K.P. Energy Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

INDIAN ECONOMY REVIEW

The Indian economy was on the road to a swift recovery post the pandemic, despite the uncertainties associated with the various waves of the coronavirus and rising global inflationary pressures. However, right when it seemed to be at the cusp of witnessing green shoots of recovery, the war in Ukraine escalated, adding fresh challenges to the mix. This led to a sharp rise in all commodity prices in India, including basics such as oil and food, therefore also orchestrating a trade deficit for the country.

Interestingly, Indias underlying economic fundamentals are strong, and despite the shortterm turbulence, the impact on the long-term outlook remains marginal. The Indian governments proactive approach is expected to withstand the blow, with increased introduction of Production Linked Incentive (PLI) schemes, boosted infrastructure spending and rapid capital and technological transformation. In fact, as per a Deloitte research report, India is expected to be the fastest-growing economy in the next decade.

According to the report, Indias GDP is projected to grow at 8.8% in 2022, followed by 7.5% and 6.5%, respectively, in 2023 and 2024.

INDIAN ENERGY LANDSCAPE

Initiatives focused on renewable energy, particularly solar and wind energy, have exploded in popularity in India. India is now rated fourth worldwide for installed renewable energy capacity. In fact, the Government of India has recently committed to reaching a 50% renewable energy mix by 2030, with a total renewable energy capacity to the tune of 500 GW. Government and industry have been proactively assessing the feasibility of integrating various brand-new, emerging renewable technologies, such as storage, hydrogen, and geothermal, among others, and shifting more and more toward renewable energy.

As of January 2022, Indias installed renewable energy capacity (excluding large hydro) stood at 105.85 GW compared to 94.43 GW in FY21.

As of January 2022, Indias power generation from renewable sources represents 39% of the total power installed capacity and is in line to reach its annual target of 40% by the end of 2022. The country plans to reach 500 GW of installed renewable capacity by 2030, which will provide an investment opportunity of USD 221 billion. The use of renewable energy is rapidly and consistently increasing, demonstrating Indias continued efforts to decarbonize its energy ecosystem.

INDIAN WIND ENERGY OVERVIEW

• Indias wind energy sector is led by the countrys own WTG manufacturing industry, which has made steady progress over the years. A robust 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.

• 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 January 2022, wind energy contributed 38% to Indias total renewable energy capacity. Wind energy capacity increased at a CAGR of 8.4% from FY14 to FY22.

As a result, it achieved a cumulative capacity of around 40 GW in January 2022.

REGULATORY BODIES

The nodal ministry for Indias renewable energy sector is the Ministry of New and Renewable Energy (MNRE). It oversees every facet 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. MNRE also makes it possible for the nations energy needs to rise. The MNREs National Institutes of Solar Energy and Wind Energy carry out research and development, testing, certification, standardisation, skill development, resource evaluation, and public awareness. In September 2011, the government successfully pioneered the "Solar Energy Corporation of India Limited" (SECI) under the MNREs administrative control. 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

Indias offshore wind sector gained significant momentum recently since the Prime Ministers announcement of net zero targets at COP26 in November 2021. In addition, India made a commitment to achieve 500 GW of cumulative renewable energy capacity by 20230, and 30 GW of this is to be achieved exclusively through offshore wind capacity, therefore adding mileage to this sector. Further, Indias 7,600 KM long coastline, which is one of the longest in the world, provides vast potential for offshore wind power asset development in the nation. The Ministry of New and Renewable Energy (MNRE) is the nodal agency responsible for the development of offshore wind energy in India, working in close coordination with other government entities for the development and use of maritime space within the Exclusive Economic Zone (EEZ) of the country, and responsible for overall monitoring of offshore wind energy development in the country.

The National Institute of Wind Energy (NIWE) is the nodal agency responsible for carrying out resource assessment, surveys, and studies in the EEZ, demarcating blocks and facilitating developers to set up offshore wind energy farms.

Beginning from FY23, offshore wind bids to the tune of 4 GW per year (for a period of three years) are expected to be rolled out off the coast of Tamil Nadu and Gujarat for the sale of power through open access, captive, bi-lateral third-party sale, or merchant sale route. In addition, the Indian government, in its attempt to incentivise investors, has also introduced specific initiatives that include carbon credits for the first 8 GW of capacity bids and free-of-cost power evacuation and transmission from offshore pooling substations to onshore transmission networks for capacities built till FY30. These initiatives, coupled with the Indian governments thrust on offshore wind development, paint a positive picture for this space for the next couple of years.

RECENT SCENARIO,

TRENDS & DEVELOPMENT

The pandemic, and most recently the second wave in India, has undoubtedly impacted the Indian wind energy industrys performance. Production of wind towers, among other fabrication work, was de-prioritised as oxygen supply for industrial processes was diverted to medical requirements during this phase. However, since the second half of 2021, manufacturing and installation activities have slowly picked up. As a result, over 1.4 GW of wind energy assets are estimated to have been installed (by GWEC), surpassing the 1.1 GW installations from FY21.

Wind energy assets are estimated to have been installed, surpassing the 1.1 GW installations from FY21

The auctioning activities also gained momentum, with nearly 2.7 GW of onshore wind energy assets being auctioned in 2021, while 1.95 GW of hybrid auctions were awarded by state and central government agencies.

During this challenging time, certain policy measures came as a relief to the industry, including the extension of waiver of inter-state power transmission system (ISTS) charges for projects commissioned by June 2025 and other innovative auction models for round-the-clock hybrid generation. On the public-section side, action to improve the health of DISCOMs becomes crucial for accommodating a higher share of wind into the transmission and distribution network. In addition, the Government is also encouraging PSUs to invest in renewables and participate in bidding auctions to further the scope of wind energy in India.

INDUSTRY OUTLOOK

Indias ambitious plans to realise its 2030 climate commitments cannot be actualised through its current wind energy assets, which stand at 10.2% of the total energy assets of 395 GW.

Policymakers are already evaluating the vast, untapped onshore and offshore wind resources

For this, the MNRE has estimated the deployment of an additional 140 GW of wind energy capacity until 2030.

To meet this target, policymakers are already evaluating the vast, untapped onshore and offshore wind resources. Across the country, the National Institute of Wind Energy (NIWE) has assessed more than 300 GW of onshore wind potential at 100-metre hub height and nearly 700 GW of onshore wind potential at 120-metre hub height. By repowering older kW- rated wind turbines through suitable repowering policy measures, India can add substantial wind capacity while optimising the utilisation of existing wind-rich and consented sites. This certainly is a very challenging task but is within reach of the country, and companies like KP Energy, with presence across the value chain that will be well-suited to push the progress in this space.

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 essentially 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)

3. Independent Power Producers (IPP) distinguishes KP Energys business model. All of the Companys business segments centre 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.

FY22 PERFORMANCE DISCUSSION

Our financial results have been a mixed bag. While we saw strong growth, as seen by our Revenue from Operations, which increased by 263 % year on year to Rs.250.4 crores from Rs.69.0 crores, our EBITDA margin for the year was 13.7 %, which is lower than the previous years 25.8 %. The reduction in EBITDA margin can be attributed to an increase in commodity prices and input costs, coupled with a not-so-lucrative EPCC contract mix, i.e. contracts with WTG supply and contracts without WTG supply. Subsequently, our PAT stood at Rs.20.9 crores in FY22 compared to Rs.7.2 crores in the previous year.

Apart from a strong recovery in our EPCC business, we also witnessed a steady increase in our OMS businesses, with the addition of O&M contracts during the quarter.

As for our Balance Sheet, the Company improved on its Debt to Equity ratio, which stood at 0.28 at the end of FY22 compared to 0.45 in the previous year. In addition, the Companys net worth increased from Rs.89.1 crores during the last year to Rs.108.4 in FY22. The Company also improved its interest coverage ratio, in addition to its increase in profitability. The strength of our balance sheet gives us an optimistic outlook, which will prove to be a significant advantage for the Company, as it will help us absorb transitionary difficulties and take on large utility-scale projects.

FINANCIAL RATIOS

Ratios FY21 FY22

% Change

Remarks
Total Debt to Equity 0.37 0.26 (29) Due to Revenue growth in the EPC Segment and consequent increase in profit and repayment ofterm loans during the current financial year
Current Ratio 2.14 1.23 (42) Due to increase in Current Liabilities as a result of advance received from customers for projects undertaken against which sales invoice will be raised in next financial year
Interest Coverage Ratio 2.83 7.36 160 Due to significantly higher profitability and optimisation of Finance Costs
Debtors Turnover 6.31 24.70 291 Due to realisation of debtors and Revenue growth during the current year
Inventory Turnover 0.46 1.89 311 Due to Purchase of Inventory at the end of current financial year which will be consumed in next financial year
Operating Profit Margin 24.9% 13.6% (45) Due to lower Gross Profit Margins because of inflationary pressures on inputs costs
Net Profit Margin 8.3% 7.2% (13) NA

BUSINESS PIPELINE

Project Name Type Client Type Capacity
Mahuva- II Wind IPP 30.0 MW
Bhungar Hybrid Retail 100.0 MW
Fulsar Hybrid Retail 100.0 MW
Vanki Hybrid IPP 300.0 MW
Sidhpur - I Wind IPP 300.0 MW
Sidhpur - II Wind IPP 250.8 MW

OUTLOOK

The Company enters the new financial year with a solid business pipeline of ~1081 MW; thus, the outlook is very positive. Sidhpur-II (250.8) MW and Mahuva Bhungar and Fulsar (200 MW) are two projects that are scheduled for execution in FY23. Together, these projects would result in the commissioning of 435.8 MW of new capacity, giving the Company a clear view of its top and bottom lines for the upcoming year.

RISK & RISK MITIGATION

REGULATORY RISK

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.

BUSINESS RISK

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 RISK

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 unauthorised use or disposition and that all transactions are authorised, 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 have been taken to improve the same.

HUMAN RESOURCE DEVELOPMENT & 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 STATEMENT

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 forwardlooking 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, FY22.

Leading with our hearts

KP Energy has always been ahead of the curve when it comes to its sustainable mindset and its community initiatives. The Company is founded on the core principle of sustainability - for the environment and people alike. In its many years of operations, the Group and KP Energy have always prioritised its commitment towards the communities it is deeply entrenched in, the communities that are a part of its ecosystem. It is this inclusive approach that has enabled KP Energy to achieve success beyond just its business operations. Today, apart from its CSR activities, the Company also partakes in social welfare activities through its affiliate Non-Profit Organisation, KP Human Development Foundation.

The Company truly believes in sustainable development - the kind that doesnt rule out any aspect of the living nature. In pursuance of this development, the Company knows, for certain, that no human can be left behind if one truly aspires for inclusive growth. Its communities, where it thrives, have every right to live a life of dignity and one full of exposure and possibilities - and that is precisely what KP Energy hopes to make available for them.

COVID-19 RELIEF MEASURES

2021 witnessed one of Indias most challenging times - the second wave of COVID-19. While there were measures in place to protect and safeguard people from the spread of the virus, yet, this wave claimed the lives of many and left many people hungry and in despair. Once again, medical and food shortages became common, and stringent lockdowns were announced country- wide.

At KP Energy, we provided our communities with the best we could by distributing food packets, rations, and vegetables in surrounding areas. In addition, the Company, through KP Human Development Foundation, has distributed free masks and sanitisers to all in Surat, Bharuch and Bhavnagar areas as Covid-19 protection measures. It has also set up a Covid care centre of 69 Beds in Bharuch Welfare Hospital in just 15 days. For this proactive participation in the time of the Pandemic, KP Human Development Foundation was honoured by District Collector Surat.

PROMOTING EDUCATION

The Company recognises that education tools and necessary infrastructure are critical to a childs education. The Company has donated a significant amount for setting up a library for orphan students to prepare for competitive exams like UPSC. To that extent, KP Energy has distributed educational materials, including a backpack, accessories and other school supplies, to 150 schools in Bhavnagar, Mahuva, Talaja, Jesar and other locations. From distributing 500 such kits to over 3,000 kits annually, the Company has expanded its scope year on year. Further, it has also worked on improving school infrastructure, including restoring boundary walls, building schools, and providing potable water to multiple schools that need basic infrastructure. The Company has, through its Non- Profit Organisation, KP Human Development Foundation, adopted a Government School located in the Slum area of Bapunagar, Surat, with ~550 Students.

GENERATING EMPLOYMENT

KP Energy believes that humans can be developed as skilled resources who can prove to be an asset not just for the Company it works in but also for itself and its community. This belief has led it to include local unemployed youth in its workforce through diligent training and skilling. The competence that KP Energy requires the most is building and basic engineering skills, and as such, this training is made available to people so that they can learn and grow within the Company. This has proved to be a very successful model, as besides providing work, dignity and earnings to someone, the Companys acceptability in the communities has also increased multifold. These opportunities are rare in rural areas and therefore mean a great deal to these communities.

PLANTATION DRIVES

KP Energy is spearheading mass plantation drives with the aid of rural communities and school children to recognise the significance of our natural ecosystem and forests. It involves planting several types of mangrove trees on the coastal borders to reduce soil erosion and salinity. So far, the Company has planted over 1 lakh saplings in different areas, including an environment awareness rally where thousands of children from more than 26 different schools participated.

We also look after the trees previously planted and try to preserve biodiversity and animals. We strongly believe a healthy environment is the foundation for a stable and productive society and ensures the well-being of present and future generations.

SECURITY, SAFETY AND WELL- BEING

At KP Energy, environmental care & concerns are also vital parameters in the design, engineering, execution & operations of a project. We develop versatile designs for overhead transmission lines that mitigate bird fatality, especially for long-tailed birds.

We ensure guards, and protection measures for any accidental injury to flora or fauna during construction or wind energy project installation.

KP Energy also benefits from obtaining the first environmental approval from the Ministry of the Environment, Forestry & Climate Change, Government of India, for developing particular wind projects in the coastal regulatory zone. The Company strives for the well-being of the people, in addition to environmental safety and ecology. In Mahuva, Bhavnagar, we have been engaged in activities such as the distribution of grain, food packages, vegetables, etcetera.