Karma Energy Ltd Management Discussions

Annexure III

General Economy

The global economy remained steady overall despite the ongoing international political disputes in selected European Countries and now couple of Asian Countries has also entered the fray. Global trade improved albeit less than the historical average. Few countries have started experiencing the pangs of disinflation. Central Banks in important countries are treading a cautious path with respect to Interest rate cuts. A possible risk which can boomerang is high levels of public debt.

In the above scenario having certain uncertainties, Indian economy continues to move forward at an accelerated pace and estimates point to real GDP at 7.6% in FY 2023-24. Both the manufacturing sectors and Service sectors reflect momentum and buoyancy. Considering certain sudden instability expected due to political disputes amongst some nations but considering the resilience shown by Indian economy RBI has estimated a GDP for FY 2024-25 at 7%.

Both Direct tax and Indirect tax mainly GST collections clocking one lakh crore plus consistently are reflecting the Indian entities all round growth and compliance.

With the ongoing general elections leading to a new government at the Centre, it is expected that there would be continuity and improvement in Policies for a faster Growth of the Economy.

Company Business

The renewable power generation, which is the business of the Company, though has received all encouragement from both central and state governments have not grown to the extent expected due to pessimistic approach of many regulatory commissions and most of the State utilities, the latter themselves being in doldrums. In many states tariffs have not being encouraging and sale to third parties are being discouraged by imposing high open access charges under one pretext or other. In fact it is seen that present environment in Green Energy is only for Big Players with deep pockets and gone are the days when many a small and medium entities entered the Green Energy sector and laid the foundation for rapid growth.

The performance of the Company is directly linked to the Renewable Energy Policies of both Centre and State Governments, effectiveness of Nodal Agencies and formulation of encouraging policies and implementation thereof by State Electricity Regulatory Commissions.

Further the Ministry of Power has paved the way for realizing regular dues in Installments along with interest for delays. AP has chosen to pay in 12 installments of the dues as of May 2022 and TN in 48 installments of the Dues as at end March 2022. This has facilitated regular cash flow leading the Company pre-paying the term loans availed from Bank and become DEBT FREE.

OUTLOOK, OPPORTUNITIES AND THREATS

The Pandemic Covid-19 continues to raise its head time and again after gap of every few months causing anxiety.

As far as Companys operations are concerned like any other renewable energy entity many adverse regulatory changes have been worse than the pandemic. Some sites are recording negative earnings. The Company has taken lot of steps for cost reduction, tight cash flow management, policy changes to mitigate the downturn. In fact during the FY 2022-23 it sold its lone wind mill of 0.55 MW along with the land at Poolvadi in Tiruppur District, in Tamil Nadu. In FY 2023-24 the Company decided to close AP wind farm of 7.5MW due to very low tariffs being offered by AP Utility. The final closure has been deferred to post elections expecting some favourable poilicies of third part sale or hybrid RE systems. Also more wind mills which due to passage of time has outlived its technical life and continuing its operation even with good operation and maintenance may prove uneconomical as tariff remains fixed for many years with no adjustment to inflation or factual cost of repairs and establishment costs.

As it stands today, it seems the Central Governments ambitious quantum leap in RE Power is encouraging, Its commitment towards the environment by 2030 included: (i) 500 GW non-fossil energy capacity; (ii) energy mix comprising 50 percent renewable energy;(iii) reducing total projected carbon emissions by one billion tonnes; (iv) reducing the carbon intensity of its economy by 45 per cent; and (v) achieving net zero by 2070

Considering the huge outlay needed to achieve the targets, only big business houses are jumping into the Green Power bandwagon as their pockets are deep and may be able to absorb the running losses in the RE Business which they may leverage for growth in their other core businesses.

RISKS AND CONCERNS

On the Renewable Energy Sector, the considerable delay in processing or decision making by state utilities and State Electricity Regulatory Commission and also the higher judicial authorities have been resulting in considerable strain on the sustainability of small wind farms and also impeding the future projects. It is seen that present environment in Green Energy is only for Big Players with deep pockets with many a small and medium entities who entered the Green Energy sector more than two decades back closing their units.

The experience of the Company has been that inordinate delays in adjudication of the matters by Electricity Regulatory Commission, Appellate Tribunal for Electricity and higher courts result in acute pressure on the Company due to huge mismatch in inflow and outflow of funds. In the wind power business the expenses are more or less fixed, the delayed receipt of generation proceeds necessitate that company has to resort to temporary borrowings to tide over the mismatch. This is also a concern as it has to bear the brunt of finance cost. However the good turn of events in FY 2022-23 helped the Company to tackle the liquidity issues in FY 2023-24 too and based on past experience, same old problems would surface in future.

The Management Discussions and Analysis explaining the objectives of the company, the opportunities and threats, the outlook for the future, the risks and concerns have to be read with the meaning of relevant applicable laws and regulations. The actual physical performance may differ materially from those explained hereinabove.

INTERNAL CONTROL SYSTEM

The company has a system of internal controls to ensure that all its assets are properly safeguarded and protected against loss from unauthorized use or disposal. Further all the internal control system is practiced by the company to ensure that all transactions are authorized, recorded and reported correctly.

The Company has an Audit Committee of Directors which reviews the adequacy of internal controls.

MATERIAL DEVELOPMENT IN HUMAN RESOURCES

The business in which the company is engaged does not call for large manpower resources.

The company has a team of able and experienced professionals. The work culture and value system in the company is designed to provide each employee the adequate space, freedom and guidance to bring out their full potential and provide personal growth opportunities within the organization. The human resource assets have been ably supporting the company despite the issues which the company is facing in its chosen field.

SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS – To fill in

Notes :

The ratios are in respect of ordinary activities and hence exclude impact of other comprehensive income.

a) The variation in Interest Coverage Ratio is due to realisation of old dues in February / March 2023 along with interest for period January 2011 to May 2014 from AP Utilities pursuant to CERC Order 01.01.2022 facilitating repayment of ICDS in FY 2023-24 and fairly regularly payments being received from State Utilities except some mismatches. In FY 2022-23 the Company had to regularly borrow due to delayed receipt of dues from State Utilities. Thus marked improvement in Interest Coverage Ratio in FY 2023-24.

b) The variation in Debt Equity Ratio is due to good net profits pursuant to realisation of old dues as stated in a) above. Since it was a non- repetitive event, the Company recorded a small Net Loss vis-a-vis Good Profits in FY 2022-23 leading to marginal reduction in Net Worth.

c) The variation in Operating Margin , Net Profit Margin and Return on Net Worth are all attributable to operating profits in FY 2022-23 being good due to reduction in Finance Costs due to clearing of bank term loans , reduction in Open Access Costs since Company shifted from sale of Power to third party through open access to sale to utility from its 18MW wind farm in Satara District , Maharashtra and further realised old dues along with interest from AP utilities pursuant to favourable CERC order. The major income of old dues recovery along with huge interest amount in FY 2022-23 was a non- repetitive event leading to drop in ratios in FY 2023-24 as compared to previous year.