IL&FS Transportation Networks Ltd Management Discussions.

1. Global Economy - A Snapshot1

The World Bank, the International Monetary Fund and the Reserve Bank of India predict a turnaround in global economy after a lackluster 2016. Economic indicators point to better performances in 2017 and 2018, especially in the emerging markets and developing economies. World growth is expected to rise from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018. Economic activity gained some momentum in the second half of 2016, especially in advanced economies

The United States economy was in growth mode, as firms grew more confident about future demand and inventories started contributing positively to growth. The United Kingdom also witnessed economic revival where spending was resilient in the aftermath of the June 2016 referendum to leave the European Union (Brexit). Japan surprised the world with an upturn in economy, thanks to strong net exports. The Euro area countries such as Germany and Spain also grew on the back of strong domestic demand

In case of emerging markets and developing economies, the growth rate in China was marginally stronger than forecasted, supported by continued policy stimulus. Economic activity was slower than expected in some recession-hit Latin American countries such as Argentina and Brazil which was also the case with Turkey. Activity in Russia was slightly better than expected, in part reflecting firmer oil prices

Geopolitical turmoil and a range of other non-economic factors continued in various regions - civil war in parts of the Middle East and Africa, the tragic plight of refugees and migrants in its neighboring countries and in Europe, acts of terror worldwide, the protracted effects of a drought in eastern and southern Africa and the spread of the Zika virus

During the last year, there has been a perceptible improvement in the sentiment of the investor community and India is viewed with renewed confidence. The macro-economic framework has strengthened, backed by a clear and comprehensive strategy of the Government

The US

The US economy is projected to expand at a faster pace in 2017 and 2018 with growth forecasted at 2.3% and 2.5%, respectively. The stronger near-term outlook reflects the momentum driven by a cyclical recovery in inventory accumulation, robust consumption growth and the assumption of a freer fiscal policy stance. Uncertainty restrained business investment in early 2017 but tax cuts and infrastructure spending will push up GDP in 2018 and 2019

Infrastructure spending was a key component of President Trumps campaign with a spending program in that domain worth about $125 billion earmarked for 2018 and 2019. About half of this is assumed to be traditional infrastructure spending with the rest being private-sector spending

The anticipated shift in the policy mix so far has buoyed financial markets and strengthened business confidence, which could further hasten the current momentum. Over a longer horizon, due to shifts in trade, taxes and regulations, it is almost certain that economic conditions for businesses will change in the coming months

Europe

The euro areas recovery is expected to continue at a broadly similar pace in 2017 and 2018, as in 2016. The modest recovery is projected to be supported by a mildly expansionary fiscal stance, accommodative financial conditions, a weaker euro and positive spill-over from a likely US fiscal stimulus. Political uncertainty is likely in several countries as they approach elections. This, coupled with uncertainties about the European Unions future relationship with the United Kingdom is also expected to weigh on activity

Output in the euro area is expected to grow by 1.7% in 2017 and 1.6% in 2018. Growth is expected to soften in Spain (2.6% in 2017 and 2.1% in 2018), but is likely to increase modestly in France (1.4% in 2017 and 1.6% in 2018). The medium-term outlook for the euro area as a whole remains dim, as projected potential growth is held back by low productivity and adverse demographics. In addition, some countries, are dealing with unresolved legacy problems of public and private debt overhang with a high level of non-performing loans. Growth in the United Kingdom is projected to be 2.0% in 2017. The increase in growth reflects the stronger-than-expected performance of the U.K. economy since the June Brexit vote. This points to a more gradual materialization than previously anticipated of the negative effects of the United Kingdoms decision to leave the European Union

Latin America

A weaker-than-previously-expected recovery is projected in Latin America and the Caribbean, with growth forecast at 1.1% in 2017 and 2.0% in 2018. Within the region, outlook varies substantially across countries. While activity in most commodity exporting countries is expected to be supported by the recovery in commodity prices, domestic fundamentals continue to play a key role in the outlook of some large countries. At the same time, the outlook for Mexico, one of the largest economies in the region, has weakened

Among commodity exporters, Brazil is expected to emerge from one of its deepest recessions, with growth forecast at 0.2% in 2017 and 1.7% in 2018. The gradual recovery will be supported by reduced political uncertainty, easing of monetary policy and further progress on the reform agenda. Higher commodity prices will also help strengthen growth in 2017 in Chile (1.7%) and Colombia (2.3%)

Asia

In Japan, a comprehensive revision of the national accounts led to an upward revision of historical growth rates and placed the 2016 growth estimate at 1.0%. This was significantly higher than projected. The growth momentum, fuelled by stronger-than-expected net exports in 2016 is predicted to continue into 2017 with forecast at 1.2%

Growth in China is projected at 6.6% in 2017 but is expected to slow down to 6.2% in 2018. This is a reflection of the stronger-than-expected momentum in 2016 and the anticipation of continued policy support in the form of strong credit growth and reliance on public investment to achieve growth targets. Elsewhere in emerging and developing Asia, growth is projected to remain robust

Economic activity is forecasted to accelerate slightly in 2017 in four of the ASEAN-5 economies namely, Indonesia, Malaysia, Philippines and Vietnam. These economies are expected to grow at 5.1%, 4.5%, 6.8%, and 6.5%, respectively. The fifth economy Thailand, is projected to recover from a temporary dip in tourism and consumption in late 2016

Sub-Saharan Africa

A modest recovery is foreseen in the Sub-Saharan African region in 2017. Growth is projected to rise to 2.6% in 2017 and 3.5% in 2018, largely driven by specific factors in the largest economies, which faced challenging macroeconomic conditions in 2016. However, the outlook for the region remains subdued. Output growth is expected to only moderately exceed population growth over the forecasted horizon, it having fallen short in 2016. Many commodity exporters still need to adjust fully to structurally lower commodity revenues because commodity prices are expected to remain dull

After contracting by 1.5% in 2016 because of disruptions in the oil sector coupled with foreign exchange, power, and fuel shortages, output in Nigeria is projected to grow by 0.8% in 2017. This projection is a result of a recovery in oil production, continued growth in agriculture and higher public investment. In South Africa, a modest recovery is expected with growth forecast at 0.8% in 2017, as commodity prices rebound, drought conditions ease and electricity capacity expands

Middle East and North Africa

The near-term outlook for the Middle East and North Africa region has weakened with growth forecast set at 2.6% in 2017. The subdued pace of expansion reflects lower headline growth in the regions oil exporters, driven by the November 2016 OPEC agreement to cut oil production. Continued strife and conflict in many countries in the region also detract from economic activity. Growth rates in most countries in the Cooperation Council of the Arab States of the Gulf are similarly projected to dip in 2017

2. Indian Economy

India today is counted amongst the fastest growing major economies of the world. Despite persistent global headwinds, the country has displayed resilience in its macroeconomic performance and the outlook presented for the economy by several multilateral institutions is also very encouraging

The Indian economy is growing strongly and remains a bright spot in the global landscape. The halving of global oil prices that began in late 2014 boosted economic activity in India, further improved the external current account and fiscal positions, and helped in lowering inflation. In addition, continued fiscal consolidation by reducing Government deficits and debt accumulation and anti-inflationary monetary policy stance, has helped strengthen macroeconomic stability. The Government has made significant progress on important economic reforms, which will support strong and sustainable growth going forward

The growth forecast of India for 2017 is expected to trim by 0.4% to 7.2%. This is primarily because of the temporary negative consumption trend induced by cash shortages and payment disruptions resulting from the recent currency reform. Medium-term prospects, however, are favorable with growth projection at about 8%. This is on account of the implementation of key reforms, loosening of supply-side bottlenecks, appropriate fiscal and monetary policies

Against the backdrop of robust macro-economic stability, the year was marked by two major domestic policy developments namely, (i) passing of the Constitutional amendment by the Parliament, paving the way for implementing the transformational Goods and Services Tax (GST) legislation, and, (ii) action to demonetise the two highest denomination currencies. The GST will create a common Indian market, improve tax/governance compliance which will help boost investment and growth. It is also a bold new experiment in the governance of Indias cooperative federalism. Demonetisation has had short-term costs but holds the potential for long-term benefits. Follow-up actions to minimize the costs and maximize the benefits include: fast and demand-driven remonetisation, further tax reforms including bringing land and real estate in the ambit of GST, reducing tax rates and stamp duties and acting to allay anxieties about over-zealous tax administration. These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17

Outlook

The outlook for the current fiscal 2017-18 is buoyant. Various multilateral agencies have pegged Indias growth forecast for the year 2017-18 between 7.4% and 7.5%. This is also in line with the Reserve Bank of Indias latest projection. On the domestic front, the impact of demonetization is expected to dissipate fully and discretionary spending is expected to gain further momentum. The thrust given in Union Budget 2017-18 on rural and agricultural sector, infrastructure sector and digitization is directionally correct and would support growth. Also, in India, monsoon remains an important variable in determining prospects in any given year. The Indian meteorological department has predicted a ‘normal monsoon in 2017 which will be another positive for the economy. On the global front, outlook for growth has improved and trade is also expected to pick up in 2017 and 2018. This is likely to have a beneficial impact on our overall exports

India is also witnessing some critical structural shifts which are expected to push growth over the course of next few years. The country is at the edge of a major digital transformation which will bring in massive opportunities. With this we also expect to see large volume of businesses moving into the formal sector. Further, the implementation of the GST from July 2017 as proposed will be a game changer. Also, we are on course of addressing the issue of non-performing assets in the banking sector and corporate balance sheets are also expected to see an improvement as growth trajectory improves further

3. Indias infrastructure opportunity

Infrastructure sector is a key driver for the Indian economy. The sector is highly responsible for propelling Indias overall development and enjoys intense focus from the Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country. The Ministry of Road Transport and Highways has announced the Governments target of Rs 25 trillion (US$ 376.53 billion) investment in infrastructure over a period of three years, which will include Rs 8 trillion (US$ 120.49 billion) for developing 27 industrial clusters and an additional Rs 5 trillion (US$ 75.30 billion) for road, railway and port connectivity projects

The Indian construction equipment industry is reviving after a gap of four years and is expected to grow to US$ 5 billion by 2019-20 from the current size of US$ 2.8 billion. India is witnessing significant interest from international investors in the infrastructure space. The Government of India is taking every possible initiative to boost the infrastructure sector

Road sector

The Ministry of Road Transport & Highways has invested around Rs 3.17 trillion (US$ 47.7 billion), in the past two and a half years for building world class highways in the country. As against the target of 15,000 km set for development of national highways in 2016-17, only 6,604 km of roads had been constructed by end of February 2017, according to the Minister of State for Road, Transport & Highways, Government of India

National Highways Authority of Indias (NHAI) activity for award of roads has been highly erratic in 2017. The year started with ambitious targets set by the Ministry of Road Transport & Highways (MoRTH) and NHAI. After a strong show during the period April-June 2016, Jul-Dec 2016 saw subdued activity of awards. Factors like demonetization, land acquisition issues, etc were responsible for the slackening of momentum. However, in the last two months, the order award activity has picked up again. This is especially true of projects that were offered on Hybrid Annuity Model (HAM) basis. From the 47 projects targeted for tendering under this model, as many as 10 projects have been awarded in March 2017. While NHAI will still end up significantly short of its target, the Company sees this strong momentum continuing thereafter, leading to robust order award activity in 2018. While NHAI has de-risked HAM model to a large extent, developers remain cautious and only few companies are going aggressively over this relatively ‘new model of road development

Opportunities in BOT Projects continued to be few and far in between. Out of around 3,000 km of road projects awarded last year, less than 500 km were awarded on PPP basis, most of which were in the form of re-bidding due to non-receipt of bids through initial bidding or termination. Considering the current market scenario, only the bidders with sound financial position and sufficient strength for undertaking the PPP projects submitted realistic bids

On the EPC front, MoRTH and NHAI continued tendering more projects and bidders responded favourably with competitive bid quotes

The Government has recently undertaken initiatives for revitalizing the sector, streamlining systems and processes to fast-track the implementation of National Highway projects. Major steps taken in this regard include:

(i) Mode of delivery of projects:

NHAI has shifted the mode of delivery from BOT Toll and Annuity to Hybrid Annuity and EPC

(ii) Stressed projects: 73 National Highway projects with aggregate length of around 8,310 km had been languishing for around two and half years after award. These projects involved estimated capital investment of around Rs 1,00,000 Crore which remained blocked. MoRTH intervened in the issue on a case to case basis with the concessionaires and lenders. As a result, most of the languishing projects have been effectively put back on track

(iii) Toll-Operate-Transfer Model: In November 2016, NHAI had proposed monetization of 75 toll highways operated by it for over two years, to be leased out under the new toll-operate-transfer (TOT) model to private parties including domestic road companies and international funds for a specified duration. This would be in return for a fee. Tenders for projects on this mode may be expected in 2018

(iv) Financial front: NHAI plans to raise funds from the Life Insurance Corporation of India and the Employees Provident Fund Organisation, who have subscribed to NHAI bonds worth Rs 100 billion. NHAI is hopeful to list masala bonds worth Rs 70 billion on the London Stock Exchange soon

(v) Major policy initiative: Additionally, the Government has taken a major policy initiative to pay 75% of arbitral claims awarded in favor of the concessionaire/contractor. This will provide the much needed liquidity comfort to construction players and restore order in the cash strapped sector

The pace of development of projects is likely to increase due to these policy interventions. Lesser number of BOT players and innovative bidding model, along with conventional BOT models will facilitate the Company to secure bids and retain its market share

Railways

The Indian Railways is among the worlds largest rail networks. It has emerged as one of the fastest growing sectors and has proved as the ideal mode of transportation for freight and goods transportation. The network is also ideal for long-distance travel and movement of bulk commodities, apart from being an energy-efficient and economic mode of conveyance and transport

The revenue generated by the Indian Railways is expected to grow at 10% in the fiscal year 2017-18. The Union Budget 2017-18 estimated that the overall earnings will rise to about Rs 1,89,498 Crore (US$ 28.42 billion) in 2017-18, compared to Rs 1,72,305 Crore (US$ 25.84 billion) in the fiscal year 2016-17. In the last Union Budget, the Government has allocated Rs 55,000 Crore (US$ 8.25 billion) towards capital and development expenditure for Railways

The Government of India has focused on investing in railway infrastructure by making investor-friendly policies. It has moved quickly to enable Foreign Direct Investment (FDI) in railways to improve infrastructure for freight and high-speed trains. At present, several domestic and foreign companies are also looking to invest in Indian rail projects

Indian Railways has initiated measures to attract private sector investment

FDI inflows into Railways and related industries engaged in components manufacturing during the period April 2000 to December 2016 was US$ 789.03 million. Following are some of the major investments and developments proposed by the Government of India/Indian Railways in the sector:

• Pl an to set up a US$ 5 billion, Railways of India Development Fund (RIDF) for investments in its projects

• Mission 41k, an initiative aimed at saving Rs 41,000 Crore (US$ 6.15 billion) on the Indian Railways expenditure on energy consumption over the next 10 years, by doubling the annual rate of electrification from 2,000 km to 4,000 km over the next two years

• A Lett er of Award (LoA) worth Rs 14,656 Crore (US$ 2.19 billion) issued to US-based corporation, General Electric (GE) for setting up a diesel locomotive factory at Marhowra. It has also issued LoA to the French transport major, Alstom, worth Rs 20,000 Crore (US$ 3 billion) for setting up an electric locomotive project in Madhepura

• Spending worth Rs 8,50,000 Crore (US$ 127.5 billion) over the next five years to modernise Indian Railways for which they have received a 30 year loan from LIC

• Investment worth Rs 82,000 Crore (US$ 12.3 billion) for development of a dedicated freight corridor for decongesting existing network

• Cities like Chennai and Mumbai have come up with bids for O&M services for Metro/Mono Rail Projects with a tenure of 10 years

4. Threats

Factors, which can threaten the business model and the Companys market standing, emerge from changes in Government policies, safety and security concerns, among others. Some possible threats include:

Credit availability

The private sector is dependent on commercial banks to raise debt for the Public Private Participation (PPP) projects. With commercial banks reaching the sectoral exposure limits and large Indian infrastructure companies being highly leveraged, funding the PPP projects is becoming difficult. Over the last few years, credit availability has become one of the most significant threats. The infrastructure sector has witnessed restrained funding from banks and financial institutions. Banks in some cases have reached their lending limit to the Company and in some cases at the Parent Company level. Hence, seeking viable funds is becoming increasingly difficult. Although Hybrid Annuity Model (HAM) was introduced with an aim to revitalize the sector and bring order to the cash strapped sector, but this looks highly unlikely as most of the awarded HAM projects are struggling for funding and financial closure

Business environment changes

At the domestic level, the business environment remained unfavourable for PPP players. Government has shifted the mode of delivery from PPP to EPC projects. Keeping this in mind, the Company has ventured into the EPC sector. The introduction of GST is another move that is being closely watched and followed as it can have both an uphill and downhill repercussion for the sector. Also, tightening on mining activities and ban on use of river sand in many states, which is expected to be followed by many others, has the potential to affect the design of Companys existing projects

Market competition

With the Government keen on promoting EPC contracts, EPC markets pose a bigger threat to the Companys business. The Company has ventured into the EPC sector and will target to bid for large & complex EPC projects and will look to develop an in-house company as a construction contractor in mid-size segment

The Company is also on the lookout for BOT Toll and Annuity projects bid out by the Government. However, market players have become more cautious due to financial constraints which have led to more rational bids. Many projects that were put out for bid on HAM/BOT Toll & Annuity had failed to attract bidders as most of them were in the form of re-bidding due to non-receipt of bids tendered in the earlier bidding process or on account of termination of concessions granted

Dispute resolution and claims settlement

Although, in the recent past, slight improvement is witnessed in claims settlement, the pace remains slow and tedious. Closure of arbitration and accrual of claims is critical to restore concessionaire trust and ensure timely completion. Ball has been set rolling to set up an independent regulator for the road sector, which is expected to address this issue comprehensively

5. Operational Performance

The Company performed well, both in India and globally. The Company has a large and diversified surface transportation asset portfolio across geographies. The Company possesses engineering, designing, planning and project monitoring skills required for its business

Domestic operations

There was hectic activity on the construction front. Despite economic slowdown and hardened lending scenario, the Company managed to stand firm and also ensured that construction was progressing as per schedule and completed five highway projects. The details are as follows:

(i) K erala Road Fund Board approved Commercial Operation Date for the balance stretches of Phase II & III of Thiruvananthapuram City Road Project effective May 31, 2016. This has resulted in completion of the entire project length of 158 Lane km

(ii) Under RIDCOR Phase III, 2 road projects namely, (i) Bhadra to Haryana Border Road and (ii) Mathura-Bharatpur-Gangapur-Bhadoti Road received completion certificate effective June 17, 2016 and June 30, 2016 respectively

(iii) Sik ar Bikaner Road Project in the State of Rajasthan was issued Provisional Completion Certificate for additional length of 22.091 km on August 16, 2016, thereby taking the total length under commercial operations to 234.657 km out of the total length of 237.578 km

(iv) Appointed Date was declared as November 9, 2016 for four-laning of Amravati-Chikhli section of NH-6 in Maharashtra

(v) Appointed Date was declared as November 9, 2016 for four-laning of Fagne- Gujarat / Maharashtra border section of NH-6 in Maharashtra

(vi) The longest road tunnel project developed by the Company namely, Chenani Nashri Tunnel project in Jammu & Kashmir received the Provisional Completion Certificate on March 8, 2017 and commenced commercial operations

(vii) The Company received

Completion Certificate for Chaibasa-Kandra-Chowka Road Project in the state of Jharkhand for the complete length of 68.7 km on March 3, 2017

(viii) Khed Sinnar Road Project in the State of Maharashtra received the Provisional Completion Certificate on January 31, 2017 and started commercial operations in a length of 104.64 km out of 137.90 km

(ix) The Company was awarded a project for design, validation and construction of underground station of the Chennai Metro Rail project, a JV between Government of India and Tamil Nadu on EPC basis on January 5, 2017

(x) The Phase II of the Metro Rail Project namely, Rapid Metro South Extension corridor, a 7 km stretch in Gurgaon was commissioned on March 31, 2017

The following 21 road projects of the Company are under operations and maintenance:

a) V adodara - Halol Project,

b) Ahmedabad - Mehsana Project, Gujarat

c) Belgaum - Maharashtra Border Project, Karnataka

d) Jetpur- Gondal- Rajkot Project, Gujarat

e) Pedda Amberpet - Bongulur (Outer Ring Road) Project, Telangana

f) Mega Highways Road Project, Rajasthan

g) T hiruvananthapuram City Road Improvement Project, Kerala

h) Beawar - Gomti Project, Rajasthan

i) Hazaribagh - Ranchi Project, Jharkhand

j) Jharkhand Accelerated Road Development Programme, Jharkhand

k) Pune - Solapur Project, Maharashtra

l) Nark etpally - Medarametla Andhra Pradesh

m) Moradabad - Bareilly Project, Uttar Pradesh

n) W arora - Chandrapur Project, Maharashtra

o) Sik ar - Bikaner Project, Rajasthan

p) Baleshwar - Kharagpur Project, Odisha/West Bengal

q) Jorabat - Shillong Project, Assam/ Meghalaya

r) Chenani - Nashri Tunnel Project, Jammu & Kashmir

s) Khed - Sinnar Project, Maharashtra

t) Noida Toll Bridge, Uttar Pradesh

u) Hy derabad Outer Ring Road, Telangana

International operations

The following sections highlight the key projects being pursued in Asia Pacific, Middle East and Africa, European Union, South America and North America regions, where the Company is actively pursuing business opportunities

Asia Pacific

The Company continues to focus on opportunities in Vietnam, while identifying feasible projects in Laos, Thailand, Myanmar and Papua New Guinea. Currently, negotiations are under Project, way to take over a road rehabilitation project in Laos involving paving and construction of bridges and culverts on a 165 km stretch of national highway

Elsamex Vietnam JSC has reached the halfway mark in completing its work order awarded by CIENCO4 (Vietnam State Owned Enterprise) for 200,000 square meter of Micro-Surfacing application on various roads in Vietnam, paving the way for penetration of technology into the region

Yuhe Expressway, China

During the year, Yuhe Expressway recorded revenues of US$ 72.56 million as against US$ 71.80 million in the previous year. Profit after Tax for the year ended March 31, 2017 was US$ 25.48 million compared to US$ 23.99 million in the previous year. The Company holds 49% equity stake in the project through its wholly owned subsidiary in Singapore

Middle East & Africa

UAE

ITNL Infrastructure Developer LLC (IIDL), a Joint Venture in Dubai signed a Concession Agreement on May 4, 2016 for development of "Dubai Court Complex and Robotic Car Park Project" on PPP basis.

This is the first project awarded on PPP basis in the UAE region. The concession period for the Project is 30 years including construction period of 30 months. The Project Cost is AED 287.66 million

Africa

The Companys wholly owned subsidiary, ELSAMEX S.A., Spain has commenced development works for road projects in Ethiopia and Botswana

United States

The Companys wholly owned subsidiary, IIPL USA, LLC was successful in securing its first operations and maintenance contracts in the Texas Region worth US$ 11.3 million, further bolstering the revenue stream of the Company. It is actively pursuing further opportunities in the region including British Columbia

Elsamex SA

Elsamex SA, a wholly owned subsidiary in Spain reported revenue of € 175.92 million, which is around 4% lower than that of previous year. This is attributed to delays in OPRC contracts in Botswana and Ethiopia.

Furthermore, depreciation costs were higher than the previous year as the camp sites of both the aforesaid OPRC started to depreciate. In view thereof, it also reported lower PAT of € 6.69 million

6. Risks and Concerns

Indias infrastructure sector remains the backbone of socio-economic development. However, new risks and concerns have emerged in recent years. Operating in a dynamic environment, the Company has evolved a robust framework for identification, management and mitigation of potential risks. Some of these risks are discussed below

Land acquisition

Lack of political consensus on the Land Acquisition Bill has caused uncertainty with no acquisition taking place on ground. This is due to landowners insistence on higher compensation under the Act, as opposed to lower compensation under conventional Acts, such as National Highways Act, 1956. A possibility exists in the reduction of pace of projects to be bid out by the concessioning authorities. Now, the possibility has become stronger as the authority has insisted on acquiring 90% of the right of way before tendering any projects

Timely completion of the project

Timely completion of projects is critical for their success. Failure to complete projects within given timelines results in higher costs, penalties, invocation of performance guarantees, loss of equity contribution in the project and reduced earnings; besides postponement of commercial operations and annuity payments from projects. It may also impact the Companys ability to finance debt and interest payments. Moreover, this would also adversely affect the Companys ability to pre-qualify for new projects. Projects missing completion deadlines, is mostly due to delay in Government clearances/ approvals and delay in hand-over of encumbrance free land for the projects. The Company is protected against this risk through adequate provisions in the contractual agreements. Besides, the Company also collaborates with authorities to attain the requisite clearances and approvals

Due to delays in handing over the land for 3 projects developed by the Company, there have been significant cost overruns resulting in higher costs, leading to delay in realisation of revenues. The Company had filed claims with the authorities and invoked arbitration proceedings which are pending before the Arbitration Tribunal for resolution

Retention of experienced manpower

The infrastructure sector is witnessing scarcity of skilled civil engineers. Finding quality human resources and retaining them is a key challenge. The Companys focus is to build an organisation of highly motivated employees, having the ability to execute ambitious business goals with passion and commitment, thereby exceeding customer aspirations. Besides, its scalable recruitment and retention strategies enable it to attract and retain high calibre employees

Debt financing

The Company has substantial debt and debt service obligations and is subject to risks associated with debt financing. The level of debt and the limitations imposed on the Company, by present or future loan arrangements could have significant adverse consequences. This is primarily due to cost of borrowings. The Companys experienced and knowledgeable team with support of the holding company ensures that these risks are always covered through adequate cash flow planning and other measures

Exchange rate risks

The Company avails certain External Commercial Borrowings (ECBs) for financing and refinancing part of its existing debt in certain projects with repayment in rupee terms. This exposes the Company to risks of higher repayment and interest outgo, when measured in rupee terms; where rupee devalues against the foreign currency. In order to overcome this situation, the Company hedges such transactions to ensure least impact of currency fluctuations

Revenues from toll road projects

Since a significant portion of the Companys operational assets are toll driven, any change in traffic growth rate will significantly impact earning potential. All toll revenues depend on number of vehicles plying on the road and may be affected with changes in traffic volumes. The traffic volume is directly or indirectly affected by factors beyond the Companys control such as toll rates, fuel prices, affordability of automobiles, the quality, convenience and travel time on alternate routes. In addition, the availability of alternate means of transport such as rail networks and air transport may also affect traffic volumes. Moreover, these cash flows are also affected by seasonal factors, as the traffic tends to decrease during monsoon season but increases during holiday seasons. The Company tries to maintain a balance between the annuity and toll projects and also looks to securitize future cash flows from toll receipts to reduce risk impact

7. Outlook

The Company is optimistic that the infrastructure sector will be revived with renewed efforts from the Government. It aims to achieve a near-term target of 17 km of highway per day and escalate it to 30 km per day. At least 35% of these projects are expected to be awarded through the PPP mode, of which the Company expects to bag a significant portion. The Company is diversifying its geographic spread, by actively foraying into global markets. These initiatives are expected to materialize in the coming years With global economies gradually returning to an encouraging growth trajectory, the global infrastructure landscape is expected to improve. Such a scenario augurs well for the Company, going forward. It is also improving its operational benchmarks by closely monitoring systems and procedures. The Company aligns its routine functioning with the certified Quality Management System (QMS - ISO 9001:2015) by establishing cross linkages between QMS and Internal Control Framework (ICF)

During the year under review, the Company renewed its certifications for QMS and Environmental, Occupational Health and Safety Management System (EMS- ISO 14001:2015 and OHSAS 18001:2007), with appreciation for the level of implementation and conviction shown. The Company has adopted the ESPF format of project screening prior to submission of bids. These certifications ensure that the Company has an environmentally and socially sustainable business model

The Company is optimistic about the growth of Indias infrastructure industry and its ability to achieve targets on account of:

• Significantly reduced number of competitors in the PPP sector

• Rel atively eased out project implementation process, resulting from the revamp exercise undertaken by the Government

• The thrust received from the budgetary allocation to infrastructure development

• Str ong, efficient and skilled workforce

• Continued support from bankers

The Company is also focusing on rightsizing its project portfolio through divestment of identified road assets, reducing finance costs through refinancing of existing debts in the project companies to take benefit of the softer interest rates, elongate the maturity of its debt through issue of long tenure Non Convertible Debentures. These initiatives are expected to improve the cash flow of the Company and optimise its balance sheet

The Company is also aligning itself to garner EPC projects that are large and complex while developing its subsidiary to focus on smaller and medium sized EPC projects. The Company is also actively looking forward to participate in the proposed monetisation of toll roadways to be bid out by NHAI under the new TOT model

8. Internal Control Systems and its Adequacy

The Company has implemented a well-established Internal Control Framework (ICF), which covers all aspects of financial and operational risks of the business and its controls. Under ICF detailed Risk Control Matrices and Standard Operating Procedures are prepared stage –wise / process-wise. This requires a self-assessment of the compliances by the maker together with documentary support which is then confirmed by the reviewer. This also facilitates audit at the corporate and project levels

The Company has also established a dedicated Internal Control team which is responsible for co-ordinating ICF assessments and internal audits. The Internal Control function plays a key role in providing the Management and the Audit Committee, with an objective view the reassurance of overall control systems. It also offers them perspectives on the adequacy, effectiveness and efficiency of operating controls at pan-organizational level. The ICF is periodically modified, so as to be consistent with the operating changes for improved controls and effectiveness of internal control and audit. During the year, the ICF was reviewed for testing the Design, Implementation and Operating effectiveness of internal controls on financial reporting. There were a few improvement opportunities identified and implemented subsequently

The Internal Audit is carried out by a Chartered Accountants firm which reports its findings/observations directly to the Audit Committee. The Internal Auditors scope and authority are derived from the Internal Audit Plan which is approved by the Audit Committee at the beginning of the financial year. The plan is modified periodically to meet requirements arising from changes in law, as well as out of improved controls resulting from the implementation of the ICF, including the Internal Controls on Financial Reporting. Internal audits are conducted every quarter and covers operations, accounting, secretarial and administration functions. It also provides special reference to compliances, based on the audit plan. Internal audit reports are placed before the Audit Committee at regular intervals for review, discussion and suitable action

The Company has implemented SAP in July 2013 strengthening controls in existing processes. Every employee plays a key role to foster a working environment of responsibility, accountability and ethical behaviour.

The Company strives to identify opportunities that enhance organisational values, while managing and mitigating risks that adversely impact its future performance

9. Financial and Operational Performance

Standalone

During 2016-17, the Company reported gross revenues of Rs 4,400.51 Crore compared to Rs 5,051.73 Crore which is 22% lower over the previous year primarily on account of lower construction income

However, earnings before interest, tax, depreciation and amortization (EBITDA) increased to Rs 1,587.51 Crore in 2016-17 compared to Rs 1,098.57 Crore in 2015-16 which is attributable to higher interest income and profit on sale of investments. Other expenses decreased from Rs 341.61 Crore in 2015-16 to Rs 79.12 Crore in 2016-17 mainly on account of reversal of expected credit loss on loans and receivables in 2016-17

Financing cost increased by Rs 166.01 Crore as a result of higher borrowings for partially funding the increased investments in projects and working capital requirements. The debt-equity ratio as at March 31, 2017 stood at 4.13

Profit before tax for 2016-17 is Rs 195.71 Crore compared to a loss of Rs 122.92 Crore in 2015-16. Profit after tax for 2016-17 is Rs 236.39 Crore as against a loss of Rs 97.42 Crore in 2015-16

Earnings per share on basic and diluted basis stood at Rs 7.19 per share for the year ended March 31, 2017 as against negative Rs 3.46 per share for the year ended March 31, 2016 due to lower profit after tax for FY 2015-16

Consolidated

During FY 2016-17, the consolidated revenues stood at Rs 8,401.62 Crore as compared to Rs 8,356.37 Crore compared to the previous year

The EBIDTA increased to Rs 3,576.94 Crore in 2016-17 compared to Rs 2,842.67 Crore in 2015-16, which is 26% escalation due to higher construction margins. Financing cost increased by Rs 512.37 Crore during 2016-17 due to debts availed by project companies to fund construction activities, increase in borrowing for investments in project companies and working capital requirements. The Debt equity ratio as at March 31, 2017 on a consolidated basis stood at 6.75

Profit before tax increased from Rs 72.31 Crore in 2015-16 to Rs 124.89 Crore in 2016-17, a 73% increase over the previous year

Profit after tax attributable to owners of the Company increased by 22% from Rs 121.96 Crore in 2015-16 to Rs 149.31 Crore in 2016-17

10. Human Resources and Industrial Relations

Your Company considers its employees the most valuable resource and ensures strategic alignment of Human Resource practices to business priorities and objectives

Our constant endeavour is to invest in people and people processes to improve quality & skills of human capital. The Company strives to provide a conducive and competitive work environment to help the employees excel and create new benchmarks of productivity and efficiency, thereby facilitating the organizations growth

We continue to evaluate our talent needs and strive to develop the competency and capability of our people across levels. The employees capability, sense of ownership and teamwork enabled the Company to sustain performance in a challenging market scenario during the year and strengthen its leadership

11. Cautionary Statement

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and others may constitute ‘forward looking statements within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections and so on whether express or implied. Several factors could make significant difference to the Companys operations. These include climatic conditions and economic conditions affecting demand and supply, Government regulations and taxation, natural calamities and so on, over which the Company does not have any direct control