K.P. Energy Ltd Management Discussions.

INDIAN ECONOMY REVIEW

Indias severe COVID-19 second wave continues to turmoil the health and economy of the country. At the same time, numerous economic organisations have begun adjusting their projections for the countrys gross domestic product (GDP) for the fiscal year 2021-22, with Oxford Economics lowering Indias development to 10.2% from 11.8%. RBI is expecting 11% GDP growth in 2021-22. The United Nations expects that Indias economy would rise by 7.5% this year and 10.5% the following year; however, it emphasizes that the outlook is "very fragile" as a result of the devastating Covid-19 second wave. The UNs outlook for India is less bullish than the International Monetary Funds (IMF) upbeat 12.5% forecast for the country last month, when the Covid-19 rise first began.

- IMF India GDP Forecast

According to the Centre for Monitoring the Indian Economy (CMIE), farmers lost virtually no jobs during the months of March and April 2020, and employment increased year over year during this period. However, there were 6 million fewer farmers employed in April 2021 than there were in March 2021, and 3 million fewer farmers employed in April 2020 than there were in March 2020. Nevertheless, it is expected that the countrys medium-term growth prediction will improve to approximately 7.3% by 2025, thanks to strong macroeconomic fundamentals, the implementation of essential structural reforms, and the strengthening of fiscal and monetary policy.

INDIAN ENERGY LANDSCAPE

With a total generation capacity of 1,558.7 TWh, India ranks third in the world in terms of energy consumption, behind only China and the United States of America. Despite being the worlds third-largest economy, India remains a power-scarce country, with one of the worlds lowest per capita electricity consumption rates. Indias per- capita electricity usage is significantly lower than the global average and is one of the lowest among the BRIC countries.

At the end of April 2021, Indias total installed electricity capacity was at 383 GW, with electricity output reaching 1,234 billion units (BU) in the financial year 2021. Renewable energy sources (RES) provide for around 37% of total installed electricity capacity, with big hydroelectric power accounting for 12% of total installed electricity capacity. Other Renewable sources such as wind, solar, biomass, and hydropower account for the remaining 95 GW as of April 2021, with wind and solar accounting for the majority of this total.

Policy towards reduction of dependency on fossil fuels would actually complete the circle while policy towards renewable growth is in place. By a strategic move towards alternative energy sources, we may reduce our dependence on diminishing fossil fuel resources, import of crude and by-products and the emission of greenhouse gases, among other things.

Over the last two decades, renewable energy sources (RES) have increased their proportion of total installed capacity from less than 1% in 1997 to 25% in May 2020 due to strong push from the current Indian Government.

Source: CEA, MNRE, IRENA

INDIAN WIND ENERGY

Overview

Indias wind energy sector is led by the countrys own wind power industry, which has made steady progress over the years. A strong ecosystem, project operation capabilities, and a manufacturing base capable of producing approximately 10,000 MW per year have emerged from the rise of the wind sector. On the basis of total installed capacity, the country is now ranked fourth in the world for wind power generation, with 64.64 billion units of electricity generated from wind power during the 2019-20.

According to the CEA, wind and solar energy are the most prevalent renewable energy sources, aside from large hydroelectric power plants (more than 25 MW). At the end of March 2021, wind energy contributed 42% to Indias total renewable energy capacity. Wind energy capacity increased at a CAGR of 9.4% from FY14 to FY21. As a result, it achieved a cumulative capacity of around 40 GW in fiscal year 2021.

As of March 2021, the total installed renewable energy capacity was 94.43 GW. By 2030, the government hopes to have approximately 450 GW of installed renewable energy capacity, with solar accounting for approximately 280 GW (or more than 60%) of the total.

In light of the potential for deploying wind energy projects in Gujarat, the state is expected to remain a significant role on Indias Wind Energy Map in the future.

As of March 2021, Tamil Nadu and Gujarat are home to about half of the total cumulative installed capacity of wind energy assets in the Country. Gujarat has strengthened its position in the last two years, increasing its share of installed capacity from 18% in FY18 to 21% in FY21.

Gujarat and Tamil Nadu are the states with the most onshore and offshore wind power potential in the country. It is because of this that these two states have become particularly desirable destinations for wind energy providers. Gujarat currently has the second most installed wind capacity in India, after Tamil Nadu, and has the highest potential wind generation capacity in the country. Gujarat also has the second highest installed solar capacity in India, after Rajasthan. According to the Ministry of New and Renewable Energy, the following states have significant wind potential. The first offshore project in India also is likely to be proximate to Pipavav port of Gujarat.

RANK STATE WIND POWER POTENTIAL AT Rs.100 MT. HEIGHT IN GW % SHARE WIND POWER POTENTIAL AT 120 MT. HEIGHT IN GW % SHARE
1 Gujarat 84.43 28% 142.56 20%
2 Karnataka 55.86 18% 124.15 18%
3 Maharashtra 45.39 15% 98.21 14%
4 Andhra Pradesh 44.23 15% 74.9 11%
5 Rajasthan 18.77 6% 127.75 18%
6 Tamil Nadu 33.8 11% 68.75 10%
7 Madhya Pradesh 10.48 3% 15.4 2%
Others 9.28 3% 43.78 6%
Total 302.25 695.5

Source: MNRE

REGULATORY BODIES

The Ministry of New and Renewable Energy (MNRE) is the Government of Indias nodal ministry. It is responsible for all aspects of new and renewable energy. MNREs overall goal is to develop and install new and renewable energy sources. In addition, MNRE facilitates the elevation of energy requirements in the country. The National Institute of Solar Energy and the National Institute of Wind Energy, both part of the MNRE, conduct research and development, testing, certification, standardisation, skill development, resource evaluation, and public awareness.

The Government successfully pioneered the ‘Solar Energy Corporation of India Limited (SECI) in September 2011 under the administrative jurisdiction of MNRE. SECI has bolstered the growth and investment prospects in the renewable sector by conducting bids covering all present and future energy mix like pure wind, pure solar, hybrid, and peak power.

OFFSHORE WIND DEVELOPMENT IN INDIA

India is blessed with a coastline of about 7600 km surrounded by seawater on three sides and has tremendous power generation potential from offshore wind energy. In light of this, the Government published a Gazette Notification on the 6th of October, 2015, notifying the public of the National Offshore Wind Energy Policy. According to the policy, the Ministry of New and Renewable Energy will serve as the nodal ministry for the development of offshore wind energy in India and will work in close collaboration with other government entities for the Development and Use of Maritime Space within the Exclusive Economic Zone (EEZ) of the country in an effective manner for the production of enormous quantities of grid-quality electrical power for national consumption. To carry out various pre-feasibility activities relating to resource assessment, surveys, and studies within the EEZ (Exclusive Economic Zone), demarcation of offshore potential blocks as well as assisting offshore wind energy project developers in the development of offshore wind energy farms, the National Institute of Wind Energy (NIWE) in Chennai has been designated as a nodal agency.

In 2018, the Indian government set ambitious goals for offshore wind development (5 GW by 2022 and 30 GW by 2030). In 2018, India announced a 1 GW Expression of Interest (EOI) for a possible project off the Gujarat coast in the Gulf of Khambat, marking a significant step forward in the commercialization of offshore wind energy. A total of forty participants responded to the EOI, including prominent offshore wind operators.

RECENT SCENARIOS, TRENDS AND DEVELOPMENTS

Since the paradigm shift in regulatory policy, from feed-in-tariff to reverse auction-based price discovery, the Indian Wind Industry has experienced significant challenges in regaining its former prominence.

This shift was widely regarded as one of the most groundbreaking developments in the Indian renewable energy sector. In the past, feed-in-tariffs were utilised to provide wind power providers with a guaranteed price per unit of energy produced, and hence a guaranteed return on their investments. Instead, in reverse bidding, the company with the lowest price quotes wins the bid. This is known as a winning bid. With strong participation in the initial bids, the competitive price discovery process resulted in dramatically lower renewable energy tariffs as a result of the competitive price discovery. As a result, the price per unit dropped by around 40%, which was a significant decrease. SECI-I, Indias first-ever wind power auction, was held in February 2017 and saw a record-low wind power tariff of INR 2.76/kWh, which was the lowest ever recorded in the country (Unit). It was 40 percent less expensive than the feed-in tariff rates at the time. As of now, 12.8 GW of capacity have been auctioned, with the price discovered for the latter half of the bids ranging between INR 2.8 and INR 3.0 per kWh (Unit). The issues of stringent tender conditions, low tariff caps, off-take risks, unavailability of the grid, and land availability continue to exist even after the auction has concluded; as a result, more than 80 percent of the projects that have been awarded have experienced delays of between 6 and 12 months.

A low level of interest in the auctions was attributed to the offtaker risk linked with the fragile financial status of state distribution companies (DISCOMs) and the recurrent payment delays experienced by projects that were completed before 2017. Due to financial constraints, the majority of these states have turned to central auctions as a means of hedging their payments with federal government assurances. On the plus side, international funding continues to pour into the Indian renewable energy sector, demonstrating confidence in the long-term potential of this sector.

IMPACT OF COVID-19

Though activities in the wind and renewable energy industries were categorised as critical during the national lockdowns imposed as a result of COVID-19, the sector is not immune to disruptions as a result of the virus. The following are some of the anticipated consequences of COVID-19:

Increased project delays and supply chain disruptions, compounded by the lack of infrastructure and land availability, will be a drag on growth in 2020 and early 2021, according to the International Energy Agency. According to the Ministry of New and Renewable Energy, the total active pipeline under construction is around 8.7 GW. Approximately 3 GW of this capacity was projected to be completed in 2020, with the most of it completed in 2021 and a small portion completed in 2022.

The lockdowns are also expected to have an impact on new project tendering; in total, nearly 3.5-4.0 GW of wind capacity was expected to be tendered in 2020 and 2021; however, at the time of writing, tenders for 3.2 GW have been notified by the government, with no date for the tenders completion known at the time of writing. New initiatives may be hampered by limited credit availability as a result of the existing situation of the lending environment.

The disruption of the supply chain, which is largely hurting the manufacturing of wind power components, including gearboxes, is projected to have some negative consequences for the Indian markets as well.

Long Term Installations (expected)

5 GW ANNUALLY

INDUSTRY OUTLOOK

Although the 140 GW objective for 2030 remains in place, the retirement of the ISTS transmission charge waiver after 2022 removes a critical external incentive, causing the market to become volatile. As a result, it is projected that yearly installation capacities may decline after 2022. However, on the other hand, long-term drivers are still in place since the market is undertaking a number of long-term structural reforms. The significant reforms are:

• Separation of wire and content business in the Electricity Act Amendment.

•Privatization of financially stressed DISCOMS.

•Migration to merit order-based dispatch in the market.

These interventions favour economically viable power plants and the economics of wind generation are among those that qualify. Thus, while 2023 will likely be a transition year with decreased activity, the industry is projected to steady thereafter at about 5 GW of installations per year in the long run.

(Source: GWEC)

COMPANY OVERVIEW

KP Energy Limited is a leading provider of Balance of Plant (BoP) solutions for the wind energy industry. The company is involved in the entire wind farm development value chain, right from conceptualisation to the commissioning of a project and its maintenance throughout the Project life. The Company largely works on projects in Gujarat, India. For the BoP component of the project, KP Energys end-to-end solution for wind farm development comprises services such as site identification, site preparation, construction & erection, power evacuation, and operations & maintenance.

KP Energy plays a critical role in coordinating a wide range of activities related to utility-scale wind farm development.

BUSINESS MODEL

A well-balanced combination of three business segments; namely 1. Project Based Revenue Engineering, Procurement, Construction and Commissioning (EPCC), 2. Annuity Base Revenue - Operations and Maintenance (O&M), and Independent Power Producers (IPP), distinguishes KP Energys business model. All of the Companys business segments center on its core value proposition, which is to serve as a crucial link in synergizing the full spectrum of services related to utility-scale wind farm development. But each segment serves a distinct function in the Companys efforts to establish itself as a significant player in the Indian wind energy market.

FY21 PERFORMANCE DISCUSSION

Financial Performance

The financial performance for FY21 has been in line with the previous. For the full year FY21 on a Consolidated basis, the Company reported Revenue from Operations of 71.73 crores in FY21 compared to 74.99 crores during the last year, a decline of 4% year on year. For the same period, Total Income stood at 73.21 crores compared to 75.58 crores in the previous year, a drop of 3% year on year. However, the Company fared much better on the profitability front. Operating Profits stood at 17.83 crores in FY21, a substantial increase of 65% year on year; consequently, Operating Profit Margins stood at 24.86% in FY21 compared to 14.37% in FY20. In addition, the Company reported

Profit after Tax of 6.05 crores for the year under review, compared to 1.10 crores in the previous year, a staggering growth of 451%. It would be fair to note that this increase in net profitability was despite higher Finance Costs and Depreciation and Amortisation. The Company further strengthened its Balance Sheet in the current year, with Shareholders Fund increase by 5% to reach 89.10 crores as of FY21. The Company also improved on metrics such as Debt to Equity, which declined from 0.37 in FY20 to 0.31 in FY21. An increase in operating profitability also meant a better Interest Coverage Ratio, which stood at 2.83 times in FY21 compared to 1.60 times in the previous year.

PROJECT UPDATES

CLP - SIDHPUR PROJECT On the ground, the company took a position, and action was apparent on all fronts. Two contractors at opposite ends have begun to work on the 220 kV EHV line. RoWs acquisition is ongoing at full pace, along with excavation and foundation works. In addition, 300 MW Wind Farm Pooling Substation work has been completed, and civil construction is underway to build the Switchyard & Control room. The engineering team of the company is carrying out all permits, design & equipment, technical parameters, and SCM operations. Civil work is completed in approximately 40 percent of the sites to access Substation and WTG sites. Additionally, the work for developing the 33kv internal network is finished with layout optimization, physical survey, engineering, and procurement operations at 80% completion. Team KP Energy has celebrated one full year of zero near-miss safety record at this site.
250.8 MW
AT DEVBHOOMI DWARKA
GADHSISA & VANKI PROJECTS Finally, the outstanding documentation for EHV is duly completed. The Gadhsisa projects accounting closure will commence in the coming quarters. The KP Energy team provided support for implementing the remaining activities for project implementation to GE. Furthermore, KP Energy received a loan from GE in the amount of ^80.50 crores for the Project Specific Fund to complete the transmission line. Upon account reconciliation completion, these advances would be set off against cost over-run claims of KP Energy. In a positive update, adjoining Vanki Site discussions resumed with prospective buyers.
300 MW each
AT KUTCH
EVERGREEN PROJECT The company has actively pursued and discussed with one of Indias prominent investors to develop a Hybrid Site. Discussion would enable substantial business opportunities for a maiden Hybrid wind project exposure to KP Energy. These Sites are land-ready wind farm propositions of KP Energy.
30 MW
AT MAHUVA-II
MAHUVA - III/IV/V PROJECT The Company has actively pursued and discussed projects with Indias prominent investors for the development of Hybrid Sites and these discussions would enable substantial business opportunities for a maiden Hybrid wind energy project exposure for the Company. These Sites are land-ready windfarm propositions of KP Energy.
120 MW
AT MAHUVA, BHAVNAGAR

FINANCIAL RATIOS

RATIO FY21 FY20 % CHANGE REMARKS
Debtors Turnover 9.48 3.90 143% Due to a substantial decrease in Trade Receivables
Inventory Turnover 0.40 0.79 (50%) Due to a substantial increase in Inventories
Interest Coverage 2.83 1.60 77% Due to a substantial increase in EBIT
Current Ratio 2.43 1.61 51% Due to a proportionately higher decrease in 5 0 Current Liabilities
Debt to Equity 0.31 0.37 Due to a decrease in Debt and increase in (16%) Equity
Operating Profit Margin (%) 24.9% 14.4% 73% Due to better margin in EPCC segment for 73% the year under review
Net Profit Margin (%) 8.3% 1.5% 469% Due to better Operating Profit Margin

The Company further strengthened its Balance Sheet in the current year, with Shareholders Fund increase by 5% to reach 89.10 crores as of FY21.

BUSINESS PIPELINE

SR. NO. PROJECT NAME TYPE CAPACITY
1 Mahuva-I Wind 15 MW
2 Mahuva-II Wind 30 MW
3 Mahuva-III & IV Hybrid 70 MW
4 Mahuva-V Hybrid 70 MW
5 Vanki Hybrid 300 MW
6 Sidhpur-I Wind 300 MW
7 Sidhpur-II Wind (Under Construction) 250.8 MW
Total 1,035.8 MW

OUTLOOK

The Company enters the new financial year with the highest-ever business pipeline, and the outlook remains positive. Projects lined up for execution and expected to be completed in FY22 are Sidhpur-II (250.8) MW and Mahuva I-V (185 MW). Put together these two projects would lead to additional capacity commissioning of 435.8 MW, offering the Company clear visibility of topline and bottomline for the coming year.

RISK AND CONCERNS

REGULATORY & POLICY CHANGES Our industry is a segment of the renewable energy industry. The renewable energy industry is eminently a regulated space, wherein any changes in Government and regulatory policies may impact our performance. Any adverse changes in the wind energy policy or amendments in policies related to power evacuation facilities can significantly impact the operations of the industry and the company.
WIND ENERGY INDUSTRY PERFORMANCE Our revenue streams are derived from capital expenditure in the wind energy space by either Independent Power Producer (IPP) or Captive Power Producers (CPP). Therefore, depending upon the capital expenditure scenario and cycle, a reduction caused by either of them could adversely affect our financial performance.
PROJECT DEVELOPMENT RISKS The project development process has several risks such as - building permits, land acquisitions, logistics & RoWs, which can lead to delay, cancellation, and write-off of projects. This may have a severe impact on the profitability of our business. In addition, project delays also lead to cost overruns, which may impact our profitability.

INTERNAL CONTROLS AND ADEQUACY

The company has in place an adequate system of internal control commensurate with the size and nature of its business. These have been designed to provide reasonable assurance that all assets are safeguarded and protected against loss from unauthorized use or disposition and that all transactions are authorized, recorded, reported correctly, and the business operations are conducted as per the prescribed policies and procedures of the company. The Audit Committee and the management have reviewed the adequacy of the internal control systems and suitable steps were taken to improve the same.

HUMAN RESOURCE DEVELOPMENT AND INDUSTRIAL RELATIONS

Your company firmly believes that its human resources are the key enablers for the growth of the company and hence an important asset. Therefore, the success of the company is closely aligned with the goals of the human resources of the company. Considering this, your company continues to invest in developing its human capital and establishing its brand on the market to attract and retain the best talent. During the period under review, employee relations continued to be healthy, cordial, and harmonious at all levels, and your company is committed to maintaining good relationships with the employees.

FORWARD LOOKING STATEMENTS

This document contains statements about expected future events, financial and operating results of KP Energy Limited, which are forward-looking. By their nature, forward looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is a significant risk that the assumptions, predictions, and other forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause assumptions, actual future results and events to differ materially from those expressed in the forward looking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications, and risk factors referred to in the managements discussion and analysis of KP Energy Limiteds Annual Report, FY2021.