Reliance Naval & Engineering Ltd Management Discussions.
Forward Looking Statements
Statements in this Management Discussion and Analysis of financial condition and results of operations of the Company, describing the Companys objectives, expectations or predictions may be forward-looking within the meaning of applicable securities laws and regulations. Forward-looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The Company assumes no responsibility to publicly amend, modify or revise forward-looking statements, on the basis of any subsequent developments, information or events. Actual results may differ materially from those expressed in this statement. Important factors that could influence the Companys operations include Governments strategy relating to acquisition of naval platforms, changes in Government regulations, determination of tariff and such other charges and levies by the regulatory authority, changes in tax laws, economic developments within the country and such other factors globally.
The financial statements are prepared under historical cost convention, on accrual basis of accounting, and in accordance with the provisions of the Companies Act, 2013 (the "Act") and comply with the Accounting Standards notified under Section 133 of the Act. The Company has used estimates and judgments relating to the financial statements on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner, the state of affairs for the year.
The following discussions on our financial condition and result of operations should be read together with our audited consolidated financial statements and the notes to these statements included in the Annual Report.
Unless otherwise specified or the context otherwise requires, all references herein to "we", "us", "our", "the Company", "Reliance", "RNEL", "Reliance Naval", "RNAVAL" are to Reliance Naval and Engineering Limited and / or its subsidiaries and associates.
About Reliance Naval
Reliance Naval and Engineering Limited (formerly Reliance Defence and Engineering Limited) has the largest engineering infrastructure in India and is one of the largest in the world. RNAVAL is the first private sector company in India to obtain licence and contract to build warships.
RNAVAL operates Indias largest integrated shipbuilding facility with a Dry dock admeasuring 662 M x 65 M. The facility houses a modular shipbuilding facility with capacity to build fully fabricated and outfitted blocks. The fabrication facility is spread over 2.1 million sq. ft. The shipyard has a pre-erection berth of 980 meters length and 40 meters width, 2 Goliath cranes with combined lifting capacity of 1,200 tonnes, and an outfitting berth of 780 meters.
Industry Scenario Defence Shipbuilding
The indigenization of Indias defence production industry has always been a priority for the Government. To enhance defence production many policy level changes have been brought in, which encouraged participation of private sector, including MSMEs; and provided impetus for private companies to design and construct defence platforms. However, these policies have not led to any significant increase in shipbuilding orders for the private sector, as many of these orders have gone to PSUs/ DPSUs on nomination basis.
However, with the Ministry of Defence likely to issue RFPs for multiple types of platforms, the defence business is looking up. The current size of the Indian Naval fleet is around 132 vessels, 220 aircraft and 15 submarines. There are 32 vessels that being built, or are contracted to be built, in private and public shipyards in India. By 2050, the Navy aims to have 200 ships, 500 aircraft and 24 submarines.
The commercial shipbuilding industry continues to be impacted by the Global slowdown with the Global Active Fleet growing by only 3% last year.
The three Asian shipbuilding giants, viz., China, South Korea and Japan, representing almost 95% of the global orderbook by deadweight, continued to fight fiercely for market share. In 2018, China consolidated its top position with a 43.1% market share. In second place Korea increased its market share to 27.5%, while Japan slipped back to 24.0% in third place. The rest of the world (RoW) and Europe registered a marginal 3.8% and 1.6% share of the global market respectively.
Further, the Maritime Trade growth through Dry bulk, Tankers, & Container throughput dropped in 2018, in contrast to growth in 2017.
Thus, the Indian private shipbuilding industry is going through a prolonged stressed situation, with the result that two of the large private sector shipyards are in the process of liquidation, and the rest are operating at sub optimal levels of capacity utilization. This has led to rethinking of the product mix, encompassing more verticals in the shipbuilding & Ship repair sector for viability of the shipyards in the private sector, especially with large capacity such as in case of this Company.
The Company is also facing several challenges which are impacting its operations. There is an acute cash flow crunch as the expected Debt Resolution is yet to be actualized. This is impacting the progress of the existing projects leading to extended timelines and thereby leading to erosion of confidence amongst clients.
The Shipbuilding industry is critical to Indias strategic and economic interests and is characterized by high growth potential due to its multiplier effect on the economy. Shipbuilding has spin offs to other industries, including steel, engineering equipment, port infrastructure, trade and shipping services. Further, shipbuilding is a labour intensive industry with tremendous indirect potential in employment generation and contribution to GDP through high contribution from other industries.
Development of Indian Shipbuilding industry is no longer an option, but a strategic imperative as it is both an Economic Multiplier (11.2 times) through investment in the downstream Industry as well as an Employment Generator being a labour intensive industry and has a multiplier effect of 6.4 times on generation of employment in the entire value chain. Consequently, it provides livelihood for 32 persons for each Shipyard employee.
India has about 8,000 km long coastline, around 30 shipyards, 12 major ports and 200 ports under its jurisdiction. For a country that is predominantly peninsular with a massive coastline and about 1200 islands, exploitation of Indias shipbuilding capabilities have not been in line with development in other sectors. Indias long coastline acts as a strategic geographic advantage for the defence of the country. In order to be a maritime power, the defence sector needs state-of-the-art ships and naval forces. The Ship-building industry is intrinsically linked to defence of the country.
Apart from the construction of defence vessels of Indian Navy and Coast Guard, shipyards also contribute to the other commercial areas of oil and gas security, food and commodity security and commercial transportation. The changes in the shipbuilding activity have a cyclical and direct effect on other sectors as well.
The growth of shipbuilding is vital for Indian Economy and National Security because of a consistent growth in sea trade and the need to safeguard strategic sea lanes of communication.
While Shipping provides global interconnectivity between the producers, manufacturers and markets all across the globe and
Warships being essential assets, to safeguard the security of the sea lanes and coastlines from a national security perspective, there are emerging areas in the inland water navigation, coastal navigation (such as Sagarmala projects) and offshore Oil & Gas fields which would provide high employment opportunities and growth of GDP for the nation. To realize its growth potential, the sector needs to establish and achieve a critical mass. There is a huge scope for development of shipbuilding sector considering the availability of skilled labour and engineering capabilities.
BUSINESS OPPORTUNITIES Defence Ship Building & Refits:
New orders for Defence Shipbuilding:
In the defence ship production sector following projects are envisaged for issue of RFPs (Request for Proposals), which are likely to fructify as new building contracts in 2020-21: Next Generation Missile Vessel (NGMV), Air Cushioned Vessel (ACV), Diving Support Craft (DSC), Survey Training Vessel (STV), Fast Patrol Vessel (FPV), Survey Vessel (SV), Multi-Purpose Support Vessel (MPV), High Speed Landing Craft (HSLC) and Next Generation Offshore Patrol Vessel (NGOPV).
With regard to six nos Conventional Submarine Project (P75 I), Expression of Interest (EoI) has been issued by IHQ MoD (N) to foreign collaborators having design and construction experience, viz., ThyssenKrupp Marine Systems (Germany), Naval Group (France), Saab AB (Sweden) and Rubin Design Bureau (Russia). IHQ MoD
(N) is finalizing the issuance of EoI to Indian Shipyards during Q1/Q2 FY 20. RNAVAL is one of the contending shipyards under Strategic Partner model of DPP 2016.
Repairs and Refits of Defence Ships:
In case of the refit of defence ships there is huge demand due to non availability of ship repair facility such as Dry docks, shiplifts and floating docks in the country. The majority of the PSU shipyards have over utilised facilities with new building activities and as a result there is a huge backlogs of ship refits in the Indian defence forces. There are nearly 370 vessels operating for defence and para defence in India which requires refits of minimum period of 45 to 90 days. This entails a huge segmental upgradation requirement if the country has to sustain the health of its fleet. Ship repairs being applicable for maintenance of existing ships, require extensive ship repair facilities for multiple areas of engineering such as hull repairs, system repairs, electrical repairs, instrumentation, machinery repairs, joinery repairs, domestic system repairs etc. over and above the requirement of dry dock / shiplift/ floating dock for underwater hull and machinery maintenance.
Current orders being executed for Defence Shipbuilding: New Construction
RNAVAL is currently engaged in construction of twenty ships for Indian Navy and Indian Coast Guard.
Five Naval Offshore Patrol Vessels for Indian Navy (NOPV), and
One Coast Guard Training Ship (CGTS) and Fourteen Fast Patrol Vessels (FPV) for Indian Coast Guard.
Current state of Projects
The first NOPV has been launched and is currently undergoing trials before delivery; the second NOPV has been launched and is in advanced stage of systems integration. The other three NOPVs are under different stages of erection and assembly.
Substantial progress has been made on CGTS and it is being readied for Basin trials
Construction of three FPVs are at an advanced stage
Major confidence building measures undertaken amongst Employees, Customers, Suppliers, and Government Authorities.
Positive employee relations and engagement levels
The Company with its world class infrastructure has a completed multiple repairs and refits of Naval Ships of different types and is well equipped to undertake any repair requirements of Indian Defence Forces. Recognizing this capability, the Federal Government of the USA has entered in a Master Ship Repair Agreement (MSRA) with RNAVAL for Repair and Maintenance of their 7th fleet (consisting of 104 Warships and Auxiliary vessels).
Reliance Naval is Indias leading private sector Naval shipbuilding Company, with aggregate revenues of about Rs.18,463.04 Lakhs and gross fixed assets of Rs. 6,25,868.27 Lakhs. The highlights of the performance of the Company during Financial Year 2018- 19 are furnished hereunder:
Total income of Rs. 18,463.04 Lakhs
Net loss of Rs. 10,48,116.68 Lakhs
During the financial year, the interest expenditure increased to Rs. 1,26,672.73 Lakhs as compared to Rs.65,753.81 Lakh in the previous year. Cash loss for the year was Rs.1,28,870.98 Lakhs as compared to Rs. 80,806.75 Lakhs in the the previous year. Net loss for the year was Rs.10,48,116.68 Lakhs as compared to Rs. 95,579.50 Lakh in the previous year. The capital expenditure during the year was Rs. 12.09 Lakhs. Total gross fixed assets dicreased during the year to Rs. 6,25,868.27 Lakhs, with a nagative net worth of Rs. 10,25,826.33 Lakhs.
Resources and Liquidity
The Company strives to maintain a conservative financial profile. The Companys consolidated gross debt at the end of the financial year stood at Rs. 10,91,614.88 Lakhs.
The Company sources funds for its long-term and project related financing requirements from a combination of internal accruals and external sources. The working capital requirements are met through commercial rupee credit lines provided by a consortium of Indian banks.
Key Financial Ratios
|Sr. No.||Particular||FY 2018-19||FY 2017-18|
|1.||Debtors Turnover (Days)||19.98||7.98|
|2.||Interest Coverage Ratio||(0.06)||(0.47)|
|3.||Debt Equity Ratio||(1.06)||44.32|
|4.||Operative Profit Margin (%)||(0.06)||(0.27)|
|5.||Net Profit Ratio (%)||(56.77)||(2.31)|
|6.||Return on Net worth||(1.02)||(4.29)|
Reason for Change in ratios:
Return on Net Worth is changed from (4.29) in Previous Year to (1.02) in current year. For last few years there is a downtrend in the shipbuilding industry globally and no new orders in commercial ship building and oil & gas sectors are coming to Indian Shipyards, since it is economically unviable. In Indian defence sector also the process of awarding contract has been deferred in respect of many large orders for variety of reasons. This lack of new orders has led to the significant reduction in the Companys current level of operations as compared to its capacity. During the year, the Committee based on the valuation exercise carried out by the independent expert, recommended the impairment of the Property Plant and Equipments and capital work in progress aggregating Rs. 783,304 lakhs with effect from April 01, 2018. Further, with respect to certain cases of advances, receivables and obligations, the company has carried out the impairment review and even though it is hopeful of favourable outcome, provision for impairment aggregating to Rs. 75,326 lakhs has been made, considering the overall circumstances. Since Companys debt resolution plan is under discussion and not yet achieved, therefor, no further exposure is taken by the banks and as a result the Company is not able to take money from client.
Risks & Concerns
Naval Shipbuilding and Repairs
In spite of favorable policy framework in place, the private defence shipyards are grappling with gross underutilization of shipyard capacity. Major Defence shipbuilding programmes are nominated on DPSU shipyards, leaving only low value programmes coming up for competitive bidding. Even for the orders on competitive basis, private shipyards need to compete with DPSU yards that are already facing capacity constraints in executing large order backlog of nominated projects from MoD. However, in the past few years, Government has initiated many new Defence shipbuilding programmes for Indian Navy and Indian Coast Guard. For effective patrolling of the coastal lines, pollution control and search & rescue operations, Coast Guard needs a large number of additional vessels. The defence business pipeline of Rs. 1,40,000 Cr over the next 12 years with a probability of 20% for Private Sector
Risk Management Framework
The Company has a defined risk policy and risk management framework for all units, functional departments and project sites.
This helps in identifying, assessing and mitigating the risk that could impact the Companys performance and achievement of its business objectives. The risks are reviewed on an ongoing basis by respective Business Heads and Functional heads across the organization.
Adequacy of Internal Controls
The Company has an adequate system of management supervised internal financial controls which is aimed at achieving efficiency in operations, optimum utilization of resources, and compliance with all applicable laws and regulations. The internal financial control mechanism comprises a well defined organization structure, pre-determined authority levels with segregation of duty, risk assessment and management framework. The Companys manufacturing, health and safety policies and standard operating procedures are well documented and have various ISO and OHSAS certifications. The procurement and operational maintenance activities are planned well in advance to avoid any possible risk of late delivery of equipment and materials, delay in attending to maintenance needs, etc. The Company stores and maintains on a regular basis, all the relevant data and information as a back up to avoid any possible risk of losing important business data.
Professional internal audit firms review the systems and processes of the Company in coordination with Management Team and this is helpful in providing independent and professional opinion on the internal control systems. A qualified and independent audit committee of the Board reviews the internal audit reports, adequacy of internal controls and risk management framework every calendar quarter.
Human Resource at RNAVAL is a business partner and strategic enabler with complete focus on organizational development and employee engagement. This is largely due to the alignment of HR practices with business requirements and its quick response to challenges. HR is totally committed to the highest standards of corporate governance, business ethics, social responsibility, employee engagement, performance excellence, employee satisfaction with a work environment promoting transparency, meritocracy and ownership.
During the year, the Company has successfully met the manpower skill requirements emerging from our expanding businesses. The manpower as on March 31, 2019 was at 290 across all our businesses.
The cornerstone of a highly transparent and merit based performance management system at Reliance Naval is its practice of innovation and continual improvement of the processes that evaluates, acknowledges and appreciates the employees performance. The successful implementation of Share, Outperform, Understand and Listen (SOUL) initiative enhanced employee engagement and performance excellence. The Companys reward and recognition policy, compensation structure and employee engagement policy has been benchmarked to industry standards. Special retention plans are formulated to retain highly competitive talent. A comprehensive nonmonetary reward and recognition policy encourages and rewards outstanding contributions by individuals and teams. Initiatives of 5S at the shop floor levels have contributed to high levels of motivation at the frontline levels.
Employee Relations and Welfare
The Company ensures health, safety and welfare of its employees with a robust foundation of policies and processes. The Company has provided extensive practical training on safety and undertaken a large number of safety measures like job safety assessment and adopted safe construction techniques at project sites. Throughout the year, the Company organized several medical camps, sports and cultural activities for the employees and their families. The Company has established proactive, harmonious industrial relations and inclusive practices with all employee bodies.
The shipyard has state-of-art Center of Excellence which provides training, certification from international classification agencies, for over 80 trainees simultaneously.
It is actively driving Skill Development and Employment Generation programs, to meet its skill requirements as well as enhance the growth and development in the extended locality.
The objective of these programs has been to enable large number of Indian youth to take up industry-relevant skill training that will help them in securing a better livelihood.
However, we had realized that very few women are entering in the technical. Engineering fields, probably due to lack of Industry demand for them. We feel that this is shortsighted and selective discrimination, as they are no less than the men. There is an urgent need to actively promote women participation in industrial trades like Fitter, Welder, Mechanic, Fabricator, Machinist, Electrician, Blaster/Painter, etc. This will further contribute to their economic growth and creation of an Empowered India through Womanpower.
Project Shakti was started by Reliance Naval to cater to this need, increase the availability of trained and certified technical resources by encouraging girls to take up technical fabrication roles, create a repository of professionally trained, certified and employable Woman-power in Reliance Shipyard, Gujarat, together with economic up-gradation of their families.
Project Shakti has rolled out the first batch of 42 trained trades-women, who have already been productively engaged in the Pipe-spool fabrication Shop at the shipyard. The second batch of over 50 is currently being selected for undergoing training and certification at our Center of Excellence (COE).
Reliance Naval ensured an appropriate eco-system and infrastructure for the women along with counseling, medical facility, special security and transportation for a highly enabling and comfortable environment, as we intend to train, certify and make over 200 women employable over the next 2 years.