Punj Lloyd Ltd Management Discussions

Management Discussion & Analysis

Introduction

In the last decade, Punj Lloyd Limited (Punj Lloyd, PLL or the Company), went through a phase of rapid business expansion as an EPC (Engineering, Procurement and Construction) conglomerate primarily delivering energy related infrastructure projects across emerging markets in Asia and Africa. After the initial phase of quantum growth, the Company had to deal with several headwinds. First, it had to abandon the large portfolio of projects in Libya in the aftermath of political turmoil in the region. Second, there has been a significant slowdown in the infrastructure sector in India. With large number of stalled or slow-moving projects, there has been a major financial liquidity crunch and all construction service providers across the country are struggling to manage their growing debt burden. Third, with a sharp drop in oil and related energy prices, infrastructure development related to the oil and energy sector has slowed down considerably. These adversities warranted a major course correction for Punj Lloyds business.

To realign the strategic path of the Company with the financial imperatives of increasing cash flows and reducing its debt exposure, Punj Lloyd drew up a Corrective Action Plan (CAP) along with its bankers and financial partners in the financial year (FY) 2015. Flowever, due to several reasons, some of which were beyond anyones control, there was a time-mismatch in cash requirements and the actual release of financial assistance from the lenders — which came in the way of a successful execution of the CAP. In addition, the claims recovery process has remained very slow and mired in litigation; and market conditions were not conducive for PLL to monetise some of its non-core assets.

These factors further increased pressure on the Companys balance sheet in FY2017; and operational activities were affected by the general lack of working capital. However, despite these conditions, Punj Lloyd maintained its focus on quality execution and project delivery. These have helped the Company to maintain good customer relations, which are reflected in some of the recognitions received from marquee global customers.

The Company continued to focus on improving its business processes and operational efficiencies to execute projects faster and more profitably. It is also working with the lenders to structure another round of financial restructuring that can provide the necessary breathing space for embarking upon a business turnaround. The lenders have responded positively to this second round of restructuring and are actively working with the Company to create a mutually viable solution.

Macroeconomic Environment

There is much uncertainty across the global landscape. Events like the pro-Brexit vote in the UK and the election of Donald Trump as the President of USA suggest distinct changes in the political agenda and social expectations. With rising trend in protectionism across the world there is a sense of weakening of global, regional and national institutions. Advancement in technology with focus on protecting the environment, is also playing an increasingly disruptive role across industries.

Punj Lloyds business operates primarily in the Middle-East and what the Asian Development Bank (ADB) refers to as Developing Asia. The presence in North Africa has reduced significantly since the adverse political developments in Libya.

Economic output growth in Middle East and North Africa (MENA) increased from 2.6% in CY2015 to 3.8% in CY2016. While traditionally these were mostly oil based economies, the present round of growth is primarily driven by non-oil based infrastructure development across these countries. However, there were signs of a slowdown in this region by the end of the 2016. Growth in oil revenues, which provided the surplus for other infrastructure investments, has started to reduce. There is also continued strife and political conflict in many countries in the region. Consequently, the forecast is for lower economic growth of 2.3% in CY2017.

Developing Asia, which includes India, continues to be a sweet spot in a stagnating global economy. Chart A shows that while the major industrial economies including the US, the Euro Zone and Japan witnessed a reduction in GDP growth from 2.2% in CY2015 to 1.6% in CY2016, developing Asia grew by 5.8% in CY2016 — and is forecast to expand by 5.7% in CY2017 and CY2018. Within developing Asia, there has been a moderation in growth in China. To an extent, however, this is being balanced by a healthy pickup in India as well as most other economies in the region.

Within developing Asia, there were some mixed trends. Though private consumption slowed and exports declined primarily in China, growth in East Asia remained stable at 6% in CY2016 compared to 6.1% in CY2015. In Central Asia, growth weakened from 3.1 % in CY2015 to 2.1 % in CY2016 as seven of the eight economies posted lower growth on account of weaker global oil prices, higher prices for non-food imports resulting from currency depreciation, and recession in the Russian Federation, a key trade partner. Growth in South Asia eased to 6.7% in CY2016 from 7.2% in 2015, even as five of the eight economies posted higher growth. In contrast with slower growth elsewhere, aggregate growth in Southeast Asia improved slightly from 4.6% in CY2015 to 4.7% in CY2016. Chart B gives the data for economic growth in major regions of Developing Asia.

While Developing Asia is expected to lead economic growth in the near term, the region faces risks from uncertain policy direction in the advanced economies, including the pace of interest rate increases in the US. While the shortterm risks are manageable, regional policy-makers have to effectively respond to possible spill-over through capital outflows and exchange rate movements.

In this business environment, Punj Lloyd has reoriented its business focus to much greater emphasis on the domestic market - India. In FY2017, not only has India been one of the worlds fastest growing major economies, underpinned by stable macroeconomic conditions with declining inflation and improving fiscal and external balances, it has also emerged as an economy that is enacting major structural reforms which have positive longer term implications.

Real growth in gross value added (GVA) for 2016-17 is expected to be 6.7% - a reduction on 1.1 percentage points compared to 2015-16. The number for 2016-17 is the latest forecast issued by the Central Statistical Organisation. It remains to be seen what the final number will be. The general expectation is that after a relatively modest demonetisation induced compression in the third quarter of the year, growth has again bounced back for the fourth quarter, or January- March 2017. Chart C plots GVA growth for India.

Given its large historical exposure in the sector, developments in the oil and gas industry continue to have a material impact on Punj Lloyds business. Oil prices had seen a sharp decline since the early part of CY2014 and experts suggest that in CY2016 it reached the lowest point of the present phase of oil price downturn. However, the severity of that downturn with crude hitting lows around US$30 a barrel was a major shock for the entire value chain. However, as Chart D shows, crude oil prices have stabilised around the US$50 per barrel. OPECs actions in the fourth quarter to curb output signalled a firm move of prices above US$50 a barrel and established a greater consensus around a more stable medium-term pricing outlook.

The oil and gas industry continues to reconfigure its business model to help it sustain and grow in a lower price environment, often involving

postponement of capital expenditure and cost cutting. The industry has also slowed, even shut down, new oil and gas related infrastructure projects where the cost of extraction is relatively high. Given these conditions, Punj Lloyd has had to stress on diversification and focus on opportunities in other sectors.

The Infrastructure and Construction Industry

From a long term perspective, the global construction market still has high potential. According to estimates by the global consulting major PwC, volume of construction output will grow to US$15 trillion worldwide by 2025. Much of this growth will be concentrated in three countries: China, the US and India. Indeed, 52% of all construction activities are located in emerging markets. This is expected to increase to 63% by 2025, with China and India contributing the most. China overtook the US to become the worlds largest construction market in 2010, and is expected to increase its global share from 18% today to 26% in 2025. Significant opportunities have arisen across a new generation of Asian Tigers. Indonesia, Vietnam and the Philippines are becoming increasingly attractive for export-oriented manufacturing and represent a US$350 billion construction market that is growing at over 6% annually. PwC estimates that India will overtake Japan as the third- largest construction market with annual growth in construction averaging 7.4%.

In this milieu, Punj Lloyd is working on quickly adapting to the changing market dynamics. This has two dimensions. First, it is focusing on taking up projects across a wider spectrum of sectors, developing its capabilities and creating a richer portfolio of projects. Creating this wider technical platform is a prerequisite to embarking on the next round of growth. Second, in order to efficiently utilise management bandwidth, the Company is focusing on leveraging the growing market opportunities in India while preserving its strong global client relationships.

Despite opportunities, the Indian construction and infrastructure sector is facing significant challenges with the developers, banks and government grappling with a gamut of legacy issues. These include stalled projects, nonperforming loans and widening gap between performance and targets. The sector is plagued with significant cost overruns, regulatory bottlenecks and aggressive bidding positions taken by a few market players resulting in financial losses. There is also a massive build-up of financial claims on developers, who are mostly government owned, on account of factors such as changes in scope of work (quantity variation or extra items), idling of resources like manpower and overheads, compensation beyond the original stipulated contract period, change in statute and loss of opportunity.

These factors have led to a major slackening of Indias construction sectors growth momentum achieved between FY2008 and FY2012. Chart E shows that after an impressive 10.8% growth in FY2012, the sector slowed down considerably and the lower growth trend continued with only 3.1 % growth in FY2017.

Essentially, the Government of India (Gol) is facing two very different challenges. First, it has to resolve several of these legacy issues that plague the infrastructure and construction sector. Second, it has to provide a new round of growth impetus to the sector. On both these fronts, the Gol has made some headway in FY2017. Flowever, these are initial steps and much of the developments on the ground are expected in the next few years.

Through close monitoring at the highest levels and granting faster clearances, the Gol has finally managed to break the continued curse of stalled projects. According to data released by the Centre for Monitoring of the Indian Economy (CMIE), only 24 projects that were under some stage of implementation were stalled before completion during the quarter ended March 2017. This is the lowest stalling of projects under implementation in any quarter since December 2008.

There have also been positive steps taken by various government and semigovernment institutions to provide impetus to the sector in terms of financial liquidity.

To revive the construction sector, the Cabinet Committee on Economic Affairs has approved a series of initiatives, which are expected to help in improving liquidity in the short run and reform the contracting regime in the long run. This includes:

• Public sector undertakings (PSUs) and government departments may seek the consent of the contractors/ concessionaires to transfer the arbitration cases initiated under the older Arbitration Act to the amended Arbitration Act, wherever possible.

• Where a PSU/department has challenged the Arbitral Award awarded to the contractor, 75% of the award amount should be paid by the PSU to the contractor/ concessionaire against margin free bank guarantee.

• All PSUs/departments issuing public contracts should consider setting up Conciliation Committees/Councils comprising independent subject experts to ensure speedy disposal of pending or new cases.

• Item-rate contracts may be substituted by EPC (turnkey) contracts, and the PSUs/ Departments that do so should

adopt the Model EPC contracts for construction work.

• The Department of Financial Services, Gol, in consultation with the Reserve Bank of India (RBI), is formulating a one-time package for the construction sector which is expected to be announced shortly.

In addition, the Gol has undertaken a slew of measures including reviewing mechanisms for award of contracts, regulatory approvals, funding and exit mechanism for developers that provide the foundation for pushing a new round of investment and growth in the sector. The Union Budget 2017-18 also laid emphasis on infrastructure development with 10% increase in total outlay on the sector to Rs. 3,96,135 crore. Within the sector, roads, bridges and railways saw higher levels of allocation. One is witnessing some green shoots in the Indian infrastructure sector. Hopefully, these will grow rapidly in the next two to three years.

In more general terms, given the stressed financial conditions of almost all infrastructure and construction companies in India, the banks under RBIs guidance, are playing a supportive role in working out mechanisms to overcome the stress. The new SDR/S4A guidelines from the RBI are expected to mitigate the financial hardship of some construction majors and, thus, revitalise their capability to bid for new projects.

Business Performance

Since FY2015, Punj Lloyd has been executing its business based upon guidelines of the Corrective Action Plan (CAP) developed in partnership with its lenders. The focus of CAP was increasing cash generation while lowering debt exposure. This translated to a renewed emphasis on the core EPC business, monetisation of non-core assets and recovery of past dues.

Unfortunately, while there have been some positive movements on monetisation of non-core assets and claims recovery, the actual pace of progress has been far below expectations. Having said so, there have been some positive developments in FY2017 - the Companys wholly-owned subsidiary, Punj Lloyd Infrastructure Limited (PLIL). executed definitive agreements with India Infrastructure Fund II to divest three operating solar projects located in Punjab and Rajasthan aggregating 45 megawatts (MW) subject to customary approvals and other conditions precedent. It is in the last stages of receiving the full consideration of the deal. In addition, PLIL has also divested economic stakes in three under development solar projects in the state of Uttarakhand cumulating to 36 MW to India Power Corporation Limited.

The claims recovery process continues to be mired by long drawn litigations. The CCEA recommendations in 2016 have just started making an impact on the ground. The Company is still awaiting large claims in India and abroad.

Working capital pressures on the Company were further aggravated by some of the group of lenders delaying actual release of short term capital in line with the CAP formula. As a result, Punj Lloyd had to operate under very tight financial liquidity. This affected both execution and generation of new orders.

Facing these pressures, the Company has looked inwards and worked very hard to improve the utilisation of capital and resources.

• Standalone revenues increased by 12% from Rs. 3,358 crore in FY2016 to Rs. 3,761 crore in FY2017

• With this top-line growth and cost management, the Company has turned around in terms of operating profits. Standalone EBIDTA increased from a loss Rs. 370 crore in FY2016 to a profit of Rs. 108 crore in FY2017

• However, this level of operations is still well below what can sustain the debt levels on the balance sheet

• Consequently, the Company generated net losses of Rs. 850 crore, without accounting for other comprehensive income

It needs to be stated that the lenders have been supportive of another round of financial restructuring to provide the Company breathing space to scale up operations and generate necessary cash to revive business profits. The restructuring packages that are being worked out are different from those prescribed by the RBI. Detailed consultations with the lenders are underway and a workable solution is expected soon.

Over the last few years, Punj Lloyd has laid considerable emphasis on contracts management and made focused efforts to establish legitimate claims through the arbitration-based dispute resolution mechanism.

As reported in last years Annual Report, Punj Lloyds subsidiaries in Singapore were under severe financial stress and their potential to continue as a going concern was affected. In FY2017, the Singapore High Court (the Court) heard the applications filed by Punj Lloyd Pte. Limited and Sembawang Engineers and Constructors Pte. Limited — subsidiaries of the Company — for placing these under judicial management (JM). The Court approved the applications and placed both subsidiaries under JM with effect from 27 June 2016. With the appointment of Judicial Managers, Punj Lloyd has lost control over these subsidiaries. Hence, accordingly these entities had to be deconsolidated by making consequent necessary adjustments in the financial statements.

Given the Companys liquidity position, Punj Lloyd approached business development in a calibrated manner. Activities were more geared towards exploring new market opportunities rather than aggressively participating in tenders and getting orders.

The Company has an order book of Rs. 18,561 crore as of May 2017. This includes orders of Rs. 6,845 crore in Libya which, unfortunately, are not seeing any traction.

Business Verticals

The Company operates as an EPC service provider for energy and infrastructure projects. The business is structured according to sector-specific verticals that service a global market. In the core business, these are:

• Pipelines and Tankage

• Process

• Offshore

• Power

• Buildings and Infrastructure (including highways, mass rapid transport systems and railways)

• Defence

These are supported by core functions including the Central Procurement Group (CPG), Human Resources (HR), Information Technology (IT), Quality and Health, Safety and Environment (HSE).

In addition to these core businesses, the Company has a separate engineering business under PL Engineering (PLE), an infrastructure developing business under Punj Lloyd Infrastructure Limited (PLIL), and a defence and manufacturing business.

PLLs sector-wise revenues in FY2017 are given in Chart F. It shows that, on a consolidated basis, pipelines and tankage has the largest share of 64% of revenues; followed by building and infrastructure with 13%; process with 10%; power 7%; and others 6%.

Chart G gives the sector-wise composition in terms of consolidated order backlog as on May 2017. As it shows, Building and Infrastructure has become the dominant sector in terms of

PIPELINES

Punj Lloyd undertakes a wide range of activities in the pipeline construction space. This includes onshore as well as offshore pipeline projects. Given market conditions and the Companys focus on less capital intensive ventures, Punj Lloyd currently focuses on onshore pipeline laying activities including cross-country pipelines and work related to field development.

In fact, over the last two decades, much of Punj Lloyds business growth was driven by its strong presence in oil and gas pipelines and related construction activities. In recent years, however, with the sharp fall in oil prices, several large projects in this sector have either been scrapped or put on hold. Under such conditions, and given the Companys focus on financial deleveraging, Punj

Lloyd has been very selective in bidding for new projects. It is primarily leveraging established customer relationships to grow its order book.

While securing new orders and maintaining a strong order backlog is essential for the long term stability of the business, during FY2017 Punj Uoyd concentrated on faster and leaner execution of existing projects. With a focus on improving cash flows, emphasis has also been laid on achieving faster commercial closure of projects that are near completion or already completed.

Details of projects executed or under execution during FY2017 are discussed below.

QATAR

• Polysilicon Project - Train 1 and 2:

Important milestone for FSO (First Silicon Out) was achieved in March 2017. The project is scheduled to be completed by the end of FY2017-18 as planned

• Strategic Gas Pipeline for Qatar Petroleum: This project is delayed as the upstream field project is not progressing as planned. Punj Lloyd completed work on two pipelines a few years ago. The client has taken over the pipeline and all systems and the process for commercial closure is under progress

UAE

• The Spiking Project was ready for commissioning in October 2014. The project has been completed.

Liquidation of punch points and commercial closure is in progress

• ADCO Tie-in Field Development has

been completed. Reconciliation is done and material handing over is in progress

• Falcon Project (Dubai) has been completed and commissioned. Initial acceptance has been received from the client. However, there is a dispute on certain claims raised by Punj Uoyd, which has been referred to for mediation.

• Gulf Fluor: This erstwhile Simon Carves project includes construction of a sulphuric acid plant. The plant was commissioned in August 2014. Arbitration procedure for certain disputes has been completed and the arbitration award is awaited

SAUDI ARABIA

• SATORP: The port tank farm for Saudi Aramco and Total, awarded to a joint venture of Dayim-Punj Lloyd was commissioned in FY2014. Commercial closure and punch list was achieved in FY2015. The project has been successfully completed and commercially closed

• SP2: Utility and export pipelines for Saudi Aramco and Sinopec were completed as per the original project scope. Punj Lloyd secured an additional package in this project. Mechanical completion was achieved in October 2016. At present, certain demolition work of old facilities is under progress and is expected to be completed by the middle of FY2018

LIBYA

• TMGP and KTGP: These two projects remain on hold since the revolution started in Libya in February 2011. The current political situation is still volatile and the projects are incomplete. Punj Lloyd continues to make efforts to secure certain payments related to the projects

MALAYSIA

• Sabah-Sarawak Pipeline: The project achieved mechanical closure in December 2014. The pipeline is charged with gas and commissioned. The compressor station at Bintulu is commissioned. Punj Lloyd has initiated discussions for commercial closure with the customer

MYANMAR

• The Myanmar-China Oil and Gas Pipeline: Punj Lloyd has been working on 200 km of the 450 km gas line and 180 km of the oil line. Both the oil and gas pipeline are completed and commissioned. Commercial closure is actively being sought

OMAN

• ORPIC & Oman Gas Corporation (OGC) Project in Oman: The scope of

work for the contract includes the EPC of a 14" diameter, 300 km natural gas liquid (NGL) pipeline and a 32" diameter, 301 km gas pipeline. The 14" diameter pipeline, which is a part of ORPICs US$6.4 billion Liwa Plastic Industries Complex (LPIC), will be from the New Fahud NGL Plant to the Steam Cracker Unit at Sohar in Oman. Given increased gas demand, the Company will be laying a 32" diameter gas pipeline parallel to the existing 32" diameter Fahud-Sohar pipeline for OGC. The pipeline is being laid to supply gas for North Power station. The scope of work also includes construction of Block Valve and Pigging Stations. The project is progressing as per schedule

NEW ORDERS

Clean fuel and interfacing facilities project in Saudi Arabia: This new project was awarded in April 2017 by YASREF (Yanbu Aramco Sinopec Refining Company), a joint venture between Saudi Aramco and China Petrochemical Corporation (Sinopec). It is worth around US$48 million and has a 12 month completion period. The scope of work comprises constructing two pipeline systems, 30"dia x 7 km each (diesel and gasoline), which will be installed to deliver refined produce from YASREF to the Yanbu Refinery for domestic distribution. The project includes metering system, analysers and injection facilities and the work encompasses modification of tanks and extension of existing building with associated activities related to civil,

structural, fire-fighting, and electrical, instrumentation and automation.

TANKAGE

The Company has developed strong credentials and built a good portfolio of projects related to construction of large scale tankage and terminals. Punj Lloyd and its subsidiaries have constructed three LNG and LPG tank farms in India and over 300 tanks globally, ranging from cryogenic double walled full containment tanks to atmospheric floating and fixed roof storage tanks and terminals.

Details of tankage projects executed or under execution during FY2017 are given below.

• Kuwait National Petroleum Company (KNPC) Project: KNPC, the national oil refining company of Kuwait, owns and operates two fuel depots, namely Sabhan and Ahmadi. This expansion involves increasing storage capacities of mogas, gasoil and kerosene and loading capacities at the Ahmadi depot. Punj Lloyd Limited is engaged as the EPC contractor. The project achieved an overall completion of 78% by the end of FY2017 and is set for completion in FY2018

• RAPID Project (Malaysia): The RAPID tank-farm is a flagship project by Petronas and a part of the Refinery and Petrochemical Integrated Development (RAPID) complex at Pengerang,

Malaysia. The base project scope included setting up 42 storage tanks, seven bullets and two spheres with associated piping, civil, structural and E&l work. Already 65% of the work has been completed and the project is on track for completion according to schedule

• Ennore Project (India) for Indian Oil Corporation Limited (IOCL): IOCL through its joint venture, Indian Oil LNG Private Ltd. (IOLPL), is setting up a 5 MMTPA (expandable to 10-15 MMTPA) LNG import, storage and re-gasification terminal at Ennore in Tamil Nadu. This is expected to be commissioned in 2018. Punj Lloyd is engaged as a subcontractor to Mitsubishi Heavy Industries Limited in the construction work related to LNG Storage Tanks System, which comprises early site work and construction of two LNG storage tanks of 180,000 cubic capacity each. In spite of repeated disruptions due to flood and cyclone, the project has achieved an overall progress of 55% and is expected to be completed on time. Air lift of the first tank roof was completed in April 2017 and the second in May 2017

NEW ORDERS

The Company secured the following order during FY2017:

• Mundra Tank Project for Adani:

The project includes design, construction and commissioning of two refrigerated storage tanks measuring 63 metre diameter x 20 metre height and 6 metre diameter x 32 metre long Mounded Bullets for the LPG Terminal at Mundra. The project was awarded to Punj Lloyd by Mundra LPG Terminal Private Limited in the January 2017 and is valued at Rs. 139 crore. The completion schedule for this project is 20 months. Successful execution will open up opportunities for several related activities with the customer

HORIZONTAL DIRECTIONAL DRILLING (HDD)

HDD is a method of installing underground pipelines, cables and service conduits through trenchless methods. It involves the use of a directional drilling machine, and associated attachments, to accurately drill along the chosen bore path and back ream the required pipe.

The process is usually adopted for laying utilities below the river bed, where conventional laying is difficult. PLN Construction, a wholly owned subsidiary of Punj Lloyd, has developed a specialised HDD construction business that is gaining traction. This business is carried out on EPC as well as design and construction basis.

• Maheskhali Anwara Gas Pipeline Project by GTCL, in Cox Bazaar, Chittagong district, Bangladesh:

In the first quarter of FY2016-2017, Punj Lloyd was awarded this project for construction of 30" diameter pipeline using the HDD technique. This was similar to an EPC contract. The project has been completed successfully, one month ahead of schedule

• SMPL Project of IOCL: Successfully completed the installation of 24728" diameter pipeline using the HDD technique under various rivers in Rajasthan and Gujarat

• Reliance DNEPL Project: The

Company secured this order for installation of pipeline under various rivers including the challenging Narmada in Gujarat as part of the Dahej Nagothane Ethane Pipeline Project (DNPL). Gujarat section of this fast track project was successfully completed in FY2017 and a related additional/change order was also secured. It was the first time in India that we successfully adopted and accomplished the meet in the middle technique

NEW ORDERS

The Company secured the following order during FY2017:

• Gas Transmission Company Limited (GTCL) project at Bangladesh: HDD and pipeline installation for the Nalka Gas Transmission Pipeline Project, involves six river crossings

• IOCL project at Bihar, India: Installation of 10.75712.75"OD pipeline across major river crossings from Patna to Motihari and Baitalpur on the Barauni- Kanpur pipeline Over the years, Punj Lloyd has created wide ranging service capability in the offshore space, with investments in capital equipment including ownership of world class pipe-laying barges. It has executed projects in India, South East Asia and the Middle East. The spectrum of activities include providing engineering, procurement, fabrication and installation services for offshore wellhead and process platforms, including topsides and jackets, risers, submarine pipelines, underwater cables and single buoy mooring systems.

Unfortunately, offshore projects have seen a significant slowdown in the last few years. Being a more capital intensive method for extraction of hydrocarbons, financial viability of several projects were stressed with the sharp drop in oil prices. Given the difficult market conditions and the highly capital intensive nature of projects in this sector for the construction service provider, Punj Lloyd has become very selective in its bidding for new projects. The focus is on getting financial closure of existing projects to generate cash flow and release invested capital.

• Gujarat State Petroleum Corporation Limited awarded a contract for a Submarine Pipeline Project for Deen Dayal Field Development Project on lump-sum turnkey contract basis at a price of US$95.3 million (approximately Rs. 400 crore). The scope of work includes a 24.5 km long 20" OD pipeline, a 15 km long 10" OD pipeline, optic fibre cables and onshore work. After some initial environment related issues, the Supreme Court gave a go ahead order for Stage 1 of the Project. The mechanical completion of the offshore contract and gas-in was achieved in May 2014. It needs stating that Punj Lloyd has been able to successfully execute this landmark project due to proactive support provided by the client in releasing money in a timely manner and settlement of claims. However, there still remain certain contractual and commercial issues that need to be resolved between the client, the nodal project management agency and the Company. These are being actively reconciled, and the project is expected to close during FY2018

• Installation of three compressor units for the Platform Compressor Facility Project on the PTT Riser Offshore Platform in the Gulf of Thailand, at a contract price of US$129.32 million: Around 96% of the project has been completed. However, there has been substantial delay due to some extraneous factors and non-resolution of change order and allied claims. In FY2016, the Company reinitiated discussions with the client and remobilised resources for completion of the remaining work. During FY2017, a major headway was made with the signing of a revised contract. The project is expected to be completed by the end of FY2018

• New Hout Crude Transmission Pipeline Project in Al-Khafji, Saudi Arabia from Alkhafji Joint Operations: The project was awarded at US$57.75 million (Rs. 314 crore). Two major reasons for delay are a complete halt on facility by client due to environmental issues, and changes in laws and regulations in the Kingdom of Saudi Arabia. The Company has submitted change orders and claims to the client. After many discussions, the client has agreed to change the scope of work. Consequently, Punj Lloyd is undertaking only the engineering and procurement activities while the client will carry out construction at a later stage. The project relating to PLL scope of work is expected to be completed by the middle of FY2018

NEW ORDERS

The Company secured the following order in FY2017:

Offshore / Onshore Pipeline laying contract from Mumbai Port Trust:

This involves installing offshore and onshore pipelines and terminal work on EPC basis for the Fifth Oil (J5) Berth at Jawahar Dweep in Mumbai Harbour. The contract value is Rs. 209 crore. The scope of work includes supply, installation and testing for 42" diameter pipeline with 17.5 mm wall thickness and 100 mm concrete weight coating - a four km offshore pipeline in shallow water/ intertidal zones including pre-engineering survey, pre-construction survey, procurement and installation, pipeline coating, trenching and backfilling work. Also included in the scope is a 1.25 km long onshore pipeline section besides pipeline manifold, scraper receiver and launcher, sump tank, all piping work, SRV skids, including hookups with the existing facilities and all associated civil work.

Punj Lloyds process vertical services primarily petroleum refineries, petrochemical units and fertiliser plants. For petroleum refineries, the Company has a strong track record of successfully executing various process units including hydrogen and hydrocracker, delayed coker units, sulphur units, motor spirit quality upgradation, coke drum work, and onshore gas development projects. In petrochemicals, Punj Lloyd has been a key player in all stages of the polymerisation process, including those associated with the production of low density polyethylene (LDPE) and linear low density LDPE. Given the slowdown in the oil and gas markets, Punj Lloyds focus in

the process business during FY2017 was on refineries and petrochemicals. Even here, however, there were limited opportunities. Given the Companys strategic decision to be very selective in the bidding process and preserve capital, there was no addition to the order book. Nevertheless, with the compulsory statutory shift to Euro 6 norms in India, there will be a significant growth in opportunities as most refineries will need to upgrade and revamp. Punj Lloyd is actively pursuing such projects in strategic partnership with those who have technical pre-qualifications to service such contracts.

• Sulphur Recovery Unit (SRU), Amine Regeneration Unit (ARU), Sour Water Stripper (SWS) and Offsite facilities that are part of EPCC-2 package for Haldia Refinery of IOCL: Punj Lloyd was awarded an EPC contract worth Rs. 1,094 crore comprising a 80 tons per day SRU, 260 tons per hour ARU, 65 tons per hour SWS, a 132KV switchyard along with utilities and offsite work. The project is around 60% done and is expected to be completed by Q3 FY2019

• Coker LPG Treating Unit and offsite facilities for the Rath Chakra Project, Paradip Refinery: IOCL awarded an EPC contract worth Rs. 368 crore to Punj Lloyd at its Paradip refinery. This includes a 165 KTPA Coker LPG Treater Unit, Nitrogen Generation Unit, FCC Unit modifications, Offsite and 17 —-IK Utilities and several other elements. The project is expected to be completed by FY2018

• EPC for LSTK Package B, IOCL Paradip Refinery project: IOCL has awarded an EPC contract worth

Rs. 1135 crore, comprising various units. There was a delay in construction primarily related to issues arising out of interfacing with inputs from other agencies. The project has been mechanically completed and all the 12 units that the Company was contracted to set up have been commissioned. Final reconciliation and project closeout is in progress

• Sulphur Block of the Residual Upgradation Project at the Manali Refinery, Chennai: The Company secured an EPC contract worth Rs. 353 crore on this account. There have been mid-course changes in the original scope of work; yet all these have been complied with amidst force majeure condition of floods in Chennai. Mechanical completion was achieved for Block B in March 2017; and that for Block A is targeted for June 2017

• Indian Strategic Petroleum Reserves Limited (ISPRL): ISPRL had awarded a contract involving installation and commissioning of underground cavern and top side facilities. The project has been completed technically and final documentation process is on for handing over to the client

• Reliance Jamnagar: Reliance has awarded construction work to Punj Lloyd worth Rs. 300 crore comprising UG/AG piping work, structure erection along with civil work. The physical activity has been completed and commercial closure is underway

The power sector in India is undergoing a structural transformation and Punj Lloyd has realigned its strategy for this sector in line with the prevailing market dynamics and the Companys own financial prerogatives.

In a nutshell, enough electricity generation capacity has been created in India over the last few years to meet, indeed significantly exceed, the prevailing demand for electricity. Hence, there is a lower emphasis on power generation. Thus, there were only a few new projects during FY2017 in thermal power generation. New investments continue to be plagued with the issue of supply of coal and the financially weak condition of the State Electricity Boards, which are the primary customers.

Given these market conditions and Punj Lloyds requirements to preserve capital, the Company reduced its drive to secure new projects and, instead, focused on executing the existing order book and closing old projects. The status of existing projects is as follows:

Transmission and Distribution Projects

Work on the four distribution projects secured in FY2016 has progressed well and the projects are on track with minor delays. This includes the two projects for Power Grid Corporation of India Limited (PGCIL) involving rural electrification of the districts of Jajpur, Khorda and Ganjam in Odisha under the Rajiv Gandhi Gramin Vidyutikaran Yojna (RGGVY); and the two National Thermal Power Corporation (NTPC) projects for rural electrification of the districts of Puri and Koraput in Odisha.

Work on the transmission project from Madhya Pradeshs MPPTCL secured in FY2016 has progressed well and is on track.

Nuclear Projects

The projects under Nuclear Power Corporation of India Limited (NPCIL), KAPP#3&4 (2X700 MW) in Gujarat and RAPP#7&8 (2x700MW) in Rajasthan have been delayed due to several issues being faced by the client.

Thermal Projects

The CKP thermal power project (3x18 MW) in Indonesia was delayed in the past. Two units have been commissioned in FY2017 and closing of the contract is under process.

We secured a civil & construction work (1X800 MW) from BHEL at Kothagudem for TANGENCO. The project is on track. Our existing KSK project (6x600 MW) for civil work and construction in Chhattisgarh has been delayed due to several issues faced by the client. We have received an amendment to the contract value for the extra scope of work in KSK project.

The 2x300 MW Haldia Thermal Power Project for CESC was commissioned in FY2015. The project has been contractually closed and the bank guarantee released. So, too, for the 2x300 MW Dhariwal Thermal Power Project, also for the CESC. Unfortunately, the 2x270 MW GVK Thermal Power Project, where both units had been synchronised, the financial closure process has gone into arbitration.

The buildings and infrastructure segment has emerged as a principal driver of growth for the Company. While in the last few years the Company secured several new orders, Punj Lloyd took a step back in FY2017 and emphasised execution and completion of existing orders.

Progress on the road projects has been a mixed bag. The details are given below:

• Raipur-Simga Road Project: This is an EPC highway contract worth Rs.513 crore including construction of 4/6 lanes of Raipur-Simga stretch in Chhattisgarh under NHDP IV. The project is progressing with minor delays

• Simaria-Khagaria Road Project: This EPC highway contract worth

Rs. 567 crore involves four laning of the Simaria-Khagaria section of NH-31 in Bihar. The project has been delayed but has shown signs of taking off in the first quarter of FY2018

• Talebani-Sambalpur Road Project:

This EPC highway contract worth Rs. 392 crore involves rehabilitation and upgradation to four-laning with paved shoulder of the Talebani to Sambalpur section of NH-6 in Odisha under NHDP IV. The project is delayed

• AH 48 Road Project: This EPC highway contract worth Rs. 666 crore is for over 90 km of the Asian Highway (AH) Network, a cooperative project for improving transport facilities throughout 32 nations and providing road links to Europe. The project is progressing well with 60% of the work complete

• Balance work of four-laning of the Gorakhpur-Gopalganj section of NH-

28 in Bihar worth Rs. 542 crore from the NHAI. The project is 50% complete and scheduled for delivery ahead of original schedule

• Operation and maintenance work for the Belgaum Maharashtra Road Project and the Khagaria Pumea Road Project. This continues to be implemented

In buildings, the following projects are in different stages of progress:

• Koderma Township Project: The work involves construction of balance residential and non-residential buildings for the Koderma Thermal Power Station township of Damodar Valley Corporation, including internal electrical, water supply and sanitation. The contract is worth Rs. 207 crore, and the construction period is 18 months

• Tata Capitol Heights: The project includes civil, structural, waterproofing and auxiliary work for construction of an integrated residential and retail complex called Capitol Heights in Nagpur. There were some issues in the project, which are under rectification. The project is expected to be completed and handed over to the client in FY2018

• An para Railway Project: Earthwork in formation, ground improvement, construction of bridge, P-Way work, workshop building, S&T, electrical and other miscellaneous work in connection with augmentation of MGR system and railway siding (Anpara D thermal power plant 2x500 MW). This project is in its final stage of completion

• AIIMS Building Project in Raipur:

Construction of medical college and hostel complex including project planning, construction of civil work including finishing, electrification, plumbing and all building services for the Ministry of Health and Family Welfare. After certain initial delays, the project has gained momentum and expected to be completed in the first half of FY2018

• Delhi Police Housing: Primarily entails development, operation and maintenance of the residential zone of over 5,000 units (approximately 40 lakh square feet), along with utility facilities such as sewerage and water treatment. The project continues to be plagued with financial closure

• In addition, the Company continues to implement the difficult Sikkim Airport Project, which is a green-field airport in Pakyong, Sikkim. The scope of work includes earthwork in filling, building the worlds highest reinforced retaining wall, drainage systems including culverts and aerodrome pavements. Geological surprises, unfavourable climatic conditions and stoppage of work by locals have delayed progress of this project. However the runway construction is now complete

With the Gol taking a policy stance towards greater engagement of the private sector in defence procurement and adoption of the Make in India model to reduce the large import dependency, a massive opportunity has opened up for defence related manufacturing in India. According to estimates by McKinsey and Company, the Indian defence market will

be worth US$620 billion (Rs.38 lakh crore) by 2022 with around US$130 billion worth of contracts being awarded in the next few years.

While the opportunities are huge, the progress on the ground has been slow. Given that the industry caters to the important aspect of national security, there are stringent norms of security clearances, licences and technical parameters that need to be adhered to by all private sector participants. Also, the procurement process is often over a long period of time. So, private sector players that wish to participate in this sector require long term commitment and perseverance to succeed.

• Punj Lloyd was among the first few companies to be granted defence manufacturing licences after the sector was liberalised by the Gol to enable private participation. The Company received the first licence for manufacture of guns, rockets, missiles and artillery systems in 2007. Since then, it has expanded its scope and received several more licences. The Companys strategic blueprint comprises efforts to:

• Become a supplier of choice to the Indian armed forces

• Provide impetus to the Make in India programme

• Be a preferred partner for transfer of technology from major global players

• Be an intrinsic part of the global defence equipment supply chain

• Undertake maintenance, repair and overhaul of defence equipment

• Work in partnership with global majors to meet offset requirements as per the Indian Defence Procurement Procedure Punj Lloyds focus in defence includes land systems, small arms, aerospace, and homeland security. The most significant development in FY2017 was the Companys foray into the manufacture of small arms. Punj Lloyd cemented its joint venture with Israel Weapon Industries (IWI) with the inauguration of the countrys first private sector small arms manufacturing plant at Malanpur in Madhya Pradesh is a member of the SK Group and is a world leader in the production, marketing, design and development of unrivalled weapons for over 80 years. All IWI weapons have been battle proven around the world under adverse and extreme environmental conditions. They include the Tavor Assault Rifles, X95 Assault Rifle, Carbine and SMG, Negev Light Machine Guns, Galil Ace Assault Rifles, Galil Sniper Semi-Automatic Rifle, Uzi SMGs and Jericho pistols. All these small arms have been considered weapons of choice by governmental, military, police entities and law enforcement agencies around the world.

In the initial phase, this plant will manufacture components for IWI to assemble in its parent plant to service existing orders. In the next stage, once all licensing formalities are complete, the plant in India will fully produce and assemble these products to service Indian defence demand and for exports.

entered into this JV after considerable due diligence. Thus, the tie up is an international endorsement of Punj Lloyds capabilities as a reliable partner to global players entering the Indian defence space.

In land systems, the developments are in air defence and artillery. Punj Lloyd participated as a prime on the ZU 23 Air Defence Gun Upgrade programme, competing against major Indian defence companies and secured L1 status in the bidding process for this programme. Punj Lloyd upgraded the existing ZU-23 2B Gun by replacing the manual laying system with a rugged Electro Optical Fire Control System (EOFCS). There has been a delay in order placement for this project. However, the Company expects positive movement in FY2018.

Punj Lloyd is upgrading the 130 mm gun to 155 mm by replacing several critical aspects such as the muzzle brake, breech block assembly, barrel and rammer. User trials of summer and winter have been completed along with maintainability and environmental evaluation.

In addition to these programmes, Punj Lloyd has a strong relationship with the Ordnance Factory Board (OFB). Eight major components out of the eleven given to the private sector for Dhanush (the indigenised gun) and the loading device and loading system for both the 155 X 45 OFB guns are being manufactured by Punj Lloyd. The Company has worked on design and development of muzzle brake and loading mechanism, two of the four major components of the ATAGS for Defence Research and Development Organisation (DRDO).

Over the years, Punj Uoyd has developed comprehensive aerospace and aero structure capabilities in the Indian private sector. It is supported by strong capability for aerospace design and analysis through its subsidiary, AeroEuro Engineering. Punj Lloyd is also an investor in Air Works, Indias leading private general aviation and MRO Company. It is certified to undertake up to D level checks on A320, B737 and ATRs, among other aircraft. Air Works has also been contracted to undertake MRO work on IAF VIP jets. This relationship allows Punj Lloyd access to highly skilled manpower, specialised test equipment, hangar space and access to an independent runway. The Company has a manufacturing plant which is AS9100C certified and delivers components to HAL for SU30, helicopters LCA (Tejas).

Punj Lloyd, along with its foreign partner, has entered the Homeland Securities business with two products: an X-ray based Full Body Truck Scanning System (FBTS), and a Drive-through Container Scanner (Road) System through transfer of technology. The X-ray based scanners will be installed at line of control and ports across the country to scan goods and cargo coming in and going out of the country. Punj Lloyd will be servicing these products for ten years after delivery.

Punj Lloyds manufacturing and systems integration division (MSID) has built a robust product portfolio with focus on specific competencies - ability to manufacture large components, work on many exotic material, and undertake high precision manufacturing. The wide range of products, built for diverse industries and for different clients in India and abroad, demonstrates Punj Lloyds expertise and adaptability to meet varied market requirements.

While developing a strong capability for components production that services defence related requirements, Punj Lloyd has extended its components manufacturing portfolio to service power plants including Hydel, Nuclear, Thermal and Gas, and also for shipping, transportation and mining industries. As far as geographical areas are concerned Punj Lloyd serves OEM companies from Japan, Sweden, Italy, UK, Austria, and Finland.

The MSID business is developing at a rapid pace. The flexible and highly adaptive machines can manufacture components in a variety of sizes and complexities, meeting the rigorous standards and tight schedules of global customers. At the one end, Punj Uoyd manufactures large components like the outer casing of combustion chamber and the upper and lower tank panels for the

Sukhoi 30; while at the other end, it produces small but highly critical jigs and fixtures for the fuselage of the Indian built Light Combat Aircraft, the Tejas.

In line with the trend in India for greater private sector participation in infrastructure development, Punj Lloyd had forayed into asset development and ownership in 2010 through Punj Lloyd Infrastructure Ltd (PLIL). The aim was to go up the value chain, leverage the core EPC strength of the group and create a differentiated proposition in the market. This was also perceived as a mode to grow the order book.

However, in the last few years, given the slowdown in the sector and severe liquidity crunch, private sector infrastructure development has been adversely affected. Though PLIL was more cautious in capital outlays and risks compared to most of its peers, the going was tough. Given the cash constraints of the parent Company, it was decided to monetise some of these assets. There has been some progress on this front, such as:

• In October 2016, PLIL executed definitive agreements with India Infrastructure Fund II (a SEBI registered Category I Alternative Investment Fund represented by its investment manager IDFC Alternatives Limited) to divest three operating solar projects aggregating to 45 MW located in Punjab and Rajasthan subject to customary approvals and other conditions precedent. The transaction is expected to be completed by the first half of FY2018

• In November 2016, PLIL executed definitive agreements with India Power Corporation Ltd. (IPCL) to co-develop the 30 MW solar assets in Uttarakhand. In February 2017, PLIL sold 49% of its shareholding in two of the three solar assets with aggregate capacity of 20 MW to India Power Green Utility Private Ltd. (IPGUPL), a wholly owned subsidiary of IPCL. Sale process for the final solar assets in Uttarakhand to IPGUPL is expected to be completed by the first half of FY2018

• Punj Lloyd, the EPC contractor to these projects, has successfully commissioned the 30 MW solar PV project in Uttarakhand within the stipulated deadline of 31 March 2017. It shall be responsible for operations and maintenance for a period of two years from the date of handover of the plants

• The Khagaria-Purnea Highway project has successfully received the due semiannual annuities on time in FY2017 and operation and maintenance of the highway is being carried out satisfactorily. Even so, PLIL has initiated discussions with multiple investors to divest this asset

ENGINEERING LTD. MB

In the last two years, the business has faced several headwinds primarily emanating from the severe slowdown in the oil and gas market. In addition, there has been a general slowdown in large scale projects. Under these conditions,

PL Engineering Ltd (PLE) has adopted a calibrated strategy with focus on profitable and high value jobs while being disciplined in bidding and executing projects. This has contributed to a steady level of revenues and profits.

PLE continues to be a preferred engineering partner for various companies and are currently executing projects across Asia and Middle East including UAE, Kuwait, Oman, Qatar, India, and Malaysia. It not only has a level of geographical diversity but also across activities encompassing pipelines, refinery units, gas processing plants, residential buildings, onshore oil field infrastructure and chemical plants.

GASCO, which is one of largest gas producing companies in the Middle East has reposed its faith in PLE by awarding another large project for their ASAB gas field. This is in addition to other projects which PLE has won in the past 24 months from the same client. The other success in terms of a large order, which came from the UAE, was in petrochemicals. In fact, PLE is now actively pursuing petrochemical projects as a part of a diversification strategy. The first step was to get qualified by UAEs premier petrochemical company, Borouge, as an engineering and design consultant for future FEED and detailed engineering projects.

With oil prices expected to remain low in the medium term, PLE has taken up initiatives to diversify into other sectors like Buildings and Infrastructure, where its inherent engineering strength can be better utilised. PLE is growing this business and has been successful in winning assignments from one of Indias leading Mumbai based real estate players for its residential building projects.

A major achievement for PLE in FY2017 was the signing of an exclusive Engineering Delivery Partnership (EDP) agreement with one of UKs largest infrastructure and energy players. This is expected to open the doors to a large number of opportunities for PLE in the UK market. PLE is also engaged as a consultant with the Delhi International Airport where it is providing engineering services for a state of the art security system and electrical systems.

In FY2017, PLE took the important decision of monetising its UK based subsidiary, Simon Carves Engineering Limited. The organisation was taken over by a Mitsui group company, the ECI Corporation based out of Houston, USA. Although separated from PLE, Simon

Carves continues to work closely on some of the ongoing petrochemical projects in USA.

Recognising the key role support functions have in Punj Lloyds abilities to deliver projects, there has been a renewed focus on certain domains as part of the Companys turnaround strategy. The emphasis is to make these functions true business enablers.

PROCUREMENT

After a phase of rapid expansion, Punj Lloyd established the Central Procurement Group (CPG) in FY2015 with a goal of institutionalising the buying function. This entailed creating effective and efficient processes and policies that are supported by control mechanisms, which strictly enforce adherence to the prescribed norms. The CPG continues to function with a focus on meeting these objectives.

During FY2017, the enforcement of strict compliance of policies primarily translated into processing all purchase orders (POs) as per pre-defined hierarchy and effective monitoring of timelines for each activity.

In the construction business, on time and full delivery of goods and services is a major contributor to timely completion of projects and financial success. In view of this, the CPG has laid emphasis on close monitoring of delivery schedule and its compliance. Special focus has been given to delivery of material with long lead time, so that the overall project schedule is kept on track. In FY2017, effective utilisation of this mechanism translated into timely procurement of critical material in important projects.

The CPG task-force is actively supporting the ERP upgradation from Oracle 11 i to r12 with GST compliance. Major interventions include unique material codes for each item across projects; strict implementation of only online Oracle- based approval process; system generated MIS reports; standardisation of the purchase order format across group;

and GST implementation in the upgraded Oracle version r12.

During FY2017, the Company continued with the online vendor registration system through the PLL web portal. This allows global vendors direct access to PLL by registering online. The portal will be used for GST registration and a further vendor cleansing exercise in FY2018.

The buying process in the Company continued to reap benefits of price discovery and transparency through reverse auctions. Today, procurement activities above Rs. 5 lakh go through the process of reverse auctions. Efficiency in buying has also been enhanced by adopting the bottom up costing approach. This has provided greater level of granularity in the process of arriving at an internal value for a product or service. Commodity indices are provided on the CPG intranet site to provide buyers real time prices of commodities.

HUMAN RESOURCE (HR)

In the prevailing difficult business environment where focus is on cost controls, HR management has had a critical role in striking a fine balance between right sizing of manpower resources and ensuring effective operations of the business.

From an HR perspective, Punj Lloyd has always adopted a philosophy of Grow from Within. While acknowledging that lateral inductions are necessary for business continuity and growth, the Company has stressed on identifying, growing and promoting internal talent to take on more challenging responsibilities.

In FY2017, HR continued to focus on anchoring the Companys values and beliefs across all people related processes - from recruitment to performance management, talent development, employee communication and remuneration. During the year, the recruitment processes and policies were further strengthened to ensure standardisation across verticals and locations with emphasis on just in time hiring and redeployment of manpower across locations and verticals. The Company also initiated methods to quantify costs for various employee benefits and streamline costs of corporate functions.

In September 2016 a new automated HR system named MITRA was launched. It has been designed to automate the HR transactions of Punj Lloyd, thereby enabling employees to view and manage transactions related to their attendance and payroll anywhere and anytime.

Training activities continued across all levels, to ensure development of employees - management as well as skilled workers. More than thousand employees were trained across geographies. This covered subjects like finance, project management, planning, contracts, procurement, presentation skills, project risk evaluation and even spiritual leadership and office ergonomics. An executive coaching workshop designed for leadership skill enhancement was organised in March 2017.

Efforts were also channelised for further improving employee engagement through effective usage of reward and recognition schemes that reward work done beyond what is prescribed. There were one-on- one sessions conducted by managers to make employees feel valued and evolve the developmental plan. Initiatives were also taken on gender sensitisation in the workplace, which included focus group discussions once in two months, poster competitions, quarterly womens meet, awareness sessions by an external expert and celebration of World Womens day. Steps were taken to follow the guidelines as defined in the Prevention of Sexual Harassment policy and establishing an Internal Sexual Harassment Complaints Committee to deal with any complaints related to harassment at the workplace.

Industrial relations remained cordial and there were no disruptions of work on this account.

With a focus on increasing efficiencies and controlling costs across operations, IT continues to be viewed as a fundamental business partner at Punj Lloyd. It plays a pivotal role in enabling the business to establish strict processes and controls. Moreover, IT interventions in the Company continue to be developed and implemented with minimal new investments with a focus on in-house capabilities.

As touched upon in the previous section, a cloud based RAMCO HCM (Human Capital Management) solution was launched in September 2016. Named MITRA (or Friend), this easy to approach, reliable and consistent platform covers a wide range of HR functions from payroll to taxes, to travel reimbursements and from training needs to attendance management and much more.

Punj Lloyd has been using the Oracle ebusiness suite (11.5.10 version). Unfortunately, this ERP is an old version and does not support GST requirements that will become mandatory in India in FY2018. To have its IT systems ready for handling transactions with GST, Punj Lloyd has started re-implementation of the Oracle e-business suite with the latest release (12.2.6 version) along with the relevant GST patches. This is being undertaken in partnership with KPMG.

The Company has also engaged a tax consultant to review all its contracts, with both clients and vendors, to understand the impact of GST and recommend suitable process changes. The target Go- Live for this GST project is 1 July 2017.

The vendor portal has been a major success and registration of vendors continues seamlessly with approval workflows built in. Enhancements to capture GST details are underway and will be rolled out when GST comes into force. A direct interface to Oracle is also being developed so that vendors registered and approved by all authorities are registered directly in Oracle.

Another major initiative in FY2017 was the Data Centre consolidation. The Punj Lloyd Engineering servers were migrated into the central data centre with minimal downtime for end users. As part of hardware consolidation, old servers are being migrated to new blade servers, which are more powerful from a processing perspective, but are less on energy consumption.

The Company continued to follow standard e-waste disposal process for getting rid of old IT assets.

QUALITY

Quality initiatives play a critical role in differentiating the Company in a highly competitive market place. Punj Lloyd acknowledges that efforts on quality management is a continuous process and is firmly committed to deploying effective systems and processes across all its functions and project sites.

The Company has secured a combined ISO certification for all locations and projects after detailed assessment of its Quality Management Systems (QMS), Environment Management Systems (EMS) and Health and Safety Management Systems (OHSAS) by DNV-GL Business Assurance India Ltd in May 2016.

The non-compliance report (NCR) tracking system has been upgraded with escalation mechanism embedded in it for on-time closure of NCRs. A dashboard has also been created in the NCR tracking system to review performance of a project at any stage.

HEALTH, SAFETY AND ENVIRONMENT

Early in its working, Punj Lloyd realised that to be a preferred EPC contractor, standards of health, safety and environment had to be high and nonnegotiable. This later became one of the differentiators between Punj Lloyd and its competition.

Specific HSE activities during FY2017 included IMS Re-certification Audits, which were conducted across project sites and corporate office by DNV-GL. Punj Lloyd has been recommended for re-certification as per ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 Management Standards.

Awards and Recognition

Achievement of LTI Free Safe ManHours

Punj Lloyd was awarded appreciation certificates from clients at the following project sites for maintaining high level

HSE standards and achieving milestones.

• LSTK-B Project, Paradip, India - 20 million LTI free safe manhours

• RIL J3 Project Jamnagar, India - 20 million LTI free safe manhours

• RAPID Tank Farm Project, Malaysia - 3 million LTI free safe manhours

• Expansion and Revamping of Ahmadi Depot (KNPC), Kuwait - 3 million LTI free safe manhours

• LNG Ennore Project, Chennai, India - 2 million LTI free safe manhours

• SRU Project, Haldia, India - 2 Million LTI free safe manhours

• SRU Project, CPCL, India - 5 Million LTI free safe manhours

Award by Clients

• NPCIL RAPP 7&8 Rajasthan, India -

Punj Lloyd has been awarded Best HSE Project by NPCIL for maintaining sound safety standards for 2016.

• NPCIL KAPP 3&4 Kakrapar, India - Punj Lloyd has been awarded for maintaining Accident Free Days by NPCIL for 2016.

Promotional Activities

To encourage safe execution, Punj Lloyd organised a contest for the Best HSE Project Award, where the following projects were selected and received award from Punj Lloyd Chairman on the Founders Day 2016.

• Buildings & Infrastructure - BBRP project

• Power - NPCIL KAPP 3&4 project

• Process - LSTK-B, Paradip Refinery project

• Pipelines and Tankage - RAPID project

In addition, the Companys 45th National Safety Week was celebrated across the organisation with great enthusiasm. Also, campaigns like World Environment Day, Swachh Bharat Abhiyan, World AIDS Day and Road Safety Week were organised to mark their significance and spread awareness.

FINANCIAL HIGHLIGHTS

Table 1 gives the abridged standalone and consolidated profit and loss account of the Company. From an accounting perspective, there are two major developments in FY2017.

First, this is the first year when both figures for FY2016 and FY2017 have been reported on the basis of the revised Indian accounting standards (Ind-AS) with the transition date of 1 April 2015. Consequently, the numbers are different from what has been reported earlier in annual and quarterly reports. Primarily, the impact of transition has been accounted for in opening reserves and the comparative amounts have been restated accordingly.

Second, as discussed earlier, with two subsidiaries in Singapore going under judicial management, Punj Lloyd has lost effective control over them and these were deconsolidated during the year by making consequent necessary adjustments. Accordingly, the reported consolidated accounts and the figures for FY2017 and FY2016 are not comparable.

The highlight of FY2017 from a financial performance perspective is the turnaround to positive operating profits on a standalone basis. Companys consolidated net borrowings reduced to Rs. 7,174 crore from Rs. 7,564 crores in FY 2016, primarily due to deconsolidation of Singapore subsidiaries.

The finance function continues to play a critical role in the Companys business, especially in this tight liquidity environment. Fundamentally, efforts at convincing the lenders at developing a restructured financial package apart from schemes prescribed by the RBI is at the core of the Companys turnaround. The lenders have been supportive and in

January 2017 a techno-economic viability study was instituted to lay the foundation of such a plan. Such a plan will essentially include some element of moratorium from the lenders, restructured repayment, and should offer avenues for non-funded working capital like bank guarantees that are critical for effective execution of projects and revenue generation.

Under extremely difficult conditions, the Company has managed to balance inflow and outflow of working capital and utilisation of bank guarantees to sustain project execution and grow revenues. The claims process has also been aggressively pursued although cash inflows are yet to be material. The major claim on the Heera project has been reapplied for, under the New Arbitration Act. Some arbitration activities have been concluded for claims on projects in the Middle East and favourable results are expected in FY2018. On the Libyan projects, efforts are being made to get some bank guarantees released from the customer.

RISK MANAGEMENT

Punj Lloyd has a comprehensive Enterprise Risk Management (ERM) framework in place for identification, assessment, treatment and reporting of risks.

The Audit Committee of the Board oversees the efficacy of the risk management processes. Business level risks and the mitigation plans for each vertical are reviewed periodically by the respective top management. The Corporate Risk Department appraises critical risks impacting the Company and ensures adherence to policies. Risk management at Punj Lloyd is done at two levels. First, at a strategic level, there is a macro perspective of risks, charted out to define business strategy and influence. Second, it is an inherent and integral part of operations at Punj Lloyd, which governs the execution of each individual project. At an organisation level, there are clearly defined roles for the senior management in terms of timely identification, mitigation and management of risks.

Corporate risk management team and project embedded risk teams are responsible for managing and reporting of risks to senior management. Each project goes through a detailed risk evaluation and the identified risks are tracked through three stages of project lifecycle: the sales decision process, the bidding and estimation processes and project execution. Operational risks are managed through a risk register and risk manual.

Internally, Punj Lloyd has been extending all its efforts to adopt a project delivery model that is as light as possible, in terms of capital intensity, with an effort to selffinance projects through efficient cash management. Special emphasis is being laid on improving contract management and dealing with claims.

The major external risk the Company is continuing to face is liquidity. Faced with tough financial conditions, most customers, including government players, are not making timely payments. Several contractual issues are getting dragged into arbitration or judicial intervention. Further, there are inordinate delays in claims settlements, which are locking the Companys capital in large chunks.

The top Enterprise level risks for the Company and the mitigation measures being implemented are:

Debt Servicing

Flaving taken on debt to enhance growth, Punj Lloyds balance sheet remains leveraged. This has led to a series of obligations for continuous pay-out to banks and financial institutions, which is difficult in a market with liquidity crunch. The risks associated with any default of such pay-outs are significant.

Reputation and Brand

Being in the service industry, Punj Lloyds business faces risks in terms of loss of brand value. Strong relationships based

Table 1: Abridged Profit and Loss Account

	Standalone		Consolidated
	FY17	FY16	FY17	FY16
Revenue	3,761	3,348	4,867	4,447
Other Incomes	299	180	1,355	258
TOTAL INCOME	4,060	3,528	6,222	4,705
Cost of Sales	(3,952)	(3,898)	(5,883)	(5,382)
EBIDTA	108	(370)	339	(677)
EBIDTA %	3%	-10%	5%	-14%
Finance cost	(882)	(898)	(1,018)	(1,059)
Depreciation	(125)	(227)	(221)	(342)
Share of loss of associates/joint ventures	-	-	(5)	(5)
Loss Before Tax	(899)	(1,495)	(905)	(2,083)
Tax	49	(18)	35	-
Loss After Tax	(850)	(1,513)	(870)	(2,083)
Non-controlling interest and other comprehensive income	(937)	(215)	419	(50)
Total Comprehensive Income	(1,787)	(1,728)	(451)	(2,133)

on good delivery can be affected by any major catastrophe in a project, especially involving danger to life. The Company has reinforced its HSE practices to manage this risk.

In addition, inability to meet financial obligations may affect the Companys ability to finance its operations, which can have a major impact on the brand value attributed by customers, even leading to blacklisting.

Economic slowdown

Even as the global economy slowly recovers from the prolonged downturn, large ticket infrastructure spends will take time. Consequently, demand for construction service remains muted. And in pockets where there is demand, one finds stiff competition from players trying to get most of a shrinking pie. Therefore, companies are exposed to significant market risks in terms of not getting orders or securing these at such prices as may put unsustainable pressure on margins.

Political Uncertainty

To secure business in todays environment, the Company has to enter into markets in Africa, Middle-East and South Asia etc. Many of these geographies have inherent risk of sociopolitical uncertainty. While Punj Lloyd always evaluates such risks, it has to take certain calculated strategic decisions as many of these are politically volatile markets

INTERNAL CONTROLS

The Company provides an effective internal control environment and a robust internal control framework,

commensurate with the size and complexity of its business. Audit committee of the Board and senior management is periodically apprised on the internal processes of the Company with respect to Internal Financial Controls, Statutory Compliances and Assurance.

The Company has designed and implemented a process driven framework for Internal Financial Controls (IFC) as detailed in the Companies Act, 2013. These controls have been established at the entity and process levels to comply with internal control requirements.

The system of internal controls in Punj Lloyd ensures the following:

• timely and accurate financial reporting in accordance with applicable accounting standards;

• optimum utilisation and safety of assets;

• compliance with applicable laws, regulations, listing agreements and management policies; and

• an effective MIS system and reviews of other systems.

The assurance function is carried out by the Corporate Audit department which makes independent assessment by conducting internal audit of all units of the Company and its major subsidiaries at regular intervals. Internal audit inter alia covers assessment of financial and operational efficiency as part of the process. Further, it conducts operating effectiveness testing of the internal financial controls with the objective of providing an independent and reasonable assurance to the Audit Committee and the Board of Directors.

OUTLOOK

While global economic uncertainties are expected to continue in FY2018, one expects more opportunities to emerge in India with the Gol focusing on boosting investments for job creation while undertaking several structural reforms.

The infrastructure sector is showing some early signs of a recovery especially in projects related to the transportation sector. One expects this trend to continue.

Punj Lloyd will continue to selectively grow its order book and to stress on effective execution. A restructured financial package from the lenders is expected in FY2018, which should provide some breathing space to stabilise the business. However, operations will continue under difficult liquidity conditions and implementation of execution excellence will be very important for the successful turnaround of the Company. One does expect some material cash inflows in FY2018 from the claims arbitration procedures pursued during FY2017. Overall, the E&C business is expected to progress on a positive growth path in FY2018 but the developments are going to be incremental and gradual.

The momentum gained in the defence business is expected to continue. The small arms JV with IWI is expected to start components production with buy back arrangements, which will provide the business with a jump in revenues.

FY2018 will continue to be a financially difficult year. However, one expects higher revenues and a better EBITDA than FY2017.