likhitha infrastructure ltd share price Management discussions


Industry Structure and Development

Indian Economy

The Indian economy demonstrated robust growth in the fiscal year 2022-23, with a GDP expansion of 7.2%. This figure surpassed both the second estimate of 7% and the governments forecast of 7%. It also outperformed the 8.7% growth achieved in the previous financial year. The driving forces behind Indias economic growth were private consumption and capital formation, which not only contributed to the expansion but also facilitated job creation.

India, currently the third-largest economy in the world based on Purchasing Power Parity (PPP) and the fifth-largest in terms of market exchange rates, has reaffirmed its belief in its economic resilience. Despite internal and external challenges, such as mitigating external imbalances resulting from the Russian-Ukraine conflict, the country has managed to sustain its growth momentum.

As a result, manufacturing and investment activities gained momentum. While export growth moderated, the rebound in domestic consumption, particularly in contact-intensive services such as trade, hospitality, and transportation, bolstered Indias economic progress.

Furthermore, construction activity witnessed a significant increase in FY23, driven by the substantial capital budget (Capex) allocated by the central government and its public sector enterprises. Notably, direct tax revenue collections remained buoyant, along with GST collections, indicating a revival in private-sector investment.

Despite these global challenges, the Indian economy has admirably confronted the adversities brought about by the pandemic, achieving a complete recovery ahead of numerous other nations. As we look ahead to the forthcoming fiscal year, FY2023-24, India is poised to reclaim its pre-pandemic growth trajectory, reaffirming its resilience and potential for sustained economic expansion.

Outlook

Indias recovery from the pandemic has been relatively swift, and the upcoming years growth will be supported by robust domestic demand and an increase in capital investment. Encouragingly, there are early indications of a new cycle of private sector capital formation, which compensates for the cautious approach in private sector capital expenditure. To stimulate growth, the government has significantly raised capital expenditure, as noted in the Economic Survey 2022-2023. Budgeted capital expenditure has risen 2.7 times over the last seven years, from FY16 to FY23, reinvigorating the capital expenditure cycle.

In the Union Budget 2023-24, there has been a substantial 33% increase in the capital investment outlay for the third consecutive year, reaching 10 lakh crore, equivalent to 3.3% of GDP. This figure is nearly three times the outlay recorded in 2019-20. Structural reforms, including the implementation of the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code, have enhanced the efficiency and transparency of the economy, ensuring financial discipline and improved compliance.

According to the International Monetary Fund (IMF), India is projected to grow by 5.9% in FY 2023-24 and maintain an average growth rate of 6.1% over the next five years.

Strong domestic demand, coupled with high commodity prices, may lead to an increase in Indias total import bill and potentially widen the current account deficit (CAD). These factors may be exacerbated by a decline in export growth due to weakened global demand, putting pressure on the Indian currency and potentially leading to depreciation. Furthermore, persistent inflation may prolong the tightening monetary policy, resulting in higher borrowing costs for the economy. Consequently, global growth in FY24 is expected to be modest, which will inevitably impact the Indian economy. However, the possibility of low oil prices and a potentially better-than-projected CAD provide some positive factors for consideration.

Industry Overview

Depletion of easily accessible onshore oil and gas reserves has led exploration and production companies to seek opportunities in less explored areas. Deepwater and ultra-deepwater oil and gas wells have garnered attention due to their vast deposits and untapped potential. With the increasing prices of crude oil, the future of these projects appears promising. Consequently, the expansion of exploration and production activities will drive market growth in the foreseeable future.

The market for oil and gas pipelines is benefiting from advancements in pipeline inspection technology. One notable advancement is the use of intelligent drone vehicles, which are integrated with the Internet of Things. These drones provide a cost-effective solution for visual pipeline inspection, contributing to the overall improvement of pipeline inspection capabilities.

The demand for natural gas has experienced a significant increase, primarily driven by its growing use in various industries such as power generation and transportation. This upward trend is expected to continue in the coming years, leading to substantial development in gas pipeline infrastructure. By 2030, natural gas is projected to witness substantial growth among all fuel types, driven by the environmental benefits it offers and the pursuit of energy security in regions like the Middle East, Africa, and the Asia-Pacific.

Government Initiatives For Gas Pipeline Infrastructure

As part of its commitment to address climate change in COP21, the Government of India has pledged to reduce carbon emissions by 45 percent by 2030. However, balancing the need to meet the energy demands of a billion people while mitigating environmental pollution poses a significant challenge. In light of this, the government is actively promoting the transition to a gas-based economy.

Recognizing the importance of shifting towards a gas-based economy, the Government of India has prioritized this transition. With the Indian economy expected to grow five-fold by 2040, the focus is to more than double the share of natural gas in Indias energy mix. To achieve this objective, the government is heavily emphasizing the development of a robust city gas distribution infrastructure.

The Petroleum and Natural Gas Regulatory Board (PNGRB) has expanded the number of Geographical Areas (GAs) to 293, encompassing 617 districts in India, which cover 96% of the Indian population and 86% of the countrys area. The concluded bidding rounds for city gas distribution projects are estimated to attract investments of approximately Rs 1.2 lakhs crore.

A gas-based economy has been identified as crucial for achieving Atmanirbhar Bharat (self-reliant India) and a lot of work is being done on One Nation, One Gas Grid. Infrastructure development, coupled with market reforms, presents significant potential for increased natural gas utilization across various sectors in India. The government of India has set a target to expand the gas pipeline infrastructure to 34,500 kilometers by 2024-25. Furthermore, there are plans to connect all states with the trunk natural gas pipeline network by 2027. As of December 2022, the operational gas pipeline network in the country spanned 22,335 kilometers.

In the Union Budget for 2023, the government has allocated Rs 35,000 crore for priority capital investments aimed at transitioning to green energy, achieving long-term net-zero goals, and ensuring energy security. Additionally, Rs 10,000 crore has been allocated to compressed biogas plants. As part of its global climate change commitments made in COP21, the government is committed to reducing carbon emissions by 45% by 2030. The government has also taken significant steps to facilitate the transition to a gas-based economy. Atmanirbhar Bharat has identified this as a priority and is promoting market-driven incentives and policies to encourage relevant initiatives.

With various indicators pointing towards India emerging as a $5 trillion economy within the next five years, and the objective of becoming the worlds third-largest economy, efforts are underway to at least double the natural gas component in the overall energy mix. Consequently, there is a strong emphasis on developing a robust city gas distribution network across the country.

The Government of India is actively implementing initiatives to support the development of gas pipeline infrastructure. These efforts are driven by the commitment to address climate change, promote energy security, and pave the way for a sustainable and self-reliant future.

Key Drivers of Oil and Gas Pipeline Market

The oil and gas pipeline market is projected to witness substantial growth, with an expected increase from USD 27.3 billion in 2023 to USD 41.9 billion by 2032. This reflects a compound annual growth rate (CAGR) of 5.50% during the forecast period of 2023-2032. The key drivers contributing to market growth include the growing demand for pipelines to transport oil and gas, as well as the increasing utilization of renewable energy sources.

The market for oil, gas, and natural gas liquids (NGL) pipelines is anticipated to experience rapid expansion until 2030. The shift towards gas-based power plants and the rising demand for natural gas liquids like propylene and ethylene are major factors motivating investments in infrastructure development. To ensure the smooth operation of oil and gas pipelines, the incorporation of advanced security technologies and preventive measures against disruptions will further enhance the industrys statistics, making operations secure, cost-effective, and efficient.

Opportunities Ahead - Advantage India

India, as the third-largest energy consumer globally, has a strong correlation between its economic growth and energy demand, particularly in the oil and gas sector. This makes the sector highly attractive and conducive to investment, leading to expectations of robust growth. In fact, the upcoming period is often referred to as a "Gas-based Economy" in the Indian context.

Infrastructure development, especially the establishment of a gas pipeline grid across the country, has been a major focus area. In February 2021, Prime Minister Narendra Modi announced a plan to invest 7.5 trillion in oil and gas infrastructure over the next five years. The goal is to create a national gas grid, and currently, authorization has been given for a 35,000 km natural gas pipeline network. Of this, 20,238 km is operational as of September 2021, and 14,930 km is under development.

Indias per capita consumption of natural gas is relatively low, at around 29 standard cubic meters (SCM), compared to the global average of 363 SCM. Recognizing the benefits of natural gas and the need to increase its share in Indias primary energy mix, which currently stands at 6.2%, the government has expressed its commitment to raising the gas share to 15% by 2030. This commitment is supported by various policy directives and regulatory changes to facilitate the achievement of this goal.

Significant work is underway to develop the PNG/CNG infrastructure across India, including the laying of gas pipelines. An investment of 88,000 crore is allocated for pipeline infrastructure development, utilizing methods such as Horizontal Directional Drilling (HDD) and the "Open Trench" approach. The demand for HDD machines is high as leading EPC pipeline contractors undertake large-scale projects to develop gas pipeline infrastructure in more than 400 cities across the country. These contractors are actively contributing to the development of the gas pipeline infrastructure in India.

Challenges Ahead

Stakeholders in the oil and gas industry recognize the importance of diversifying Indias energy sources to sustain its growth trajectory. To support the transition to a gas-based economy, it is crucial to establish a robust infrastructure. Currently, Indias gas pipeline infrastructure spans 22,000 km, with a target of reaching 35,000 km in the next five years.

The recent Ukraine crisis has underscored the significance of energy security, prompting governments to prioritize the secure supply of gas at affordable prices.

Despite government interventions, the exploration and production sector has not attracted significant foreign direct investment (FDI) participation, except for the involvement of a few companies. To encourage greater investment, the government needs to ensure that gas is provided to City Gas Distribution companies at affordable rates, enabling them to achieve reasonable profit margins.

Company Overview

The Company is a prominent service provider specializing in oil and gas pipeline infrastructure. Our primary focus revolves around laying extensive pipeline networks, constructing associated facilities, and providing comprehensive operations and maintenance services to oil and gas companies throughout India. With a wide-ranging presence, we operate in over 19 states and 2 union territories and Nepal. The Company has successfully expanded its global footprint into new geographical areas by incorporating a Joint Venture Company in the kingdom of Saudi Arabia in 2023. we have achieved remarkable milestones, successfully completing numerous projects encompassing more than 1500+ kms of oil and gas pipelines. These projects include the installation of both steel and medium- density polyethylene (MDPE) networks. Currently, we are actively involved in ongoing projects, having laid approximately 1000+ kms of oil and gas pipelines. Our company prides itself on a stellar track record of executing projects in a timely manner, ensuring high-quality standards, and satisfying our clients.

In 2019, we accomplished a significant feat by executing the first trans-national cross-country pipeline of South-East Asia, connecting India to Nepal for the supply of petroleum products. This achievement further solidified our reputation as an industry leader. With a robust client base consisting of prominent gas distribution companies in India, including both private and public entities, we have secured a strong order book. Our commitment to excellence is evidenced by our ISO 9001:2015 certification awarded by International Certification Services Pvt Ltd for our Quality Management system. This certification recognizes our expertise in designing and constructing cross-country pipelines, city gas pipelines, and civil constructions.

Our company is guided by a highly skilled and experienced management team. Their collective knowledge spans technical, operational, and business development aspects of the industry. This expertise empowers us to capitalize on existing market opportunities while remaining well-positioned for future growth.

At the helm of the company is Mr. Srinivasa Rao Gaddipati, a first-generation entrepreneur with nearly three decades of technical experience. Co-promoting the company alongside him is his daughter, Mrs. Likhitha Gaddipati.

SWOT Analysis

Strengths

• High Revenue and Profit Growth with High Return on Capital Deployed (ROCE) and Low PE ratio

• Company with low debt

• Annual Net Profits improving for last 2 years

• Book Value per share Improving for last 2 years

• Company with Zero Promoter Pledge Weaknesses

• Availability of skilled technical manpower for projects

• Inflation

Opportunities

• Expansion of the business based on new Government initiatives

• Potential global expansion of the company

Threats

• Increase in competitive bids for procuring the projects

• Any future pandemic lock-down extensions would affect

Operational Highlights

Order Book

The Companys outstanding order book position is ^1,42,593.92 Lakhs as on March 31, 2023, which includes ^97,585.55 Lakhs from Cross-country pipelines and associated facilities, ^32,480.92 Lakhs from City Gas Distribution including CNG Stations, Rs.452.79 Lakhs from Operation & Maintenance of CNG / PNG services and ^12,074.65 Lakhs from tankage projects, thereby increase in growth of order book by 28.67% as compared to the previous financial year ended on March 31, 2022.

Order Book Distribution Chart to be provided percentages

Management Outlook

The Company is one of the leading companies in its industry space with over 25 years of experience, presently working with major Oil & Gas companies across India. The Company is planning to expand the capacity to execute work of laying Oil & Gas pipelines above 400 kilometers per year. In view of the PNGRB (Petroleum and Natural Gas Regulatory Board) expansion plan, the Company is gearing up to increase its presence across the country.

Future Outlook

Our Company is currently executing tankage projects for IOCL and NOCL in Nepal and expects to bid on more tankage projects in the future. Additionally, the Company is exploring opportunities in the Middle East, Africa, and other similar countries where there is a significant demand for pipeline infrastructure companies.

To further expand its presence, Likhitha Infrastructure Limited has registered a Joint Venture in the Kingdom of Saudi Arabia and is looking forward to bidding on and executing projects in the region.

Risk Management

The company operates in a dynamic environment and is exposed to a variety of risks that can affect the business continuity. The Companys risk management assessments, policies, and processes are established to identify, analyze and monitor the risks that might occur. The policies and company activities are reviewed regularly by the Board of Directors, Risk Management Committee, and Audit Committee according to the changes in market conditions.

Risks

Description

Mitigation

Occupational Health and Safety

Occupational Health and Safety involves safety for not only people but also the environment. It is important for companies to make their operations safe and prevent any harm to the people and environment. Any mishandling of safety- related parameters can lead to a negative on the health and environment.

To address the risks associated with employee health and safety, the company is implementing the following approach:

Risk: Safety Training and Education: Providing comprehensive safety training programs to employees to ensure they have the necessary knowledge and skills to perform their tasks safely.

This includes regular safety briefings, hazard identification, and emergency response training with a goal of zero accidents.

Safety Equipment and Infrastructure: Investing in appropriate safety equipment, protective gear, and infrastructure to minimize the risk of accidents and injuries. This includes regular maintenance and inspections of machinery and equipment to ensure they are in safe working condition.

Human Resource Risk

One of the fundamental value of the Company is to Respect human rights.

The company is committed to cultivating an empathetic positive culture. This dedication is reflected in the companys various corporate policies, which include the Whistle Blower Policy, policy on prohibition of Sexual Harassment, Code of Business Conduct and ethics. Furthermore, the company is actively implementing various initiatives to support this culture, such as conducting Training programs to ensure awareness and compliance with company policies, fostering a diverse and inclusive work environment, increasing womens representation in senior leadership positions and promoting their professional growth and advancement.

Compliance with the human rights laws and regulations is critical for the company. Failing to do so can lead to legal consequences and damage the reputation and brand image of the company.

The Company has adequate resources on permanent basis and would constantly scale resources based on the requirements of the projects from time to time.

Competition

risk

The Company might face competitive risks from other players in the market depending on the size, nature, and complexity of the project.

Technical and financial qualification of the Company would be one of the major criteria in determining the eligibility for the project.

The Company is constantly enhancing technical and financial aspects along with performance, quality, timely completion of the projects and technical qualifications which provides edge over competitors.

Risks

Description

Mitigation

Regulatory

regime

The Complex nature of infrastructure projects includes interference with various regulators/ authorities throughout the project life cycle, making them especially vulnerable to regulatory action. Failure to comply with these requirements may result in liability.

The regulatory compliance such as site permissions, clearances from the Governments, local bodies, and other such associated compliance responsibilities will be on the client.

The Company also has a regulatory compliance review mechanism in place through which the Company reviews the applicability of laws and regulations and complies on a realtime basis.

Liquidity Risk

Liquidity risk is that the Company might be unable to meet its financial obligations.

The Company has strong financial background through which it meets its financial requirements on timely basis. Management regularly reviews the financial obligations and ensures to meet them in time.

Data privacy and security

Loss of sensitive and confidential information and impact on the reputation of the Company.

The company has mapped possible areas of such breaches and have implemented corrective measures through employee training on cybersecurity awareness, regular security assessments, incident response plans and essential protocols for data storage, backup, retrieval, access, and other important activities are established and followed on regular basis.

Internal Controls and its adequacy

The Company has strong internal control procedures commensurate with its size and operations. The internal control system ensures that all assets are safeguarded and protected against loss from unauthorized use or disposition and that transactions are authorized, recorded, and reported correctly.

The Companys internal control systems are further supplemented to internal audit which carries out extensive audits throughout the year, across all functional areas, and submits its reports to Management and Audit Committee about the compliance with internal controls and efficiency and effectiveness of operations and key processes risks.

The Company has clearly laid down policies, guidelines, and procedures which form part of its internal control system. The Companys internal control system is designed to ensure management efficiency, measurability and verifiability, reliability of accounting and management information, compliance with all applicable laws and regulations, and the protection of the Companys assets. This is to timely identify and manage the Companys risks (operational, compliance-related, economic and financial).

The Audit Committee of the Company consists of independent directors who possess expert knowledge and vast experience in the field of their area of operations. They periodically review accounting records and various statements prepared by the Accounts Department. They advise the senior management of the Company for any precautionary steps to be taken as required from time to time. During the year, the Audit Committee reviewed the internal control mechanisms of the Company and initiated necessary follow-up actions thereon.

FINANCIAL HIGHLIGHTS

Revenues

Revenue from the operations increased by 36.41% in FY 2022-23 recording Rs.35076.61 Lakhs against Rs.25713.67 Lakhs in FY 2021-22 on standalone basis.

Revenue from the operations increased by 41.89% in FY 2022-23 recording Rs.36495.50 Lakhs against ^25721.17 Lakhs in FY 2021-22 on consolidated basis.

Profits

EBITDA increased by 31.41% in FY 2022-23 recording Rs.8501.48 Lakhs against Rs.6469.37 Lakhs in

FY 2021-22 on standalone basis. EBIDTA increased by 32.89% in FY 2022-23 recording Rs.8730.80 Lakhs against Rs.6570.06 Lakhs in FY 2021-22 on consolidated basis.

Net profit after tax increased by 32.06% in FY 2022-23 recording Rs.6004.38 Lakhs against Rs.4546.57 Lakhs in FY 2021-22 on standalone basis. Net profit after tax increased by 30.73% in FY 2022-23 recording Rs.6029.68 Lakhs against Rs.4612.07 Lakhs in FY 2021-22 on consolidated basis.

Net worth

Net worth increased by 30.18% YoY to Rs.25007.69 Lakhs as against Rs.19208.92 Lakhs in the previous year on standalone basis. Net worth increased by 29.84% YoY to Rs.25008.05 Lakhs as against ^19261.32 Lakhs in the previous year on consolidated basis.

Earnings Per Share

Earnings per share are up from Rs.11.52 as of March 31,2022, to Rs.15.22 as of March 31,2023 on standalone basis.

Distribution of Income

( Rs.in Lakhs)

Raw Material Consumed

5,844.26

Construction Expenses

19,628.91

Changes in Inventories of Work-in-Progress

(2,326.89)

Employee Benefits

3,153.54

Depreciation

507.21

Finance Cost

77.66

Other Expenses

1,060.22

Tax Expenses

1,912.24

Human Resources

The Company has total payroll of 871 employees as on March 31, 2023. The Company recognizes that our human resources are fundamental to the achievement of our objectives. Our HR and Operations teams work closely with senior management to devise strategies that attract top talent and enhance our capabilities. By empowering, inspiring, and motivating our employees, we foster an environment that drives higher levels of performance. It is the unwavering commitment of our employees that propels us forward and enables us to fulfil our vision.

We believe that our employees are our most valuable asset. We strive to create a supportive and inclusive work environment that encourages growth, innovation, and collaboration. By investing in the well-being and development of our employees, we strengthen our collective capabilities and pave the way for continued success.

Key Ratios

In accordance with the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations 2018, the Company is required to provide details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefore.

During the year under review, there are no significant changes in the financial ratios as compared to previous financial year except for Debt Equity ratio and Current ratio.

1. Debt Equity Ratio was increased by 46.74% on Standalone basis and 46.47% on Consolidated basis due to increase in Shareholders Equity during the current year and also decrease in debt for the current year.

2. Current Ratio was decreased by 30.90% on Standalone basis and 29.72% on Consolidated basis due to increase in trade payables during the current financial year.

The details of other ratios reproduced in note no. 42 of Standalone financial statements and note no. 41 of Consolidated financial statements.

Details of any change in return on net worth as compared to the immediately previous financial year along with a detailed explanation:

• Return on Net worth increased to 1.44% on Standalone basis and 0.40% on Consolidated basis due to increase in Shareholders Equity during the financial year 2022-23.

Cautionary Statement

This report may contain certain statements that the Company believes are or may be considered to be forward-looking statements which are subject to certain risks and uncertainties. These estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the statements reflect truly and fairly, the state of affairs and profits for the year. Actual results may differ materially from those expressed or implied. Significant factors that could influence the Companys operations include government regulations, tax regimes, market access-related regulatory compliances, patent laws, and domestic and international fiscal policies.