Karma Energy Ltd Management Discussions.

BUSINESS REVIEW

General Economy

The Pandemic COVID-19 which began across the globe since first quarter of 2020 adversely affected every person / entity whether Individuals, Manufacturing or Service Sectors, Commercial establishments, Governments and Nations itself to a varied degree. Though the global economy struck all economies world over including India, India has successfully navigated through the turbulent times with measure steps by Government, RBI and other regulatory entities. Unfortunately the commencement of the war in Europe, followed by sanctions and escalating geopolitical tensions has resulted in the global economy witnessing a tectonic shifts. There have been shortages in key commodities; fractures in the International financial structure, extreme volatility characteristics in commodity and financial markets. Indian neighborhood also is witnessing political and economic instability in couple of countries.

As far as India is concerned, the Central Government and RBI took a number of remedial steps restricting the adverse impact and as per RBI survey indicators reflect the GDP growth in 2021-2 is around 8.9% despite some spikes on the pandemic in the form of Omicron creating a scare. Several high frequency indicators railway freight; GST collections; toll collections; electricity demand; fuel consumption; and imports of capital goods posted robust year-on-year expansion. However the continuing geo-political turbulence arising from a war in progress with world divided, the real GDP growth for 2022-23 is now projected at 7.2 % with varying growth rates each quarter with the critical factor being steadiness in the Crude Oil prices.

Company Business

The renewable power generation, which is the business of the Company, though was one of the sectors which had less impact of the Pandemic continues to suffer from adverse impact of regular regulatory changes especially in Maharashtra which has even forced the Company to shift from Sale to a Blue Chip third party to State Utility since under Open access various excessive charges permitted by the regulatory commission to protect the State utility was resulting in abysmally low net realization.

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.

In Andhra Pradesh, though company has been generating power from its 7.5 MW, it continues to battle in judicial forums for realization of the 50% of the generation dues with about Rs.3.80 Crore for the period January 2011 to May 2014 pending to be received due to the imbroglio created by the State bifurcation and judicial authorities including the jurisdictional High court not imparting a fair justice and consequently the matter is still lingering in the legal circles.

The payments against Power sold to State Utilities continue to be a nightmare with dues pending over a year in Tamil Nadu, just less than a year in Andhra Pradesh and Maharashtra.

The brighter part of FY 2021-22 is APTEL setting aside the drastic price reductions effected by CERC in early 2020 which had resulted in Nil reading of RECs in FY 2020-21. Post APTEL order REC trading commenced leading to the Company selling virtually all the RECs issued with very little stock on hand. With the Company, now selling power to State utility in Maharashtra, no further RECs can be availed as per the relevant REC Regulations.

OUTLOOK, OPPORTUNITIES AND THREATS

The Pandemic Covid-19 raising its head time and again after gap of every few months is causing anxiety. However so far as per the experts the new mutations though mare contagious is less harmful.

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.

As it stands today, the steep increases and new type of levies through regulations, restrictions on banking especially in Maharashtra, belated payment of dues by utilities do not augur well for decent future for the Industry and Company. It seems the Central Governments ambitious quantum leap in RE Power is encouraging only big business houses who 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 liquidity front and also planning on the future projects.

The company continues to suffer due to multiple issues viz. state bifurcation, lack of funds, delays in releasing the outstanding dues by state utility in Tamil Nadu and so also in Maharashtra coupled with ever increasing open access charges, restriction on banking to mere one month from 12 months which was in vogue for two years Maharashtra, introduction of forecasting and scheduling across many states leading to payment of penalties for deviations are major concerns.

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 and also the loan repayment and interest to lenders like banks, however, 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.

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

Sr. Parameters F.Y. 2021-22 F.Y. 2020-21
No.
1 Debtors Turnover 30.34% 49.12%
2 Inventory Turnover 8.93% 6.39%
3 Interest Coverage Ratio (1.18)
4 Current Ratio 2.65 0.44
5 Debt Equity Ratio 1.21 2.69
6 Operating Profit Margin (%) 139.13%
7 Net Profit Margin (%) (7.72%) (50.68%)
8 Return on Net Worth (33.88%)

Notes :

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

The variation in Debtors Turnover percentage is due to inordinate delays in releasing the generation proceeds by State Utilities couple with lower turnover in Vankusavade Site in Satara District where realisation is faster as sale is to a third party.

The variation in Interest Coverage Ratio, Operating Profit Margin, Net Profit Margin, Return on Net Worth are attributable to operating loss in FY 20-21 attributable to lower generation, negligible sale of Renewable Energy Certificates and Higher Open Access Costs in Maharashtra.

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