Pratibha Industries Ltd Management Discussions.
Industry Structure and Development
Infrastructure sector is a key driver for the Indian economy. The sector is highly responsible for propelling Indias overall development and enjoys intense focus from Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country. Infrastructure sector includes power, bridges, dams, roads and urban infrastructure development. In 2018, India ranked 44th out of 167 countries in World Banks Logistics Performance Index (LPI) 2018.
Foreign Direct Investment (FDI) received in Construction Development sector (townships, housing, builtupinfrastructure and construction development projects) from April 2000 to March 2019 stood at US$ 25.05 billion, according to the Department of Industrial Policy and Promotion (DIPP). The logistics sector in India is growing at a CAGR of 10.5 per cent annually and is expected to reach US$ 215 billion in 2020.
Opportunities and Threats.
The global economy and growth is gathering pace, and the momentum in global trade is expected to continue in 2018-19 as well. This should buoy Indian exports, and other manufacturing and infra activities.
The financial sector is going through a phase of stress, which needs appropriate measures to ensure that the sector continues to play the financial role that it had been for the India growth story to remain uninhibited.
From a global perspective, however, there are certain concerns. First, under stress from worsening domestic economic conditions, there are growing protectionist tendencies in some countries especially the USA, and it remains to be seen as to how the situation unfolds.
India is also going through a difficult phase related to its banks and non-performing assets (NPA).
INFRASTRUCTURE AND CONSTRUCTION IN INDIA
Over much of the last decade, infrastructure in the country has been characterized by massive under-investment. There are several reasons for this. Primarily, this includes the collapse of Public Private Partnership (PPP), especially in power and telecom projects; stressed balance sheet of private companies; and issues related to land and forest clearances. The need is to fill the infrastructure investment gap by bringing back investor confidence in the sector and promoting financing from private investment, institutions dedicated for infrastructure financing like National Infrastructure Investment Bank (NIIB) and also global institutions like Asian Infrastructure Investment Bank (AIIB), New Development Bank (erstwhile BRICS Bank), which focus more on sustainable development and infrastructure projects. With the entire infrastructure development ecosystem under stress in India since 2012, there has been a considerable slowdown in construction activities. The growth momentum achieved between 2007-08 and 2011-12 has completely subsided.
PRATIBHA INDUSTRIES LTD: STRATEGIC DEVELOPMENTS
As one of the leading players in the Indian construction industry, the company has been exposed to the vagaries of the external business environment faced by the industry in India. The Company has continuously recrafted its strategic positioning and calibrated its business objectives in line with the evolving business environment.
Since many years, the company was under acute financial distress. Due to which the Company was unable to repay the bank loans and was not able to grab new projects and all that has resulted into initiation of the Insolvency Resolution Process of the Company w.e.f. 01.02.2019.
RISKS AND CONCERNS continue as an HINDRANCE stopping the GROWTH
Following are the major risks and concerns associated with infrastructure sector:
- High debt and high cost of finance
- High Capex with no sustained business cycle
- Delay in realization of receivables
- Equal Level Playing Field
- Increasing cost of raw materials
- Delay and Cost Overruns
- Complexities of structures
- Regulatory compliance
- Delay in hand over possession of the site
- Shortage of skilled labor
The Financial Year 2018-19 (FY2019 or year under review) was a challenging year for the Company. There was a sharp decline in the turnover and net profit of the Company. Further due to fund crises, the Company was not able bid for the new projects and resultantly there was no new revenue generation during the year under review.
All the above factors have resulted in Corporate Insolvency Resolution Process of the Company.
The business developments in the subsidiaries are as below:
Prime Infrapark Pvt. Ltd
Prime Infrapark, a wholly owned subsidiary has entered into a concession Agreement with DMRC for construction of a Multilevel Car Park cum Commercial Complex named Konnectus. The asset is fully developed. This property is strategically located above the first station of the Airport Express Line of DMRC and is opposite Ajmeri Gate Railway Station and in close proximity of Connaught Place. The duration of the Concession Agreement is till March 2040. Due to sluggish market and even after resorting to aggressive selling directly and via brokers, the company could lease out only around 65% of the leasable area. Due to the short fall, the company has negative cash flow leading to erosion of net worth of the company.
Due to above condition there was default in servicing the annuity fees as per concession agreement promptly, DMRC has encashed performance bank guarantees, and terminated the contract on 1/09/2017, and the matter is being followed closely with the client for amicable settlement or initiation of arbitration.
Muktangan Developers Pvt. Ltd
This is a wholly owned subsidiary of the Company which is in the process of developing a commercial property in the vicinity of Chembur Station in Mumbai. The approximate area of development will be nearly 468 sq. mtrs and is expected to be completed at the earliest.
Bhopal Sanchi Highways Pvt. Ltd
This subsidiary was set up to execute the project relating to construction, operation and maintenance of 2 lane highways with paved shoulders of Bhopal-Sanchi Section of about 54 kms on DBFOT model at an estimated cost of Rs 210.oo crores which was expected to generated total cash flow of Rs. 335. oo Crores.
However, due to non-availability of work front coupled with other procedural issues for considerable period and resultant cost overruns & disputes during the course of the execution of project, the company has opted for termination of the contract with NHAI. However, NHAI has disputed the termination and referred the matter to Arbitration. Arbitration procedure has started in January, 2017 and the arbitrator has passed an award 30th November 2018, which is being challenged by the Bhopal Sanchi Highways Pvt. Ltd.
Pratibha Holding (Singapore) Pte Ltd is set-up as a holding company for holding the stake in the overseas operating companies as per optimum corporate structure. It holds 100% stake in the Pratibha Infra Lanka (Private) Limited. Pratibha Infra Lanka (Private) Ltd is yet to commence its operation.
The company operates a fully integrated Enterprise Risk Management (ERM) framework in place for identification, assessment, treatment & reporting of risks. The Companys risk management processes ensure that the Company accepts risks as per the boundary conditions based on the risk appetite of the organization.
The Audit Committee of the Board oversees the efficacy of the risk management processes. Business level risks for each vertical are discussed in detail in the respective Top Management/ Board meetings. The Risk Management Committee is informed on the critical risks impacting the Company for their review and suggestions. Mitigation plans are drawn up and implemented as appropriate within the overall ERM framework of the Company. The Company is predominantly in project business and has developed robust project risk management processes. The key processes of risk reviews include country clearance in case of venturing into a new country, pre-bid risk reviews, execution risk reviews and project close out risk reviews. Pre-bid reviews are carried out based on a bid authorization matrix as determined by the Risk Management Committees. Execution risk reviews of the projects are held at regular intervals for tracking the project performance, movement of risks in the project and effectiveness of mitigation measures.
Close out risk reviews are held to capture key learnings from the projects and what went right/wrong analysis which helps in factoring the learnings in future bids.
HUMAN RESOURCES DEVELOPMENT
The company in present senario has substantially reduced its Human Resources and is working on bare minimum essential staff on both fronts, viz. in HO as well as at site level. The Company is also having a well-defined policy for environmental safety. Occupational Health, Safety and Environment Management are given the utmost importance in your Company. The relations between the Company and the employees were stressed due to delayed payment of salaries throughout the year.
INTERNAL CONTROL AND AUDIT
The Company believes that a strong internal control framework is an important pillar of Corporate Governance. It has established internal control mechanisms commensurate with the size and complexity of its business. A strong Internal Control framework is established through right tone at the top for good corporate governance which serves as a foundation for excellence and same is embedded in operations through its policies and procedures. Employees of the Company are guided by the Companys Code of Conduct. As a part of good governance, the Companys Whistle Blower policy enables the employees to have direct access to the Chairman of the Audit Committee without interference from other levels of management. Whistle Blower policy has also been implemented for Vendors & Channel partners as well to facilitate expression of genuine concerns about unethical behaviour, improper practice, any misconduct, any violation of legal or such requirements, actual or suspected fraud by any official of the Company without fear of punishment or unfair treatment. Senior Management and the Audit Committee of the Board is periodically apprised on the internal processes of the Company with respect to Internal Controls, Statutory Compliances and Assurance.
FORWARD LOOKING STATEMENTS
Statements in this report, particularly those which relate to Management Discussion and Analysis, describing the Companys future plans, projections, estimates and expectations may constitute "Forward Looking" statements, within the meaning of applicable laws and regulations. Actual results might differ materially from those either expressed or implied.