mep infrastructure developers ltd share price Management discussions

Overview of Infrastructure Sector in India & Economic Environment:

Development in the infrastructure segment has been a priority area for the Government of India and has witnessed increasing public investments and budgetary support. Further, the government has also undertaken several reforms and initiatives in the infrastructure sector which has resulted in robust secular growth in most of the segments within the sector.

While considering the overall spends of the Government or in its budgetary allocation, the focus is being always on the Road Segment. Within the infrastructure space, road projects will be a critical investment driver from fiscals 2023-27.

Key growth drivers for the infrastructure industry

The growth in capex for fiscal 2023 is in continuing momentum from FY2022 where despite challenges due to coronavirus variant, the sector showed an estimated rise of 35-40% on a low base in FY21. In FY22 the sector returned to normalcy and challenges faced during the lockdown. Growth in FY23 is attributable to rise in state and central government expenditures in various sectors such as roads, urban infra, railways etc.

Industry expects investments in roads to rise 12-16% in fiscal 2023 led by a strong pipeline of awarded and under execution national highway projects, execution of higher value expressways and recovery in state road investments. Investments in National highways led by expressway execution are projected to rise 20-25% while state road investments are projected growing 8-10% in FY23.

But at the same time, the Indian equity market was muted due to decadal high inflation, aggressive monetary policy. The stance by global central banks and Russia-Ukraine crisis the Indian equity markets which pre-dominantly remain muted.

Even as the global conflict remained geographically distant from India, ripples comprised increased oil import bills, inflation, cautious government and a sluggish equity market. But overall, Indias economic growth is at 7.2% in FY 2022-23. India emerged as the second fastest-growing G20 economy in FY 2022-23. India overtook UK to become the fifth-largest global economy. India surpassed China to become the worlds most populous nation (Source: IMF, World Bank) Indias auto industry grew 21% in FY23; passenger vehicle (UVs, cars and vans) retail sales touched a record 3.9 million units in FY23, crossing 3.2 million units in earlier FYs. The commercial vehicles segment grew 33%. This will have a significant impact on the Road Sector & its need vis-?-vis growth.

Road infrastructure, including national highways, state highways, district roads, rural roads and urban roads, plays a crucial role in connecting and transporting the diverse population of consumers and businesses. It provides last-mile connectivity to remote areas and compliments other modes of transportation. India boasts the worlds second-largest road network, spanning 6.3 million km and catering to over 90% of passenger traffic and 64.5% of freight traffic. In FY 2020-21, the pace of national highway construction reached a record high of 37 km per day but subsequently decreased to 30.11 km per day in FY 2022-23. During FY 2022-23, the construction of national highways in India reached 10,993 kilometers, falling short of the governments target of 12,500 kilometers by 13.70%. Target of 12,200 km set for construction of National Highways (NHs) in the country during the current financial year 2022-23. Overall road projects exceeding 65,000 km in length, costing more than INR 11 Lakh Crore, are in progress, of which projects of more than 39,000 km length has been completed and length of more than 26,000 km works are in progress. NHs of 5,774 km length has been constructed during the first nine months of FY 2022-23. 100% Foreign Direct Investment is allowed under the automatic route in the road and highways sector. The government aims to construct 23 new national highways by 2025. Bharatmala Pariyojana Projects under the governments flagship Bharatmala Pariyojana is expected to be completed by 2026-27 at a higher cost of H10.63 trillion as against the original investment of H5.35 trillion. Till date, projects spanning a length of 22,302 km and entailing a cost of H6.9 billion have been awarded under the programme while 9,548 km of length has been completed. In addition, expenditure of H2.29 trillion has been incurred. Under Bharatmala Pariyojana Phase I, the NHIDCL has been assigned to develop 5,070 km of roads. This project will improve connectivity among border highways and the economic corridor.

To achieve Indias goal of becoming a $5 trillion economy by 2025, infrastructure development is crucial. The government has introduced the National Infrastructure Pipeline (NIP) along with initiatives like ‘Make in India and the production-linked incentives (PLI) scheme to accelerate the growth of the infrastructure sector. As an integral part of Atmanirbhar Bharat, the various relief measures have been taken by the MoRTH for providing relief to Contractors/ Developers/Concessionaires of Road Sector from the impact of COVID, subsequent lockdown and other measures taken to prevent spread of COVID thereafter. Mandatory Electronic toll collection through FASTag with effect from February 15, 2021. With the Government permitting 100% Foreign Direct Investment (FDI) in the road sector, several foreign companies have formed partnerships with Indian players to capitalise on the sectors growth. National Electronic Toll Collection (FASTag) programme, the flagship initiative of MoRTH and NHAI has been implemented on pan India basis in order to remove bottlenecks and ensure seamless movement of traffic and collection of user fee as per the notified rates, using passive Radio Frequency Identification (RFID) technology.

Business Overview for the Fiscal

Company overview

MEP Infrastructure Developers Limited (MEP IDL) established in year 2002 and listed since 2015 has become a recognized name in the Indian road infrastructure segment. The Company along with its subsidiary companies has a strong presence in Maharashtra, Rajasthan and Madhya Pradesh. The company is primarily involved in the integrated road infrastructure development and is a key player for OMT, EPC and Toll Collection projects in India.

MEP IDL further added a portfolio of various Toll collection & OMT projects. The company along with its subsidiaries has a successful track record in executing large OMT Projects for the Government including the State Governments. The Companys material Subsidiary viz MEP Infrastructure Private Limited (MIPL), achieved Profit After Tax of Rs. 3,986.69 ( FY 2019-20 ) , Rs. 8,275.97 ( FY 2020-21) , Rs. 11,412.35 Lakhs (FY 2021-22). However, the said subsidiary incurred Loss of Rs. (919.67) Lakhs (FY 2022-23) and currently considered as Asset Held for Sale due to restructuring plan. MIPL suffered a loss of toll revenue due to successive lockdowns declared by government since March 2020. The reduction in traffic at Mumbai Entry Points in turn impacted the toll collection and liquidity of MIPL. The Company filed claims of Rs. 597 Crores under Force Majeure (clause of 54.2 (v) of Volume III of the concession agreement) for loss in toll revenue during March 2020 to May 2021.

Financial overview Analysis of the profit and loss statement

(Rs. in Lakhs)

	Standalone Results		Consolidated Results
Particulars	For the year ended as at March 31, 2023	For the year ended as at March 31, 2022	For the year ended as at March 31, 2023	For the year ended as at March 31, 2022
Total Revenue	7,212.98	22,267.18	26,909.78	1,00,212.02
Total Expenses	20,358.22	31,022.19	51,592.96	1,00,857.36
Profit/(Loss) Before Tax and Exceptional Item	(13,145.24)	(8,755.01)	(24,683.18)	(645.34)
Exceptional Item	-	4,399.31	-	4,302.05
Profit/(Loss) Before Tax	(13,145.24)	(4,355.70)	(26,705.93)	(17,249.87)
Tax Expense (Net)	(5.09)	197.35	48.42	(5,296.66)
Net Profit /(Loss) After Tax	(13,140.15)	(4,553.05)	(26,754.35)	(22,546.53)
Earnings Per Share (Rs.)	(7.16)	(2.48)	(12.24)	(12.29)

Revenue & Profit

On a standalone basis, During FY 2022-23 Total Revenue (Revenue from Operations and Other income) was Rs.7,212.98 Lakhs, Loss Before Tax was Rs. 13,145.24 Lakhs and the Loss After Tax was Rs. 13,140.15 Lakhs.

On a consolidated basis, During FY 2022-23 Total Revenue (Revenue from Operations and Other income) was Rs.26,909.78 Lakhs , Loss Before Tax was Rs. 24683.18 Lakhs and the Loss After Tax was Rs.26,754.35 Lakhs.

Reasons for increase in loss during current year compared to last year A) In MEPIDL standalone statement

1) During FY 2022-23, Revenue earned by MEPIDL was reduced from Rs. 22,267.18 Lakhs in FY 2021-22 to Rs. 7,212.98 Lakhs in FY 2022-23 due to harmonized substitution of HAM project during previous years.

2) After Harmonized substitution of HAM projects, Expenses like Material Consumption, Operating & Maintenance Expense, Employee Benefits, and Depreciation etc. significantly reduced from Rs. 21,412.28 Lakhs in FY 2021-22 to Rs. 6,281.42 Lakhs in FY 2022-23. Apart from this, Finance Cost is also reduced from Rs. 4,238.31 Lakhs in FY 2021-22 to Rs. 4,170.15 Lakhs in FY 2022-23 due to repayment of principal of various loan accounts during current financial year. However, during FY 2022-23, to comply with provisions of IND–AS and to ensure prudent accounting practices being followed by the company, provision was made for impairment losses on various investments and old outstanding receivable due to which Other cost is increased from Rs. 5,371.60 Lakhs in FY 2021-22 to Rs. 9,906.65 Lakhs in FY 2022-23 which has partially offset the favorable impact from decrease in expenses on the losses of FY 2022-23.

B) In MEPIDL consolidated statement

1) Due to harmonized substitution of HAM project, revenue earned by MEPIDL was reduced from Rs. 1,00,212.02 Lakhs in FY 2021-22 to Rs. 26,909.78 Lakhs in FY 2022-23. Apart from this, due to the proposed dilution of investment up to 51% in its wholly owned subsidiary (viz. MEP Infrastructure Private Limited (MIPL)), the Company has classified the investment of MIPL as Asset held for sale and separate disclosures are made accordingly. During FY 2022-23, as required by IND–AS 105 the Revenue earned by MIPL was excluded from consolidated revenue of MEPIDL.

2) After Harmonized substitution of HAM projects and exclusion of expenses related to MIPL for separate disclosure, Expenses like Material Consumption, Operating & Maintenance Expense, Employee Benefits and Depreciation etc. significantly reduced from Rs.60,714.70 Lakhs in FY 2021-22 to Rs. 29,249.47 Lakhs in FY 2022-23. Apart from this, Finance Cost is also reduced from Rs. 28,886.16 Lakhs in FY 2021-22 to Rs. 6,664.32

Lakhs in FY 2022-23 due to repayment of principal of various loan accounts during current financial year. However, during FY 2022-23, to comply with provisions of IND–AS and to ensure prudent accounting practices being followed by the company, provision was made for impairment losses on various investments and receivables due to which other cost is increased from Rs. 11,256.50 Lakhs in FY 2021-22 to Rs. 15,679.17 Lakhs in FY 2022-23 which has partially offset the favorable impact from decrease in expenses on the losses of FY 2022-23.

Effect on Net Worth

On a standalone basis, due to the losses incurred during FY 2022-23, the Net worth of the Company decreased from Rs. 40,391.03 Lakhs as on March 31, 2022, to Rs.29,685.37 Lakhs as on March 31, 2023.

On Consolidated basis, due to the losses incurred during FY 2022-23, the Net worth of the company was decreased from Rs. (10,623.73 Lakhs) as on March 31, 2022, to Rs. (46,664.00 Lakhs) as on March 31, 2023.

KEY FINANCIAL INDICATORS

A) MEPIDL standalone statement

Numerator		Denominator	As at March 31, 2023	As at March 31, 2022	Variance %	Remarks
Current Ratio (times)	Current Assets	Current liabilities	0.58	T>0.59	-1%	-
Debt Service Coverage Ratio (times)	Profit after tax + Finance cost + Depreciation and Amortisation	Interest + Lease Payments + Principal Repayments	(0.51)	0.56	-191%	Note 1
Return on Equity Ratio (%)	Profit for the year after tax	Average Shareholders equity	-37.50%	-10.45%	259%	Note 1
Net capital turnover ratio (times)	Net Sales	Working Capital	(0.12)	(0.40)	-70%	Note 1
Trade payable turnover ratio (times)	O&M and cost of material consumed	Average Trade payables	0.05	0.14	-61%	Note 7
Trade receivables turnover ratio (times)	Revenue from Operation	Average Trade receivables	5.54	2.53	119%	Note 2
Inventory Turnover Ratio (times)	Cost of Material consumed	Average Inventory	0.63	5.08	-88%	Note 3
Debt to Equity (times)	Total Debt (Borrowings)	Total Equity	0.87	0.68	27%	Note 6
Net Profit Ratio (%)	Profit for the year after tax	Revenue from operations	-220.72%	-23.45%	841%	Note 4
Return on Capital	Profit before tax +	Tangible Net Worth +	-21.09%	-7.69%	174%	Note 5
Employed (%)	Finance cost	Total Debt + Deferred Tax Liability

Note 1: Variation in debt service coverage ratio, return on equity ratio, net capital turnover ratio due to decrease in revenue from operation in the current year. Note 2: Variation in trade receivables turnover ratio is due to decrease in revenue from operation in the current year.

Note 3: Variation in inventory turnover ratio is due to decrease in cost of material consumed in the current year. Note 4: Variation in net profit ratio is due to increase loss and lower revenue from operation in the in the current year. Note 5: Variation in return on capital employed is due to increase loss and repayment of debt.

Note 6: Variation in debt to equity ratio due to current year losses.

Note 7: Variation in Trade payable turnover ratio due to decrease in operating and maintaining expenses.

B) MEPIDL Consolidated statement :

Numerator		Denominator	As at March 31, 2023	As at March 31, 2022	Variance %	Remarks
Current Ratio (times)	Current Assets	Current liabilities	0.82	0.49	66%	Note 1
Debt Service Coverage Ratio (times)	Profit before tax + Finance cost + Depreciation and Amortisation	Debt service	(0.48)	1.21	-139%	Note 2
Return on Equity Ratio (%)	Profit for the year after tax	Average Shareholders equity	93%	-4051%	-102%	Note 2
Trade payable turnover ratio	O&M and other expenses	Average Trade payables	0.17	0.26	-32%	Note 7
Trade receivables turnover ratio	Revenue from operations (Excluding Toll collection and Claim from authority	Average Trade receivables	1.90	2.08	-9%	Note 3
Inventory Turnover Ratio	Cost of Material consumed	Average Inventory	0.63	5.08	-88%	Note 4
Net Profit Ratio (%)*	Profit for the year after tax	Revenue from operations	-109%	-23%	369%	Note 5
Net capital turnover ratio	Net Sales	Working Capital	(0.37)	(0.69)	-46%	Note 2
Return on Capital	Profit before tax +	Tangible Net Worth +	49%	7%	564%	Note 6
Employed (%)*	Finance cost	Total Debt + Def Tax Liab

Note 1: Variation in Current Ratio is due to due to increase in Current Assets in the current year.

Note 2: Variation in debt service coverage ratio, return on equity ratio, net capital turnover ratio due to decrease in revenue from operation in the current year.

Note 3: Variation in trade receivables turnover ratio is due to decrease in revenue from operation in the current year.

Note 4: Variation in inventory turnover ratio is due to decrease in cost of material consumed in the current year.

Note 5: Variation in net profit ratio is due to increase loss and lower revenue from operation in the in the current year.

Note 6: Variation in return on capital employed is due to increase loss and repayment of debt.

Note 7: Variation in Trade payable turnover ratio due to decrease in operating and maintaining expenses.

Issues and challenges for road sector

Given the share of roads in the overall transport of goods and passenger traffic, it is critical to develop the roads sector. Although the government has been continuously making efforts to give a fillip to the sector, several issues and challenges hamper the pace of development.

Traffic risk Revenue assessment of project to be done every 5 years instead of 10 years (or once in a life time of a project) earlier. In case of traffic either exceeding or seeing a shortfall from the Target traffic, the concession period would be adjusted according providing more comfort to lenders & developers Funding constraints and financial stress have thwarted the pace of development in the roads sector. In the subsequent years, developers faced viability issues with the projects. Issues pertaining to subdued financing, lower traffic, high gearing ratio and delayed execution have stressed their balance sheets. Simultaneously, during the year under review, your Company continued its focus on improving operational efficiency through increased automation of services.

Industry/ policy risk:

The Companys business is highly dependent on road and bridge projects in India undertaken or awarded by Government Authorities and other entities funded by the Government. Any change in Government policies resulting in a decrease in the amount of road and bridge projects undertaken or a decrease in private sector participation in road and bridge projects adversely affects our business and results of operations. Our business may be affected by changes in interest rates, changes in Government policy, taxation, exchange rates and controls, social and civil unrest and political, economic or other developments in or affecting India.

Human Resource Management

Talent management has always been the crucial factor for the Company, as your Company believes that its continued success will depend on its ability to attract and retain key personnel with relevant skills and experience in the Road Sector. It has always ensured that all employee related matters are handled through an established and well-defined HR policy to drive the employees to perform on the organizational vision by providing talent development, and constantly improving on employee engagement. The Company has already automated most of its HR processes and practices such as hiring employees, segregating employees based on various factors such as department level, payment days, payment details etc. leading to increase in its efficiency and response time of HR function. Most of the employee records are now being digitally maintained. The excellent demonstration of team work by HR & Operations department led controlling hospitalization of employees, its dependent amid pandemic at the same time keeping round the clock support to toll site teams on day to day work affairs maintaining adequate control in the toll road maintenance segment.

The company promotes a healthy work-life balance, fosters a sense of pride and belonging among its employees, and supports their growth and development. The Companys employee strength stood at 111 as on 31st March, 2023.

Outlook

The road sector in India is experiencing a positive growth trajectory. Factors such as healthy traffic growth, expressway development under Gati Shakti, sustainability and multimodal connectivity and private capital influx contribute to its bright prospects. Private investments in the sector are expected to reach H1 trillion by 2030. Regulatory interventions, optimistic investor sentiment and a focus on improved mobility will further accelerate the sectors development Adoption of digital technology enables daily activity monitoring, and improves operational efficiency. These measures will optimize resource utilization, leading to margin expansion and robust financial performance.

Risk management: The Company has implemented a robust risk management framework to identify and mitigate operational and business risks. The senior management along with operations

& HR Team regularly review major risk areas. Comprehensive policies and procedures are in place to identify, mitigate and monitor risks at various levels. The company conducts a risk review through an external agency, which provides recommendations to the Board on risk management strategies and possible controls.

Internal control systems and their adequacy

The Company has a strong internal audit system in place, which is regularly monitored and updated to safeguard assets, comply with regulations and promptly address any issues. The audit committee diligently reviews internal audit reports, takes corrective action as required and maintains open communication with both statutory and internal auditors to ensure the effectiveness of internal control systems. This robust internal audit framework ensures that the company operates with integrity, transparency and accountability, while mitigating risks and safeguarding the interests of stakeholders.

CAUTIONARY STATEMENT

Statement made in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations may be within the meaning of applicable securities laws and regulations. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand, supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the government regulations, tax laws, other statutes, and other incidental factors.