IL&FS Engineering & Construction Co Ltd Management Discussions

Company Overview:

The Company boasts over thirty years of expertise in the engineering and construction sector, offering comprehensive Engineering, Procurement, and Construction (EPC) solutions. Leveraging its proficiency across various infrastructure domains and a skilled workforce, the Company has been predominantly engaged in executing infrastructure projects throughout India. The company has a proven track record of delivering projects across diverse sectors including Power, Oil and Gas, Roads, Railways and Metros, Water and Irrigation, Ports, and Buildings & Structures sectors.

Indian Infrastructure Industry:

The Government of India has undertaken an ambitious initiative to transform the nations infrastructure landscape, with the primary objectives of stimulating economic growth, enhancing connectivity, and elevating the standard of living for its populace. This comprehensive endeavor encompasses the development of transportation networks, including highways, railways, and airports, as well as the promotion of water transport and innovative ropeway systems. These initiatives are strategically designed to foster inclusive and sustainable development throughout the country.

India has achieved notable milestones in infrastructure advancement, exemplified by the inauguration of landmark projects such as the Atal Tunnel, the worlds longest highway tunnel, and the construction of the Chenab Bridge, recognized as the worlds highest railway bridge. Moreover, the nation has made significant strides with iconic ventures like the Statue of Unity, which stands as the tallest statue globally, and transformative undertakings like the Zojila Tunnel, positioned as Asias longest tunnel, facilitating all-weather connectivity in the region of Ladakh.

In pursuit of Indias ambitious goal of achieving a US$ 5 trillion economy by 2025, prioritizing robust infrastructure development has become imperative. The government has initiated the National Infrastructure Pipeline (NIP) alongside complementary endeavors such as ‘Make in India and the production-linked incentives (PLI) scheme to catalyze growth within the infrastructure domain. Traditionally, over 80% of infrastructure expenditure has been allocated towards transportation, electricity, water, and irrigation.

While these domains retain their significance, the government is now directing attention towards emerging sectors, in response to evolving environmental and demographic trends in India. There exists a compelling imperative for heightened efficiency and efficacy across the entire spectrum of infrastructure provision, spanning from housing facilities to water and sanitation services, and extending to digital and transportation infrastructure. Such enhancements promise to drive economic expansion, elevate living standards, and enhance sectoral competitiveness. Roads and Highways constitute the largest portion of infrastructure spending, followed by investments in railways and urban public transport. The government has set ambitious objectives for the transportation sector, including the expansion of the national highway network to 200,000 kilometers by 2025 and the augmentation of airport capacity to accommodate 220 airports. Furthermore, plans entail the operationalization of 23 waterways by 2030 and the establishment of 35 Multi-Modal Logistics Parks (MMLPs). The aggregate budgetary allocation for ministries overseeing infrastructure development has surged from approximately INR 3.7 trillion in FY23 to INR 5 trillion in FY24.

Outlook:

The Indian government has outlined its intentions to escalate capital outlay on infrastructure ventures to Rs 11.1 trillion ($134 billion) in the interim budget for 2024-2025, marking an 11% surge compared to the preceding fiscal term. This augmentation represents the fourth consecutive annual increment, thereby amplifying resources allocated to the sector.

The comprehensive budget for the fiscal year 2024-25 will be presented in July 2024, after the Indian general elections and the formation of a new government in June 2024. Investments directed towards the construction and enhancement of physical infrastructure, particularly in alignment with initiatives aimed at enhancing the ease of doing business, remain instrumental in driving efficiency gains and cost optimization. The Indian government has reaffirmed that infrastructure development stands as a pivotal cornerstone in ensuring effective governance across various sectors. The forthcoming opportunities in the sectors, which can be tapped by the Company are as follows:

Roads:

The Capital allocation for the Ministry of Road Transport & Highways increased although the growth is modest at 3%, it indicates the governments focus on the road sector and enables the ministry to meet the completion targets for the Bharatmala and the NIP (National Infrastructure Pipeline). The Government of India has allocated Rs. 111 lakh crore (US$ 1.4 trillion) under the National Infrastructure Pipeline for FY25. The roads sector is likely to account for 18% capital expenditure over FY25. Status of Bharatmala Pariyojana Phase 1: The status of Bharatmala Pariyojana Phase 1 entails a total length of 34,800 km in 31 States and UTs, 550+ Districts. The length awarded is 27,384 km and the length constructed is 15,045 km. The phase 1 is to be completed by 27-28.

Power:

Indias power sector is gearing up for growth, emphasizing renewable energy, policy reforms, and increased capacity to meet rising demand. The interim budget for 2024-25 has been largely welcomed by the power industry for its nuanced approach to sustainable growth. The budget includes the announcement of key measures aimed at achieving net zero by 2070. These include the provision of viability gap funding (VGF) to tap the offshore wind power potential, expansion of rooftop solar schemes to cover 10 million households with incentives for generating clean energy, and the development of a 100 million tonne capacity for coal gasification and liquefaction by 2030 to reduce the reliance on imported fossil fuels. Grid-based solar power scheme: Rs 10,000 crore (compared to Rs 4,757 crore in 2023-24); Wind Power: Rs.930 crore (compared to Rs. 916 Crore in 2023-24).

Railways:

Indias railway sector is undertaking ambitious projects such as the Mumbai-Ahmedabad Speed Rail Corridor, the worlds highest pier bridge under construction, and the Chenab bridge in Jammu & Kashmir - the worlds highest railway bridge. With a total Broad-Gauge network of 61,508 km electrified as of December 2023, the sector has also introduced 35 indigenously designed Vande Bharat Express trains, with six more set to be launched soon.

Three major economic railway corridor programmes identified under the PM Gati Shakti to be implemented to improve logistics efficiency and reduce cost are (a) Energy, mineral and cement corridors (b) Port connectivity corridors; and (c)High traffic density corridors.

Oil & Gas:

ONGC, IOC, and other oil PSUs are collectively investing about 1.2 lakh crore in oil and gas exploration, refineries, petrochemicals, and pipeline infrastructure to meet Indias growing energy needs. The Honble Prime Minister of India has also recently launched several oil and gas sector projects valued at approximately 1.62 lakh crore across multiple states in India. Furthermore, India plans to develop a $4.95 billion natural gas pipeline network for the Kashmir and northeastern regions by the end of 2025, aiming to enhance energy distribution and reduce import reliance. These projects signify Indias commitment to sustainable energy production and economic growth in the oil and gas sector.

Real Estate:

In India, the real estate sector is the second-highest employment generator, after the agriculture sector. Real estate sector in India is expected to reach US$ 1 trillion by 2030. By 2025, it will contribute 13% to the countrys GDP. Government of Indias ‘Housing for All initiative is expected to bring US$ 1.3 trillion investment in the housing sector by 2025.

Ports:

Indian Ports "Turn Around Time" has reached 0.9 days which is better than USA (1.5 days), Australia (1.7 days) and Singapore (1.0 days), as per the World Banks Logistics Performance Index (LPI) Report 2023. Sagarmala, the flagship Central Sector Scheme of the Ministry of Ports, Shipping and Waterways, promotes port-led development in the country through harnessing Indias 7,500 km long coastline, 14,500 km of potentially navigable waterways and strategic location on key international maritime trade routes. The government also aims to operationalise 23 waterways by 2030.

(Source: India Union Budget, India Brand Equity Foundation Analysis Reports, News Reports etc)

Performance during the year:

Business Performance:

Our company is actively executing various EPC and item rate projects with both government and private clients across diverse sectors including Power, Oil & Gas, Railways & Metros, Water & Irrigation, Buildings & Structures, and Roads, situated across India. Most of these projects are nearing completion. Despite facing severe challenges, we have successfully completed several projects of national importance. Additionally, we have actively engaged with clients to ensure the financial closure of outstanding dues for completed projects.

The Sector-wise Order Book of the Company is as follows:

(Rs. In Crores)

Sector	On hand as on 31-3-2024	On hand as on 31-3-2023
Roads	192	347
Railways & Metros	223	364
Power	-	11
Oil & Gas	7	7
Total	422	729

Developments at IL&FS and its adverse impact on the Company/IECCL:

As part of its initiatives for Resolution of IL&FS Group, the Reconstituted Board of Directors of IL&FS in their reports to Honble NCLT categorised the Company under the Group "Red" implying that the Company is unable to meet its contractual, statutory and debt obligations.

The Honble NCLAT vide its Order dated 15th October 2018 ("Interim Order") in the Company Appeal No. 346 of 2018 after taking into consideration the nature of case, stayed certain coercive and precipitate actions against IL&FS and its group companies including the Company. The NCLAT vide its Judgement dated March 12, 2020, accepted the resolution process and revised resolution framework, including October 15, 2018, as date of initiation of resolution process of IL&FS Group entities, (including the Company) and crystallization of claims as of that date i.e. cut-off date with no interest, additional interest, penal charges or other similar charges to accrue after the said cut-off date. Accordingly, the Company is currently not settling liabilities existing prior to October 15, 2018, being the cutoff date to its Financial Creditors and the Operational Creditors. Adverse developments in promoter group entities have impacted the operations of the Company and resulted in cancellation/ termination/suspension/foreclosure of certain contracts with customers. The Reconstituted Board and the management of the Company have taken various steps to continue the operations at present level during the period as per the resolution process framework accepted by the Honble NCLAT.

Further, the Reconstituted Board is in the process of finalizing a comprehensive approach to manage the current situation including sale of existing equity share holding by IL&FS Group. In this process, the Reconstituted Board, as part of resolution process for the Company, has invited expression of interest for acquiring the equity stake in the Company. In January 2022, a bid had been received from an unincorporated Consortium which was subjected to challenge through counter bid under a Swiss Challenge method. The successful bid has been put up to the Committee of Creditors for their approval. Upon approval by the Committee of Creditors, the bid would be placed for approval by Justice D.K. Jain (Retd.), followed by sanction of Honble NCLT.

Discussion on Financial Performance:

Your Companys Resolution process is still underway thereby leading to a significant impact on its business plans. Despite adverse situations, all out efforts have been made for running the organization on sustainable basis. All efforts are directed towards completing the order book in hand, liaise with the clients for financial closure of completed and projects where amicable foreclosures have been signed. The negotiations followed by execution of requisite documentations are being held for settlement in the lawful financial interests with minimal damage to the organization for the projects, terminated on account of IL&FS crisis. The Results of these efforts led to increase in operation of the Company when compared to previous year, in FY 24 turnover of the Company stand at Rs. 258 Crore when compared to Rs. 177 Crore in FY 23. This increase in on account of operational performance and successful project execution across sectors including Roads and Metro projects. Most of our projects are nearing completion, and despite facing severe challenges, we have successfully executed projects in hand.

Overall Financial Performance:

Particulars	Amount in Rs in Crore	Remarks
Revenue	258.54 -
EBITDA	(94.65) -
PAT	(77.19)	Includes exceptional items of Rs (38.37) Cr
EPS	(5.89)	Same as above
Share Capital	131.12
Debt	2,668.21
Net Worth	(3,179.75)
Fixed Assets
Inventory	15.97
Debt Equity Ratio	-	Due to negative net worth the ratio not calculated
Current Ratio	0.15
Return on Equity	-	Due to negative PAT the ratio not calculated
Interest Coverage Ratio	-	Interest expenses not recognized due to moratorium

Highlights of the financial year 2023-24 :

1. Although the Company is experiencing challenging times, the Company is making all out efforts in responding to these challenges.

2. Further, the Company has incurred accumulated loss of Rs. 3595.44 Crore as at March 31, 2024 (As at March 31, 2023 Rs. 3518.25 Crore). The Company has incurred loss of Rs. 77.19 Crore for the year ended March 31, 2024 (Loss for the year ended March 31, 2023, is Rs. 124 Crore). The Companys net worth is fully eroded, and the current liabilities exceed its current assets by Rs. 3,760.36 Crore as at the reporting date, the existing projects being executed by the Company are nearing completion or approaching their end of term, which resulted in significant reduction in Companys operations over the past three years. The Company continues defaulting on existing loans to lenders including borrowing from promoters and follows the terms of the moratorium of Honble NCLT, Mumbai.

Risks and Concerns:

Despite ample opportunities in Indias infrastructure and construction sectors, as outlined in the ‘Indian Infrastructure Industry section, the Company is currently facing challenges. While recognizing promising prospects in Power, Oil & Gas, Railways and Metros, Roads, Buildings & Structures, the company is currently unable to pursue new projects due to a negative net worth and financial constraints such as bank guarantee requirements. The repercussions of adverse developments within the IL&FS Group have significantly hindered Companys revenue growth strategies.

To address these challenges, the newly constituted Board is actively devising a resolution plan for the Company, which, upon implementation, is expected to enable the Company to resume bidding activities, secure new projects, and recommence business operations as before. However, this period of business realignment is anticipated to last several months, during which the company will contend with considerable uncertainties. Nevertheless, the Company remains confident in its ability to navigate this transitional phase successfully.

Risk Management:

The Company has implemented an integrated Enterprise Risk Management (ERM) framework to systematically identify, assess, mitigate, and report risks. Oversight of this framework is provided by the Risk Management Committee, the Audit Committee, and the Board of Directors, who periodically review critical business risks and corresponding mitigation strategies. The key enterprise-level risks confronting the company, along with the measures being undertaken to address them, are outlined below:

Liquidity Risk:

The Company has experienced a disproportionate increase in debt relative to its operational scale, leading to significant stress of cash flow. Discussions with the bank consortium are underway to evaluate debt-restructuring options and assess incremental working capital requirements essential for sustaining business growth. Additionally, negotiations with vendors to extend credit period support for ongoing projects are also in progress.

Order Book Risk:

The Company has faced a hiatus in securing new contracts over the past five years, except for a subcontracting arrangement with a contractor for Gujarat Metro Rail Corporation related to Surat Metro Rail Works. Presently, the Company is unable to pursue new projects due to negative net worth and financial support from banks.

Reputation and Brand Risk:

The negative repercussions stemming from the debt crisis within the IL&FS group, coupled with concerns regarding corporate governance, have cast a shadow over the reputation of affiliated companies, including IECCL. This adverse perception poses challenges in securing new EPC projects, obtaining favorable borrowing terms, and accessing credit facilities from vendors. Despite these challenges, the companys proven track record of delivering quality EPC projects and adhering to contractual obligations serves as a foundation for rebuilding trust among clients and vendors.

Operational Risks:

The Company faces several challenges while executing the project operations that lead to cost overruns and time overruns. To mitigate operational risks in project execution, the company emphasizes meticulous planning in design, subcontractor selection, supplier management, recruitment, resource allocation, and insurance coverage. Standard Operating Procedures (SOPs) have been meticulously documented and implemented across all critical operational facets, complemented by a robust business monitoring mechanism and proactive risk identificationand mitigation strategies

Political Risk:

Operating across multiple Indian states exposes the company to varying political environments and associated risks. To address this, the company has developed comprehensive mitigation strategies, diversifying its operations across different infrastructure sectors and geographic regions to avoid concentration risk.

Contractual Risks:

The Company faces contractual risks with clients, subcontractors, suppliers, and lenders in its day-today operations. To mitigate these risks, the company has established a dedicated Contracts Department tasked with overseeing contract documentation, managing major claims, and navigating arbitration processes in consultation with Legal team.

Subcontractors Risk and Joint Venture Risks:

The companys reliance on subcontractors and joint venture partners for project execution poses inherent risks to revenue and profitability due to their non-performance. To mitigate these risks, stringent selection criteria are employed, and performance is regularly monitored to ensure adherence to contractual obligations.

Material Risk:

Materials lying at completed, foreclosed, or terminated projects represent a potential risk due to the companys inability to secure new projects. Efforts are underway to address this issue, including the sale of surplus materials with the approval of relevant authorities, minimizing potential losses from deterioration or theft.

Internal Control Frame Work and its suffeciency :

The company has established a robust internal financial control framework tailored to its operational scope, aligning with the provisions of the Companies Act 2013 and commensurate with its scale and complexity of its business operations. External auditors, M/s. T R Chadha & Co., LLP, an independent audit firm, conduct regular internal audits as per the Audit Plan approved by the Audit Committee, furnishing their findings to the Audit Committee on a quarterly basis. These audits offer insights into the efficacy and adequacy of internal controls, ensuring compliance and operational integrity. Additionally, an internal Risk & Control function evaluates organizational risks and designs requisite corresponding control mechanisms for risk mitigation.

Institutionalized internal controls, such as the Delegation of Authority (DoA) and Standard Operating Procedures (SOP), are in place to facilitate orderly and efficient business conduct, asset protection, fraud prevention and detection, accurate financial record-keeping, and adherence to statutory requirements.

Moreover, the company utilizes Oracle e-Business Suite as its Enterprise Resource Planning (ERP) System, ensuring seamless transaction recording with a comprehensive audit trail, enhancing transparency and accountability across operations.

Human Resources & Industrial Relations:

Ensuring the health and safety of our employees is paramount for the Company. The Human Resources (HR) Department regularly assesses its policies, aligning them with industry best practices to maintain a competitive edge. Updated policies are communicated to all employees through email notifications and training sessions. The Company maintains constructive and harmonious relationships with its workforce across all project sites and offices in India. As of March 31, 2024, the company had 235 employees on its payroll.

Cautionary Statement:

Statements in this Annual Report, describing the Companys outlook, projections, estimates, expectations, or predictions may be "Forward Looking Statements" within the meaning of applicable laws or regulations. Actual results could differ materially from those expressed or implied. Several other factors could make significant difference Companys operations which includes economic conditions affecting demand and supply, Government Regulations, taxation, natural calamities and so on, over which the Company does not have any control.