MEP Infrastructure Developers Ltd Management Discussions.

Global economic review

The global economy reported de-growth of 3.3% in 2020 compared to a growth of 2.9% in 2019, the sharpest contraction since World War II. This steep decline in global economic growth was largely due to the outbreak of the novel coronavirus and the consequent suspension of economic activities across the world. This led to global supply chain disruptions, resulting in a de-growth in some of the largest global economies.

Consequently, global FDI reported a significant decline from $1.5 trillion in 2019 to $859 billion in 2020, the lowest since the 1990s and more than 30% below the investment trough that followed the 200809 global financial meltdown.

Regional growth % 2021 2020
World output (3.3) 2.9
Advanced economies (4.9) 1.7
Emerging and developing economies (2.4) 3.7

(Source: IMF)

United States: The country witnessed a GDP de-growth of 3.4% in 2020 compared to a growth of 2.3% in 2019.

China: The countrys Gross Domestic Product grew 2.3% in 2020 compared to 6.1% in 2019 despite being the epicentre of the outbreak of the novel coronavirus.

United Kingdom: Britains GDP shrank 9.9% in 2020 compared to 1.4% growth in 2019, 2x the annual contraction recorded in the aftermath of the global meltdown in 2009.

Japan: Japan witnessed a contraction of 4.8% in 2020, the first instance of a contraction since 2009. (Source: CNN,

IMF, Economic Times, trading economics, Statista, CNBC)

The global economy is projected to grow by 6% in 2021 largely due to the successful roll-out of vaccines across the globe, coupled with policy support in large economies. (Source: IMF)

Indian economic review

The Indian economy passed through one of the volatile periods in living memory in FY20-21.

At the start of 2020, India was among five largest global economies; its economic growth rate was the fastest among major economies (save China); its market size at 1.38 billion was the second largest in the world; its rural population of the underconsumed was the largest in the world.

The Indian government announced a complete lockdown in public movement and economic activity from the fourth week of March 2020. As economic activity came to a grinding halt, the lockdown had a devastating impact on an already-slowing economy as 1.38 billion Indians were required to stay indoors - one of the most stringent lockdowns enforced in the world.

The outbreak of the novel coronavirus and the consequent suspension of economic activities due to the pandemic-induced lockdown, coupled with muted consumer sentiment and investments, had a severe impact on the Indian economy during the first quarter of the year under review. The Indian economy de-grew 23.9% in the first quarter of FY20-21, the sharpest de-growth experienced by the country since the index was prepared.

The Indian and state governments selectively lifted controls on movement, public gatherings and events from June 2020 onwards, each stage of lockdown relaxation linked to corresponding economic recovery. Interestingly, as controls relaxed what the country observed was a new normal: individuals were encouraged to work from home; inter-city business travel was replaced by virtual engagement; a greater premium was placed on the ownership of personal mobility modes (cars and two-wheelers); there was a sharp increase in home purchase following the need to accommodate an additional room for home working.

The result is that Indias relief consumption, following the lifting of social distancing controls, translated into a full-blown economic recovery. A number of sectors in India - real estate, steel, cement, home building products and consumer durables, among others - reported unprecedented growth. India de-grew at a relatively improved 7.5% in the July-September quarter and reported 0.4% growth in the October-December quarter and a 1.6% growth in the last quarter of the year under review.

The result is that Indias GDP contracted 7.3% during FY20-21, largely on account of the sharp depreciation of the first two quarters. This sharp Indian recovery - one of the most decisive among major economies - validated Indias robust longterm consumption potential.

Y-o-Y growth of the Indian economy

FY18 FY19 FY20 FY21
Real GDP growth (%) 7 6.1 4.2 (7.3)

Growth of the Indian economy, FY20-21

Q1, FY21 Q2, FY21 Q3, FY21 Q4, FY21
Real GDP growth (%) (23.9) (7.5) 0.4 1.6

(Source: Economic Times, IMF, EIU, Business Standard, McKinsey)

The infrastructure sector is a key growth driver of Indias economy. This sector is responsible for strengthening the countrys prosperity and enjoys government priority.

As per the information by the Department for Promotion of Industry and Internal Trade (DPIIT), FDI in the construction development sector and construction activities stood at USD 26.08 billion and USD 24.72 billion respectively between April 2000 and March 2021. In FY20-21, infrastructure accounted for 13% of the total FDI inflow of USD 81.72 billion.

The Central government proposed the setting up of National Infrastructure Pipeline (NIP) in 2019, due to which infrastructure projects rose to 7,400 in 2021 with ~217 projects worth RS. 1.1 lakh crore. Sectors such as roads, urban development, railways and energy accounted for approximately 71% of the projected infrastructure investments. Nearly 42% of the projects in the NIP are under implementation, indicating that construction is already in the processes.

Another 19% is under a development stage, while a huge amount of 31% is still in the conceptual stage.

The government allocated RS. 60,241 crore for road works and RS. 57,350 crore for the national highways in the Union Budget 2021-22. Moreover, the government plans to construct 8,500 kilometers road by March 2022. An additional 11,000 kilometers of national highway corridors will be completed by this time frame. Besides, the Indian government announced an outlay of RS. 1.18 lakh crore for the Ministry of Road Transport and Highways. (Source: IBEF, Mordor Intelligence)

Indian roads sector overview

India has the second-largest road network in the world, with a total span of 6.4 million kilometres (km). This road network transports 64.5% of all goods in the country with 90% of Indias total passenger traffic using the road network to commute. Transportation through road has increased gradually over the years with improvement taking place in connectivity between cities, towns and villages in the country. One of the major growth drivers for this sector is the sale of automobiles and fast growth of movement of freight by roads.

The national highways constitute 2% of the total road network but carry more than two-fifths of the total Indian traffic.

NHAI accomplished the construction of 3,951 kilometers of national highways in FY20-21, which is one of the highest highway constructions achieved in a financial year. Moreover, the government aims to construct 23 new national highways by 2025. The pace of construction as noticed in the last few years has witnessed a steady growth with the combined length of these highways standing at 7,800 kilometers. Moreover, the country has a well-established framework for Public-Private-Partnerships (PPP) in the highway sector. India was ranked at the first spot in PPP operational maturity and further, was also designated as a developed market for PPPs.

Under the Bharatmala Pariyojana, the government awarded a project worth RS. 5.35 lakh crore including construction of more than 13,000 kilometers of roads worth RS. 3.3 lakh crore. The Ministry of Road Transport & Highways announced that it achieved a milestone by constructing 13,298 kilometers of National Highways, with the construction of 37 kilometers per day in FY20-21. The government has given the utmost priority to infrastructure development and has set a target of road construction worth RS. 15 lakh crore in the

Government initiatives

- The Government of India allocated ~$1.4 trillion towards the infrastructure sector, which is to be invested until 2025.

- A target of 40 kilometers per day construction of roads and highways has been set for the days to come.

- The NHAI decided to deploy Network Survey Vehicle (NSV) in April 2021 for the improvement in quality of the national highways. Using NSV to carry out road condition survey on the national highways was made necessary for certifying completion of the project and every six months thereafter.

- NHAI planned to award projects worth around RS. 2.25 lakh crore in the FY20-21, as against projects worth RS. 1.71 lakh crore actually awarded during this time span. Furthermore, in terms of road construction, the organisation surpassed the 4,500-kilometers target, with the NHAI awarding 141 projects totaling 4,788 kilometers in length in FY20-21.

- The Union Minister of Road Transport and Highways, Mr. Nitin Gadkari made an announcement of a large financial relief package, releasing RS. 8,000 crore to meet the working capital requirements of the contractors.

(Source: IBEF, InvestIndia, Financial Express)

Budgetary provisions

- At a cost of RS. 18,000 crore, a new scheme will be launched to support the augmentation of public bus transport services. This will facilitate the deployment of innovative PPP models in order to enable private sector players to finance, acquire, operate and maintain more than 20,000 buses.

- The Finance Minister announced an outlay of RS. 1.18 lakh crore for the Ministry of Road Transport and Highways, which includes the highest ever capital outlay worth RS. 1,08,230 crores.

- To expedite highway projects, additional fund sources are being tapped with a private investment of RS. 30,000 crore being envisaged in 2021-22 through hybrid annuity mode (HAM) and build-operate- transfer (BOT) projects.

- The NHAI has monetised two bundles of TOT (toll-operate-transfer), which comprises nine projects each with length of 681 kilometers and 566 kilometers, while receiving a bid amount worth RS. 9,681 crore and RS. 5,011 crore, respectively.

- The government plans to award another 8,500 kilometers, completing an additional 11,000 kilometers of national highway corridors by March 2022. The flagship projects to be accelerated include the Delhi-Mumbai Expressway; while for the Bengaluru-Chennai Expressway, construction will begin in FY21-22.

(Source:, InvestIndia, Outlook India)

Bharatmala Pariyojana

The Bharatmala Pariyojana envisions the development of ~26,000 kilometers length of economic corridors, which along with the Golden Quadrilateral (GQ) and North- South and East-West (NS-EW) Corridors are anticipated to carry majority of the freight traffic on roads. Moreover, nearly 8,000 kilometers of inter corridors and 7,500 kilometers of feeder routes were identified for improving effectiveness of economic corridors, GQ and NS-EW Corridors. The programme envisages the development of ring roads/bypasses and elevated corridors to reduce the traffic passing through the cities and further, improve the logistic efficiency. 28 cities have been identified for Ring Roads with 125 choke points and 66 congestion points being identified for their improvements. Furthermore, in order to reduce congestion on proposed corridors, reduce logistics costs of freight movements and enhance logistic efficiency, 35 locations have been identified for the development of multimodal logistics parks. (Source: MoRTH Annual Report)

Hybrid Annuity Model (HAM) and Engineering Procurement and Construction (EPC)

The execution of hybrid annuity model (HAM) projects is the preferred mode of awarding by the NHAI and is majorly on schedule with about 60% of projects, covering 3,200 kilometers of roads, completed on time. Introduced in January 2016, more than 40% of roads have been awarded by NHAI under the HAM model over the past five years. Moving ahead, approximately 50% of the awarding by NHAI is expected to be through HAM. Therefore, the understanding of their execution performance is essential.

Out of the 5,400 kilometers roads analysed, 1400 kilometers are operational, with a large portion of these completed six months ahead of schedule, while only a few faced moderate delays. This execution was supported by the timely availability of land and approvals. It is expected that an additional 1,800 kilometers of roads, which are in advanced stages of construction, will be completed on time in the near term. (Source: Livemint, Crisil Ratings)

Toll collection

The total toll collection on national highways is estimated to have reached RS. 34,000 crore in FY20-21. Toll collections witnessed a major increase on account of rise in movement of both passenger and commercial vehicles, which has increased significantly over the last three months, surpassing the pre-Covid-19 levels.

FASTag accounted for almost RS. 100 crore per day out of the total toll collections in India. The toll collections in India in June 2021 had increased to RS. 2,576.28 crore, 21% higher than RS. 2,125.16 crore collected in May 2021.

In FY21-22, the traffic is expected to rise by 5% and the WPI linked toll rates by 3-4%, resulting in an overall increase of 14-15% in the toll collections on a low base in FY20- 21. (Source: Livemint, ICRA)

Build Operate and Transfer (BOT)

As investors interest in pure public-private- partnership (PPP) projects increases, the share of which in the new awards have declined massively for almost a decade and has drawn to a blank in the last two years. The National Highways Authority of India (NHAI) plans to award around 450 kilometers highway stretch through the build-operate-transfer (BOT) model in FY21-22.

Moreover, in what could be considered as a revival of public private partnership (PPP) in the highway sector, private developers have offered a premium for two projects tendered recently by the National Highways Authority of India on build, operate and transfer (BOT) basis, which is a mode of private funding for national highways that are lying unused for almost ten years now. The projects in question are six-laning of Panagarh-Palsit (67.75 kilometers) at a capital cost of RS. 2,021 crore and six-laning of Palsit-Dankuni with a total span of 63.8 kilometers, requiring a capital cost of RS. 2,193 crore. Both of these projects are in West Bengal and a part of the Bharatmala Pariyojana. (Source: Business Today, Financial Express)

Toll Operate and Transfer

Under the Toll Operate and Transfer (TOT) model, operational highway projects are given on a long-term lease (15-30 years) to the private entities on a longterm concession basis against an upfront payment. During the concession period, the operator collects user fee on the stretches based on the prescribed rates by NHAI in order to recoup their investment but the operator has to operate and maintain these stretches. A minimum of six companies have submitted bids to take the long-term lease of an estimated 160 kilometers highway stretch offered by the NHAI against such upfront payment through the toll-operate-transfer (TOT) route. Moreover, under the fifth round of TOT, the NHAI has offered a 20-year lease period for two bundles with a total length of 159.5 kilometers.

The National Highways Authority of India (NHAI) is anticipated to offer 32 projects, which are 1,500 kilometers in construction size under the Toll-Operate-Transfer (TOT) model in FY21-22 as it provides a fresh monetisation plan. Keeping in mind the impact of the second wave of Covid-19, the projects on offer would be decided on a case-by-case basis. (Source: Construction Week Online, Business Standard)

Electronic Toll Collection (ETC)

The road transport and highways ministry placed major focus on expediting the process of making a complete transition to electronic toll collection (ETC) in a bid to rationalise toll rates. This will increase transparency about the valuation of highway projects, while gaining traction from potential investors. The government has made the implementation of FASTag mandatory. FASTag is an electronic toll collection device that is attached on the windshield of a vehicle across all national highways to modernise and increase efficiency.

FASTag has been responsible for approximately RS. 100 crore of toll collection per day in the country. The implementation of FASTag has witnessed growth of 20% in terms of electronic toll collection transactions, while 27% in terms of collection of user fee. Moreover, the implementation of this has also resulted in reduction of waiting time at National Highways Fee Plazas significantly, which has enhanced user experience. The electronic toll collection through FASTag is operational at 780 active toll plazas across India.

With an estimated 3.48 crore users, FASTag penetration is at nearly 96% across the country with many toll plazas having 99% penetration. As per an estimate, FASTag saves ~RS. 20,000 crore per year on fuel, which further saves precious foreign exchange and helps the environment. (Source: Livemint, The Hindu Business Line)

Growth drivers

Rising urbanisation: Indias total population is anticipated to rise from 1.38 billion in 2020 to 1.52 billion by the year 2036. A major portion of this rise is expected to come from urban areas that are expected to rise from 35% to 39% during this time span.

National infrastructure pipeline: The National Infrastructure Pipeline (NIP) contributed to rise in the number of infrastructure projects. The number witnessed a growth to 7,400 in 2021 from 6,835 and 217 projects worth RS. 1.1 lakh crore.

Rural roads: An allocation of ~RS. 80,000 crore was made by the Government of India to upgrade 1.25 lakh kilometers of rural roads between the time spanning 2019-20 and 2024-25 under Phase-III of the Pradhan Mantri Gram Sadak Yojana, out of which RS. 53,000 crore would be provided by the Central government. Since 2014, approximately 2 lakh kilometres of new roads were built across the rural India at a rate of ~109 kilometres per day.

Highways: With support from the government, Indias constructed national highways in FY21 stood at 13,298 kilometers, witnessing a rise as against 10,240 kilometers constructed in FY19- 20. This is expected to rise further with the increase driving the infrastructure development sector.

FDI inflows: FDI inflows in construction development sector and infrastructure activities sector stood at USD 26.08 billion and USD 24.72 billion, respectively, between the time spanning April 2000 and March 2021.

Smart Cities Mission: As of June 23, 2021, RS. 40,622 crore had been released by the central government for the Smart Cities Mission, out of which RS. 27,862 crore (69%) was utilised.

Increasing road traffic: Road transport accounts for nearly 60% of the freight traffic and 87% of passenger traffic in the country.

Governmental focus: The Government aims to construct an additional 11,000 kilometers of national highways by March 2022. (Source: IBEF, Mordor Intelligence, Statista, The Wire, Indian Express)

Company overview

MEP Infra was founded in 2002 by the Mumbai-based Mhaiskar family and has carved out a distinctive reputation in helping the countrys Central and State road authorities operate and maintain road assets with efficiency. The Company is headquartered in Mumbai. MEP is the leading player in the business of toll

- collection. The Companys shares are actively traded on the BSE and NSE.

Company outlook

The Company see an upside from here for some good reasons. Going ahead, the Company see accelerated road building without comprising safety and protection standards. This should translate into a higher throughput and timely completion (after getting the necessary road extension permissions from the concessionaire for reasons related to the pandemic) that revives cash flows, enhancing value for all those related to the sector and the Company.

Financial performance

The outbreak of COVID-19 pandemic has globally affected overall economic activities, and India was not an exception.

This has also affected the toll operations and construction activities of various projects across the country, due to which the turnover of the Company decreased to RS. 36,713.53 lakhs in comparison with previous year RS. 136,956.62 lakhs.

Key financial ratios

The factors stated above has affected the profitability of the Company and resulted in change of more than 25% in the Key Financial Ratios as compared to previous financial year as given below:

Particulars FY21 FY20
Debtors Turnover in days 59.25 17.47
Inventory Turnover in days 66.62 23.18
Interest coverage ratio (1.25) (2.08)

Internal control systems and their adequacy

The Companys internal audit system has been continuously monitored and updated to ensure that assets are safeguarded, established regulations are complied with and pending issues are addressed promptly. The audit committee reviews reports presented by the internal auditors on a routine basis. The committee makes note of the audit observations and takes corrective actions, if necessary. It maintains constant dialogue with statutory and internal auditors to ensure that internal control systems are operating effectively.

Human resources and industrial relations

The Company believes that the quality of the employees is the key to its success and is committed to equip them with skills, enabling them to seamlessly evolve with ongoing technological advancements.

During the year, the Company organised training programmes in different areas such as technical skills, behavioural skills, business excellence, general management, advanced management, leadership skills, customer orientation, safety, values and code of conduct. The Companys employee strength stood at 1,524 as on 31st March, 2021.

Risk and challenges

The Companys ability to foresee and manage business risks is crucial to its efforts to achieve favourable results.

Although management is positive about the Companys long-term outlook it is subject to a few risks and uncertainties like

Competition risk, Availability of capital and interest rate risk, Traffic growth risk and Input cost risk.

Cautionary statement

This statement made in this section describes the Companys objectives, projections, expectation and estimations which may be forward-looking statements within the meaning of applicable securities laws and regulations.