7420.04
EBIDT 399.19 688.71
Finance Cost 299.11 404.91
Depreciation and Amortization 25.17 31.29
Profit Before Extraordinary Item and Tax 74.91 252.50
Extraordinary Items 0.00 0.00
Profit Before Tax 74.91 252.50
Net Tax Expenses 21.10 57.17
Profit for the year 53.81 195.33

H) Key Financial Ratios:

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in Key Financial Ratios and any changes in return on net worth of the Company (on standalone basis) are given below:

Particulars 31st March, 2020 31st March, 2019 Changes
Debtors Turnover (times) 1.27 2.17 -0.9
Inventory Turnover (times) 1.53 6.25 -4.72
Interest Coverage Ratio (times) 1.25 1.62 -0.37
Current Ratio (times) 1.89 1.58 0.31
Debt Equity Ratio (times) 1.99 2.25 -0.26
Operating Profit Margin (%) 7.35 6.95 0.4
Net Profit Margin (%) 1.34 2.41 -1.07
Return on Net worth (%) 1.89 6.98 -5.09

I) Opportunity and Threat:

Opportunity:

* Strategic Joint Venture strengthening business

* Entering in to a New projects

* Favorable contract terms

* Reliable Investors

* Favorable financing method according to the advance rate and payment dynamics

* Developing a Functional and coordinated Project team

Threat:

* Rise in cost of material, cost of transportation may affect the margin

* Changes in Government Policies

* Intense competition may reduce profitability

* Act of God

* Client Dissatisfaction

* Customers inability to pay