Ircon International Ltd Management Discussions.

1. AN OVERVIEW

Ircon International Limited (IRCON/ The Company) is an integrated engineering and construction company, specializing in major infrastructure sectors, including railways, highways, bridges, flyovers, tunnels, aircraft maintenance hangars, runways, EHV sub-stations, electrical and mechanical works, commercial and residential properties, development of industrial areas, and other infrastructure activities. IRCON provides EPC services on a fixed-sum turnkey basis as well as on an item-rate basis for various infrastructure projects. IRCON also executes projects on Build, Operate and Transfer (BOT) mode by leveraging the financial strength of the Company to sustain future earnings.

IRCON has a long-standing reputation as a sectoral leader in Transportation Infrastructure amongst the public sector construction companies in the country with specialization in execution of Railway Projects on turnkey basis or otherwise. IRCON is known for its quality solutions, commitment and consistency in terms of its performance.

IRCON has executed many landmark construction projects in the last 43 years both in India and abroad. It has actively focused on becoming a diversified infrastructure player, both in terms of sectoral and geographical coverage. After commencing business as a railway construction company it diversified progressively since 1985 into entire gamut of construction activities and infrastructure services; even though, its primary focus and strength are still deeply rooted in the railway sector

It is one of the few construction companies in the public sector to have earned substantial foreign exchange for the Country and paid dividend without fail every year to the Government.

Over the years, the company has extended its operations to other geographies including countries like Algeria, Bangladesh, Iran, Iraq, Malaysia, Nepal, South Africa, Sri Lanka, Bhutan, Myanmar and Afghanistan. The Company has so far completed more than 128 projects in 24 countries across the globe, and 383 projects in India. In India, in particular, it has also been undertaking projects even in difficult terrains and disturbed regions and is an active participant in prestigious nation building projects. While, the Company already has its presence in many states in India, it intends to further expand its domestic operations across India as part of its business growth model.

IRCON is an ISO certified Company for Quality, Environment, and Occupational Health and Safety Management Systems, a Schedule ‘A, and a Mini Ratna – Category I public sector listed company.

2. LEGAL STATUS AND AUTONOMY

IRCON, a legal entity separate from the Government, is legally, functionally, and financially autonomous, operates under the corporate laws as an independent commercial enterprise, does not receive any budgetary or financial support from the Government, and is not dependent on the Government for any aid or assistance. However, the Government of India through the Ministry of Railways and the Department of Public Enterprises under the Ministry of Heavy Industries and Public Enterprises, monitors its performance through a system of Memorandum of Understanding (MOU) as regards targets to be achieved every year as part of accountability to the Parliament in respect of all government companies. Government can issue and does issue guidelines to regulate and bring about some uniform pattern in the functioning of the Company as a public sector enterprise. However, no Government department has any supervisory authority to exercise control over the Company which is managed and run under the superintendence, control, and direction of its Board of Directors as per the Companies Act.

During the year 2018-19, the Government has disinvested 10.53% of the paid-up share capital by Initial Public Offer and the public shareholding as on 31st March 2019 stood at 10.82%. Further, IRCON is required to increase public shareholding to at least 25% in near future as part of Minimum Public Shareholding (MPS) norms prescribed as a continuous listing requirement under Securities Contract Regulations Rules, 1957 for the listed companies which will be done by the Government of India by further selling its 15% holding to the public.

IRCON has been ranked amongst the Top 500 Indian Companies in Fortune India 500 companies list published in the special quarterly issue of December 15, 2018, to March 14, 2019 of Fortune India Magazine. The Company has also been recognised and ranked under the Top 50 most profitable PSUs in India, the Top 10 best performing PSUs on the basis of cash efficiency, the Top 10 PSUs on the basis of book value (per share) in the February 2019 issue of Fortune India Magazine.

3. OUTLOOK

The Vision and Mission of the Company are as follows:

A. Vision

To be recognised nationally and internationally as a construction organisation comparable with the best in the field covering the entire spectrum of construction activities and services in the infrastructure sector

B. Mission

i) To effectively position the Company so as to meet the construction needs of infrastructure development of the changing economic scene in India and abroad.

ii) To earn global recognition by providing high quality products and services in time and in conformity with the best engineering practices.

4. BUSINESS ENVIRONMENT

As per the second advanced estimates of National Income 2018-19 released by Central Statistics Office (CSO) Ministry of Statistics & Programme Implementation, Government of India the growth rate of Indian economy is estimated to be 7.0% in 2018-19, which is lower than the growth rate of over 7.2% in 2017-18. Similarly, it is anticipated that the growth of real Gross Value Added (GVA) is 6.8% as against the 6.9% in 2017-18. Despite the decrease in the overall GDP & GVA, the construction sector is likely to register growth rate of 8.9% as compared to growth of 5.6 percent in 2017-18.

India has been ranked 100 (improvement of 30 ranks over its rank of 130) in the World Banks latest Doing Business Report 2018. Moodys Investors Service has also raised Indias rating from the lowest investment grade of Baa3 to Baa2. This is due to a host of measures undertaken by the Government including implementation of GST, Insolvency and Bankruptcy Code, and announcement of bank recapitalization. A number of reforms were undertaken to boost industrial growth including ‘Make in India programme, ‘Start-up India and Intellectual Rights Policy.

5. SECTORAL OUTLOOK

Infrastructure is the backbone of any nations development and quality of life. Whether it is highways or railways or airways or digi-ways, the Company has gone beyond incremental growth to quantum improvements.

Over fiscals 2019-2022, CRISIL Research expects the construction sector to increase by 54% to Rs.22.2 trillion. Of this about 93% is contributed by infrastructure investments while the rest is from Industrial. This growth in infrastructure investments is driven by government initiatives and budgetary support especially in sectors such as Roads, Irrigation, Urban Infrastructure and Railways. Over the next 3 years, the construction opportunity in Railways is expected to double, driven by investments by public as well as private sector especially in Network decongestion, expansion and Safety which account for over half of the total investments in railways during this period. Investments in key segments such as new lines, gauge conversion, doubling, track renewals, and electrification will account for Rs.2.3 trillion (73%) of the construction opportunity during fiscals 2019-2022 with doubling accounting for the highest share at 31% during this period. CRISIL Research also expects the investments in railway sector to increase by about 77% from Rs.3.9 trillion in fiscals 2015-2018 to Rs.6.8 trillion in fiscals 2019-2022.

Some of the initiatives of the Government as part of infrastructure development which may yield business opportunities for IRCON are detailed below:

A. Railways:

Railway capex for the year 2019-20 is set at a record level of Rs.1.6 trillion. Rolling stock has been a major thrust area for Indian Railways and new trains have been introduced. Indian Railways (IR) is undertaking several initiatives to ensure passenger safety and security. Modernisation and mechanisation of rolling stock and station infrastructure is also being pursued more aggressively.

A few highlights in development of Railways sector are as follows:

• According to India Infrastructure Research, the railways sector offers an investment opportunity of over Rs.10 trillion across various segments. Of this, 80% is constituted by rail tunnels, doubling works and new line projects combined together.

• In the next four to five years, IR plans to undertake 22,825 km of new line and 12,215 km of line doubling. Besides, it plans to electrify at least 28,000 km of railway network. Also, 3,360 km of Dedicated Freight Corridor (DFC) is expected to be commissioned by 2020.

• The eight proposed high speed rail (HSR) projects will entail a total investment of at least Rs.13 trillion over the next 15-20 years. In addition, nine semi-HSR projects are in the planning stage.

• Further, IR plans to manufacture a total of 4,941 coaches in 2019-20 and 4,839 coaches in 2020-21. It is also setting up 17 new manufacturing units at an estimated cost of Rs.390 billion.

• About Rs.1.1 trillion worth of investment opportunities in station and commercial development around stations is anticipated under IRs station redevelopment programme.

• Given the mandate to ramp up the renewable energy share in IRs total energy mix, IR has set ambitious targets of setting up 1000 MW and 200 MW of solar and wind power respectively by 2020.

• All-inclusive, the railways sector in India is poised to become one of the major drivers for economic growth in the country. Going forward, IRs network expansion and decongestion plans are expected to create huge opportunities for project developers, EPC contractors, technology providers, manufacturers of rolling stock, renewable energy developers, and transmission and distribution equipment providers.

Apart from these initiatives, Railways infrastructure development have also been emphasized. This includes focus on commissioning of new Broad Gauge lines, completion of electrification and also providing infrastructure status to Station Development. The station re-development has been undertaken through various modes such as Zonal Railways, Indian Railway Stations Development Corporation Limited (IRSDC), JV between IRCON and RLDA with Smart City SPVs, Railway PSUs and Co-operation with State Government.

B. Roads:

India has second largest road networks in the world, spanning a total of 5.5 million kilometres (kms). Increased industrial activities, along with increasing number of two and four wheelers have supported the growth in the road transport infrastructure projects. The governments policy to increase private sector participation has proved to be a boon for the infrastructure industry with a large number of private players entering the business through the public-private partnership (PPP) model. The government, through a series of initiatives, is working on policies to attract significant investor interest. A total of 200,000 km national highways are expected to be completed by 2022.

To achieve the vision of massive highway network in the country, the governments flagship highway construction programme ‘Bharatmala Pariyojna was started in 2017, which is an umbrella programme comprising 65,000 km of highways, out of which 24,800 km highways fall along economic corridors, inter corridors, feeder routes and border roads. The "ambitious" project, with a total capital outlay of Rs.6.92 lakh crore will see construction of Economic Corridors (9000 km), Inter Corridor and Feeder Route (6000 km), National Corridors Efficiency Improvement (5000 km), Border Roads and International Connectivity (2000 km), Coastal Roads and Port Connectivity (2000 km), Green field Expressways (800 km) and remaining work of NHDP works (10,000 km).The first phase, being undertaken between 2017 and 2022, will see construction of 34,800 km of national highways, including 10,000 km of remaining highways under NHDP, at the cost of Rs. 5.35 lakh crore.

All these highways, along with 10,000 km residual National Highway Development Projects stretches have been envisaged for construction under Phase-I of the Pariyojana over a period of five years from 2017-18 to 2021-22 for which Rs. 5.35 lakh crore have been earmarked.

The Government has taken various measures for providing boost to the road sector, which includes measures such as conversion of State Highways to National Highways; connecting rural roads to main roads through Pradhan Mantri Gram Sadak Yojana (PMGSY). In addition, the Ministry of Road Transport and Highways (MORTH) and National Highways Authority of India (NHAI) have been monitoring the stalled projects and initiated revival of projects by infusion of funds and expediting completion of delayed projects. The government has taken various steps for streamlining of land acquisition & environment clearances, exit for equity investors, premium rescheduling, revamping of dispute resolution mechanism, frequent reviews at various levels etc.

In order to facilitate implementation of more road projects, the Government has introduced and adopted Hybrid Annuity Model (HAM) in addition to Engineering, Procurement and Construction (EPC) mode for execution of the projects. In HAM mode, the capital expenditure is shared by the client and requires lesser amount of funds by the developer during construction years in comparison to projects on EPC mode. Moreover, the risk of tolling is taken by the Government, thus, making the easy availability of funds from the financial institutions. Further, initiatives such as monetization of projects through the Toll Operate and Transfer model, securitization of toll revenue, adopting the Infrastructure Investment Trusts route, and other innovative financing options such as through LIC, Long Term Pension Funds etc., have been taken up to attract fresh capital from the market on the strength of already operational projects.

In International arena, opportunities exist in countries like Bangladesh, Thailand, Turkey, Ghana, Sri Lanka, Mozambique, Rwanda, UAE, Malaysia, Oman and Guinea.

Few countries such as Sri Lanka, Bangladesh, Malaysia, Algeria and South Africa also offer avenues for Indian construction companies to expand their foot print due to their increased construction spends as a percentage of GDP (current prices).

In case of Sri Lanka, construction contributed about 7.4% of the GDP (Current prices) in 2015 while it is about 7.3% in 2015-16 for Bangladesh. Similarly, Malaysias construction spend stood at 4.7%, Algerias construction spend was at 11.5% in 2015 and South Africas construction spend was steady at 3.5% (constant prices). Sri Lanka and Bangladesh are expected to offer opportunity in Railways as well. In case of Sri Lanka and Bangladesh, long term plans by respective railways reveals investment to the tune of LKR 289 billion and Tk 2.34 trillion respectively.

For Sri Lankan Railway, only improvement of existing railway network and construction of new railway lines offer significant amount of construction potential, as the projects under these segments involve construction of bridges, laying of tracks, strengthening of tracks, Electrification, track renewals among others.

6. FINANCIAL AND OPERATIONAL PERFORMANCE

A. Financial Performance:

The total income of the Company during 2018-19 stood at Rs.4679.54 crore as compared to Rs.4121.44 crore in 2017-18. About 94.34% of the total income i.e. Rs.4415.10 crore, has arisen from operations, out of which about 13.27% i.e. Rs.586 crore has been contributed by foreign projects.

Operating income from foreign projects has decreased by 2.59% over the previous year. The main reason for lower contribution of foreign turnover are that the projects at South Africa is nearly at completion stage, one project at Bangladesh has got completed this year and other projects at Bangladesh and Algeria are going on. There had been a corresponding increase of 16% in Profit before tax from Rs.530.35 crore in 2017-18 to Rs.615.18 crore in 2018-19. Profit after Tax has increased by 14.64% from Rs.387.90 crore in 2017-18 to Rs.444.68 crore in 2018-19. Net Worth has increased by 5.54% during the year and earnings per share have increased by 19.09% from Rs.39.70 in 2017-18 to Rs.47.28 in 2018-19.

Turnover of the Company for the year 2018-19 is at Rs.4415.10 crore and is record high for IRCON, the earlier highest figure being Rs.4220.19 crore in the year 2012-13. The Company has secured new projects whereby the order book stands increased to Rs.33,901 crore approx. at the close of the financial year 2018-19.

The details of interim dividend paid and dividend proposed for consideration and declaration by the shareholders, over and above the interim dividend, at the forthcoming AGM is given in Directors Report under ‘Financial Highlights.

Details of significant changes (i.e. change of 25% or more as compared to the FY 2017-18) in key financial ratios, along with detailed explanations thereof is as follows:

S. No. Name of Ratio Formula 2017-18 2018-19 Changes in ratio as compared to FY 2017-18 Remarks
1 Debtors Turnover Revenue from Operation/ Average Account Receivable Operating 7.13 7.53 6% -- There is variation of 31 % in Inventory
2 Inventory Turnover Expenses/ Average Inventory 23.06 15.80 -31% Turnover ratio in comparison to corresponding previous year due to increase in WIP (at cost) by Rs.168.86 Crore.
3 Interest Coverage EBIT/Interest Expense 139.9 100% There is no interest expenses in 2017-18. Hence, there is variation in Interest Coverage Ratio of 100% in comparison to previous year.
4 Current Ratio Current Assets/Current 1.66 1.32 -20% Current Ratio has changed by 20% in comparison to previous year due to transfer of current maturities of Long Term Debt & Interest thereon from Non-Current.
5 Operating Profit Margin Liabilities (PBT-Other Income)/ Turnover 0.077 0.079 3% --
6 Net Profit Margin Net Profit / Total Income 0.09 0.095 1% --
7 Return on Net Worth Net Profit / Average Net Worth 0.10 0.12 13% Net worth has changed due to transfer of surplus and payment of dividend & taxes thereon.
8 Debt/Equity Debt/Total Shareholders Equity 0.85 0.65 -24% Debt Equity ratio has been varied by 24% due to transfer of current maturities of Long Term Debt & Interest thereon from Non-Current.

During the year, no deviation has been made from that prescribed in the Accounting Standard has been made while preparing the financial statements.

B. Operational Performance:

(i) Sectoral Performance:

During the year, more than 85% of the revenue is from Railway sector, out of which 50% is on nomination basis from Ministry of Railways; the balance 35% is from foreign railway projects including projects in Algeria and Bangladesh as well as the projects which IRCON is doing for DFC and toll connectivity projects. Though main focus of IRCON is in railways, the Company is also doing highways business, revenue from which is approx. 12.5%. Revenue from electrical works and building works constitute the balance revenue.

A sector-wise comparative position for the last three years is given below:

(in Rs. crore)

Sectors

2018-19

2017-18*

2016-17

Operating Income % Operating Income % Operating Income %
Railways 3758 85.12 2904 74.63 2098 69.25
Highways 555 12.57 844 21.70 592 19.67
Electrical 97 2.20 89 2.29 255 8.45
Buildings 5 0.11 48 1.23 78 2.60
Others - - 6 0.15 1 0.03
Total 4415 100 3891 100 3024 100

* Figures have been re-grouped.

(ii) Segment-wise Performance:

Contribution of foreign projects to total revenue has decreased from approximately 15% in 2017-18 to 13% in 2018-19. A comparative position for the last three years is given below:

(in Rs. crore)

Segments

2018-19

2017-18*

2016-17

Total Income % Total Income % Total Income %
Foreign 605 13 622 15 339 10
Domestic 4075 87 3499 85 2915 90
Total 4680 100 4121 100 3254 100

* Figures have been re-grouped.

7. STRENGTH

Since incorporation, IRCON has diversified into various infrastructure sectors and is now an established player in the field of railways and highways construction. The Company also caters to customers needs in many other areas such as construction of commercial and residential complexes, power transmission lines, industrial lighting, bridge/fly-overs and has a track record of on-time and high quality project completion which has helped in developing a strong reputation resulting in increased opportunities to bid for larger and more prominent projects.

Through years of development, IRCON has put in place well-tested systems and controls as below:

• Robust contract management: Once awarded a contract, IRCON actively tracks and manages the deliverables and strives to ensure that there is no breach of the contractual terms and conditions. To improve customer satisfaction, IRCON also endeavours to provide timely response and solutions to our clients.

• Efficient planning and project management: Through our project teams, IRCON plans every step of the project and, over time, has developed strong project management and execution expertise and capabilities for both domestic and international projects. A combination of efficient and systematic project management and execution skills through our procurement, resource deployment, operation and maintenance of construction equipment, and other resources for multiple project sites, has helped IRCON to establish a good track record and reputation for timely completion. IRCON believes that the achievement in these types of infrastructure projects enhances its reputation as a domain player in the Indian infrastructure segment, and enables it to secure a fair share of large-size contracts, both domestically and internationally.

• Use of innovations in designs and advanced technology: IRCON has been proactive in using modern construction techniques, technology and equipment comparable to the market standard. In executing its projects, IRCON attempts to achieve high efficiency and on-time performance, often by cooperating with leading consultants and manufacturers to innovate and to develop more advanced and efficient methods and techniques.

IRCON has developed some of the best processes and methodologies in the industry to provide economic solutions and quality output while meeting tight schedules on the most challenging projects. With the Companys diversification into various infrastructure projects, it is now an established player in the field of railway and highway construction. IRCON caters to its customers needs in many other areas such as construction of commercial and residential complexes, power transmission and distribution, industrial sheds, bridge / fly-overs, tunnels, development of commercial, residential and retail properties, electrical and mechanical work, signaling / telecom, coach factory, station buildings and multi-functional complexes. With its expertise and professional approach to project execution, IRCON has not only widened its horizons of work thereby reducing dependence on any one sector or type of project, but also propelled itself to traverse the physical boundaries of the country.

The broad geographical coverage has helped the company to diversify to DBFOT/EPC/HAM/Annuity and other type of contracts as well as project development and operations through JVs / SPVs. During the year, IRCON has secured project for Eight lane Vadodara – Kim Expressway (Package-II) on HAM basis from National Highways Authority of India (NHAI), in the State of Gujarat for which project specific SPV (Ircon Vadodara Kim Expressway Limited -IrconVKEL) was formed. The Engineering, Procurement and Construction (EPC) contract for the said project is being executed by IRCON. In addition to IrconVKEL, the Company also has three project specific SPVs (formed as wholly-owned subsidiaries) for implementation of highway projects in the State of Rajasthan, Madhya Pradesh, and Karnataka. Additionally, the SPV projects for the construction of Railway corridors for transportation of coal and mineral in the States of Chhattisgarh, Odisha & Jharkhand have been secured during year post approval of their Detail Project Reports and inflated mileage by the Railways.

The strength of IRCON is mainly in its large pool of trained and experienced manpower which can be supplemented by employees on short term / deputation basis. The Company has an integrated team of Railways and Highways, Design and Execution Engineers and Business Development managers to work on opportunities of large high value projects being bid out on EPC, DBFOT and HAM basis. With the existing manpower resources, IRCON can undertake additional work of approx. Rs.20000 Crore and there is no need to further increase the manpower.

Over the years, the Company has ventured into other geographies including countries like Afghanistan, Algeria, Bangladesh, Bhutan, Iran, Iraq, Malaysia, Myanmar, Nepal, and South Africa. Presently, the Company has operations in Algeria, Bangladesh, Nepal, South Africa, and Sri Lanka.

8. OPPORTUNITIES

A number of macro level and sectoral initiatives undertaken to improve economic growth coupled with revival of interest in the development of infrastructure sector in the last few years in India as well as abroad, particularly in Railway sector, has opened up several opportunities for securing more business. Continuous efforts to develop maximum number of other related and remunerative projects in States of Chhattisgarh, Odisha, and Jharkhand, shall continue to bring more business in the coming years

IRCON has experience in construction of Railways projects, highways and roads in accordance with the international standards, both in India and abroad. With the Government proposing to increase spending in this sector, IRCON is having opportunities in the areas of Metro Rail projects; Construction of National Highways in Indian states in areas such as connectivity of secondary cities, ports and various regions; Connecting habitations with rural roads through Pradhan Mantri Gram Sadak Yojana (PMGSY); Bharatmala Pariyogana for the highways sector; Commissioning of Broad Gauge lines; Stations Redevelopment programme which is envisaged to be done by leveraging commercial development of near the stations; etc. IRCON is also Planning to participate in bid for Zojila tunnel civil construction work in Kashmir for which the government has invited fresh bids.

A large number of high value projects are coming up in the Highway sector on EPC, DBFOT, HAM, and Annuity basis. IRCON has formed four wholly-owned subsidiaries as SPVs for execution of projects on BOT/DBFOT/HAM basis and holds strategic share in joint venture companies formed for coal connectivity projects in three states of India. With this experience, the Company is geared up to undertake turnkey projects under new project execution models including EPC/ HAM and Annuity in the Railways, Highways sector and other infrastructure projects. We see large opportunities in the projects of Indian Railways like implementation of Mumbai-Ahmedabad High Speed Rail Corridor with Japanese funding and other projects to be bid out on EPC and DBFOT basis.

On the international front, IRCON has proved to be extremely competitive in foreign projects in the past in Bangladesh and Sri Lanka and shall continue efforts to secure more projects in these countries. IRCON has recently secured a contract valuing USD 91.27 Million for a Track Rehabilitation project between Omanthai to Maho in Sri Lanka. The commitment of Government of India for new lines of credit amounting to USD 10 billion for Africa and second lines of credit of USD 4.5 billion for Bangladesh, would provide opportunities for securing works in these countries. Opportunities also exists for undertaking turnkey Railway projects on Government to Government basis with Ministry of Transport, Malaysia.

In the next couple of years, with a vision to almost double its turnover, the Company intends to focus intensively on further diversifying into various other segments where its presence is either non-existent or insignificant. To achieve this goal, the Company shall endeavor to formulate strategic alliances both in the domestic and foreign markets with other major private players and participate in bids aggressively to further expand its horizon of business opportunities.

Adoption of new technology and construction methodology will ensure competitive edge over the competitors and thus would ensure improvement of operational efficiency, establish credibility and result in enhancement of order value, customer satisfaction and in turn would have impact on the revenues of the company. The Company plans to train its manpower accordingly and take up some of the infrastructure projects which require new/ latest technology.

9. CONSTRAINTS

Although every organization has to work within a certain legal framework, IRCON as a public sector company faces more constraints (not applicable to private sector companies) which puts it at a disadvantage in a competitive market. The contracts are awarded to IRCON following competitive bidding processes where the Company is meeting the prescribed pre-qualification criteria. The Companys competition varies depending on the size, nature, complexity of the project and on the geographical region in which the project has to be executed.

IRCON being a dominant player in the railway infrastructure segment and a significant player in Highways sector, has been able to secure a fair share of business for the Company in the past. However, entry of a large number of players in the railways and highways sector has made it difficult for the Company to compete in Item Rate Contracts. Further, with the Employer(s) diluting the qualification requirement, a sizeable number of contractors are diversifying in the Railway segment thereby increasing the competition for IRCON.

Most of the upcoming private organizations in the infrastructure sector are willing to take higher risk and work at low profits to increase their order book position and capture a wider share of the market, which poses fresh challenges for the Company.

The Company is operating in a highly competitive and price cutting environment of the construction industry where profit margin is diminishing due to increased market competition in the traditional areas of operation. With the changes in the Government policy as well as further disinvestment of shares by the Government to be offered to private parties (to comply with the statutory requirement of minimum public shareholding of 25%), there is likelihood of reduction of new work orders coming on nomination basis from Indian Railways and other government agencies. Hence, the Company has to prepare itself to expand its footprint in high technology and high value projects like High Speed Railway projects and PPP investment projects. The Company also needs to revise its strategy taking into account its strength in terms of its large and trained manpower and financial resources and its weakness on account of being a government entity limiting its ability to take risk and work on lower margins, to secure projects in present competitive environment. In foreign countries, most of the projects are now being available on open tender basis, unlike in the past when the G to G negotiation was normal mode of award of work. This also contributes to less orders in foreign countries and that too with lesser margins.

10. STRATEGY

The Company strives to be recognized nationally and internationally as a construction organization comparable with the best in the field, covering the entire spectrum of construction activities and services in the infrastructure sector.

The Company is diversifying its areas of operations both sectorally and geographically. It is focused towards strategic business development to sustain and improve its order book position by giving a thrust to its areas of core competence and international business. The Company is focusing on undertaking projects having high order value and further consolidating its core competence namely, Railways, Highways, Electric sub-stations, S&T, and Railway Electrification. The revenue generation streams of the company are widened with portfolio of BOT/ DBFOT/EPC and coal connectively projects undertaken by its subsidiaries and joint venture companies.

Though IRCON already has presence in many states in India, it intends to further expand its operations domestically across India as part of its business growth model. It is felt that by further expanding its geographical coverage and expanding into new areas within the country, the Company would be able to take more projects proposed by the Government of India and further consolidate its position in the infrastructure sector.

Additionally, the Company plans to continue its strategy to diversify across industry segments and increase orders from foreign countries to capture better profit margins afforded by these projects as compared to domestic projects. Also, while it continues to focus its efforts in the railways sector, through portfolio diversification, it hopes to hedge against risks in specific areas or projects, and protect itself from market variations resulting from business concentration in particular industry sectors and/or limited geographical areas. With increasing experience and success, the company expects to see a steady growth in its business with a rate of expansion comparable to or better than the best in the construction industry.

As a strategy, apart from revising the IRCONs strategy for securing contracts in the infrastructure sector based on the experience managing large-scale project work of PMC (Project Management Consultancy) could be one of the sector where IRCON can leverage its potential. IRCON in past and present has been executing real estate and building projects and thus has requisite experience which can be scaled up over a period of time to act as another business sector. In this respect, as per requirement, strategic tie-ups with Indian and International companies can be taken up to explore the Indian market for the various works of PMC.

The Government interest in infrastructure, particularly in the railway sector, has opened up opportunities for the Company to secure more business. The Company is leveraging its established project executing track record and diversifying its infrastructure work expertise into transportation engineering, civil and industrial construction, and other infrastructure projects. With the focused project execution focusing on performance quality and continuing development, the Company is likely to have new business opportunities in the coming years. IRCON intends to enter into Joint Venture with reputed private players in specialized areas of work. This will enable synergizing the expertise and supplement the strengths of the JV partners.

IRCON intends to focus on undertaking large value projects where the Company has the required expertise and experience and can be competitive. Projects having high order value typically have a smaller percentage of overhead cost as a percentage of total cost and therefore provide a greater potential for profit. In addition, projects having high order value are also, in the current market, subject to less competition. In addition, IRCON may be required to execute large-value projects through joint ventures, which expose us to the risk of default by our joint venture partners.

11. RISKS AND CONCERNS

A. Project Risk Management:

The Company has an elaborate Enterprise Risk Management (ERM) framework in place. As a part of implementation of the ERM framework and in terms of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, IRCON has in place a Board Level Risk Management Committee (RMC) which reports to the Board /Audit Committee about the risk elements, their mitigation plans, etc. The RMC has been entrusted with the responsibility to identify and review the risks and formulate action plans and strategies for risk mitigation. The main function of RMC is to monitor various risks and to examine the adequacy of risk management policy and practices adopted by the company and also to initiate action for mitigation of risks arising in operations and other key functional areas of the Company.

As per ERM, IRCON has a Rapid Action Group at Executive Director (below Board) and Chief General Manager levels, business group, and internal audit to ensure its implementation. Risk Management Policy, Risk Management Processes, and MIS reports formats including MIS reports on Risk Management have been evolved in accordance with the Framework. Reports from Rapid Action Group and internal audit are required to be submitted through the Risk Management Committee to the Audit Committee for review.

In India, a major concern in execution of projects is non-availability of encumbrance free land, and delayed approval of drawings and estimate due to which there is a risk of time and cost overruns which are seldom compensated by the client. The revenues generated from the projects are difficult to predict and are subject to variations driven by various factors.

B. Treasury Risk Management:

IRCON was assigned a ‘CARE AAA rating by Credit Analysis & Research Limited (CARE) for long-term non-fund based credit facilities and an ‘A1+ rating for short-term non-fund based credit facilities in 2008-09 based on BASEL II norms of the Reserve Bank of India. These rating have been re-affirmed in an annual surveillance review by CARE in January 2019.

IRCON conducts its business in various countries and, therefore, has to deal in foreign currencies. Execution of projects abroad necessitates investing some funds in foreign banks in order to take care of any exigency arising on account of temporary cash flow mismatch. However, dealing in foreign currencies involves foreign exchange risk and the exchange rate may change unfavorably before the currency is exchanged. In order to minimize or eliminate foreign exchange risk, these exchange rate fluctuations are monitored constantly and surplus funds are converted / repatriated to India at the appropriate time, and in accordance with the laws. Efforts are made to provide a natural hedge by matching foreign currency inflows and outflows from various foreign projects. Investment guidelines for foreign projects have been formulated to ensure placement of funds with foreign banks in a fair and transparent manner.

12. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

A properly designed and consistently enforced system of operational and financial internal control helps a companys Board of Directors and management to safeguard the Companys resources, produce reliable financial reports, and comply with laws and regulations. Effective internal control also reduces the possibility of significant errors and irregularities and assists in their timely detection when they do occur. IRCON has adequate internal control mechanism and an Internal Audit System commensurate with its size and nature of business.

The Company has in place adequate internal financial controls with reference to financial reporting in compliance with the provisions of the Companies Act, 2013 and such internal financial controls over financial reporting were operating effectively. The controls have been designed to provide assurance with respect of maintenance of proper accounting records, ensuring the orderly and conduct of its business including adherence to the Companys policies, safeguarding of its assets, prevention and detection of frauds and errors and ensuring reliability of financial and operational information. The internal control system (including Internal Financial Controls over Financial Reporting) are reviewed on an ongoing basis and necessary changes are carried out to align with the changing business requirements.

The management discloses all financial, budgetary and program information needed for proper understanding of finances and operations about the Company. The Company has in place an organizational chart and a system of delegation of powers. This coupled with robust internal MIS systems, ensures appropriate information flow to facilitate effective monitoring. Adherence to these processes is monitored through internal audits. The frequency of the Internal Audit is linked with the turnover and percentage of completion of each project.

The internal audit framework provides scope of Internal Audit covering areas from tendering to statutory compliances. The same has been issued for implementation to internal auditors so as to make the internal audit system more effective and project specific. Projects are closely monitored through online/offline reporting formats and the key performance indices are monitored by the Management on monthly basis in addition to the Departmental inspection by in-house professionals.

The Company has an internal audit system that requires the Internal Auditors to comment on the existence of adequate internal control systems and compliance therewith in addition to the opinion on existence of proper risk assessment and mitigation mechanism. The Internal Auditors are experienced Chartered Accountant firms which are selected through a transparent selection process, and upon appointment directly report to the Management. This ensures Internal Auditors independence. Reports of the Internal Auditors are reviewed, compliances are ensured, and synopses of Audit Reports along with compliance are put up by Internal Audit Department for consideration of the Audit Committee.

The Company has in place SAP ECC 6.0 based Finance-Controlling module. No changes are allowed in SAP after the entries are made therein. Enhancement of SAP ERP FI-CO module has been done for improved transparency and financial control and maintaining books of accounts fixed assets, MIS, P&L for all projects. During the year online ‘View PF Statement, ‘View Payslip and ‘View Attendance system have been developed and launched.

The internal control and audit system are being reviewed periodically by the Management as well as by the Audit Committee, followed up by corrective action, whenever necessary as a part of continuous improvement. A report by a professional agency is in place for further strengthening the Internal Financial Control in IRCON. Most of the recommendations of the report have been implemented and rest are being implemented for strengthening the Internal Financial Control. A structured Fraud Prevention, Detection, and Control Policy (FPDC Policy) along with a Whistle Blower Policy duly approved by the Board of Directors is in place with facility to make e-complaints in confidence.

13. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

Human resource development efforts of IRCON are aligned with industry best practices. We understand that a positive workplace is, and will always remain, the foundation on which a company can realize its goals and achieve competitive advantage.

IRCON is an equal opportunity employer, embracing diversity in race, religion, marital status, gender, age, ethnic origin, and physical ability; and providing its diverse workforce with a stimulating environment to aid both their personal and professional development.

The Company aims to achieve the right size and right mix of human resource/ employees for the organization. Since IRCON is a project based company, there are fluctuations in the manpower requirements which are being taken care by recruiting employees on deputation, contract, and service contract. Recruitment strategies have been re-engineered to tune them with the overall strategy of the Company to keep cost of supervision and establishment at optimum level. The Company offers post superannuation benefits of Contributory Provident Fund, Gratuity, and Post retirement indoor medical benefits through a Medical Trust to all its employees.

The total manpower strength as on 31st March 2019 was 1576 employees. The attrition rate during 2018-19 was 6.09%, with 96 employees leaving the organization.

IRCON is moving towards a competency based framework with the aim of building competency pool for the employees at all levels. As an outcome of competency mapping, individual development plans are prepared for senior and middle level management. Based on this, training needs are identified and customized training programs are conducted.

Strengthening our human capital is, therefore, core to our operations. IRCON runs multiple initiatives to help employees grow in their careers. Progressive policies such as a mentoring and skill development programmes for junior employees, and special leadership development programs for senior employees, have gone toward making the workplace more employee-friendly.

During the year, as a part of employee development, total 4046 man-days trainings was imparted to the employees, which included programs like Special Refresher Course at Indian Railways Institute of Signal Engineering and Telecommunication (IRISET), Indian Railways Institute of Signal Engineering and Telecommunication (Pune), and Training on Project Management. The Company has envisioned an ambitious growth plan for Human Resources for the next few years, and training programs are specially designed for 3-5 days for Senior Management from best Management institute of India.

During the year, IRCON engaged M/s QAI India Limited for assessment of level of People Capability Maturity Model (PCMM) in our organization. The Board of Directors of the Company has decided for upgradation of People Capability Maturity Model (PCMM) Level 3 by the year 2020 for which engagement of transition partner is in process.

The succession planning policy of the Company provides an integrated and systematic approach for identifying, developing and retaining employees in line with current and projected business objective. Under succession planning policy of the Company, 29 employees of the level E7 to E9 were considered as succession pool of likely leaders to take up critical roles in future. To groom this pool of potential leaders, special training for leadership and management development at IIM Ahmedabad was provided during the year.

Cautionary Statement

Statements made in the Management Discussion and Analysis Report describing the Companys objective, projections, estimates, expectations may be forward looking statements within the meaning of applicable laws and regulations, based on beliefs of the management of the Company. Such statements reflect the Companys current views with respect to the future events and are subject to risks and uncertainties. Many factors could cause the actual result to be materially different from those projected in this report, including among others, changes in the general economic and business conditions affecting the segment in which the Company operates, changes in business strategy, changes in interest rates, inflation, deflation, foreign exchange rates, competition in the industry, changes in Governmental regulations, tax laws and other Statutes & other incidental factors. The Company does not undertake any obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise.

For and on behalf of the Board of Directors
Sd/-
(S.K. Chaudhary)
Date: 22 nd July 2019 Chairman & Managing Director
Place: New Delhi (DIN: 00515672)