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The following Management Discussion & Analysis (MD&A) is intended to help the Shareholders of Sankhya to understand the results of operations and financial condition of your company. MD&A should be read in conjunction with and as a supplement to the financial statements and the accompanying notes to the financial statements.
Chronicles of the events and the efforts made by the management of Sankhya are listed below to provide a transparent view to Shareholders on the current situation of the company. This is up to date as on 10th August, 2019.
The company is a 22-year-old SME enterprise, established to provide mission critical simulation and training solutions to global and Indian aviation and defense sectors.
The company is established by first-generation entrepreneur, whose hard and dedicated efforts have led the company to win customers such as Airbus, Boeing, Etihad Airways and State Bank of India to name a few, that has won many global awards and recognitions.
The company was banking with SBI for over 13 years before switching its banking facilities to IDBI Bank in 2010-11 as IDBI Bank has provided enhanced working capital limits to the company (from 12Crs in SBI to 20Crs in IDBI). The company had an unblemished banking track record at SBI and with IDBI Bank till recently.
The companys cash credit limits with IDBI bank and the events that followed after getting declared as NPA and payment of 12 Crores to regularize the account have had severe impact on the company.
I. Withdrawal of Restructuring package:
On the 30th March 2017, the company has made a request to the bank to restructure an amount of 2.47 Crs. that comprised of 1.55 Crs of Penal Interest and 0.92 Crs of overdue. While this Penal Interest, per se, is bad in law and banking practice, the company, in good faith and to keep its relationship with IDBI bank at good level, made this request after its attempt for waiver of Penal Interest were not accepted.
The Bank after due consideration of the companys request has conveyed the approval of the restructuring package through its sanction letter dated 12th June, 2017, with a cut-off date as April 1st 2017, that had several conditions in addition to the demand of Processing Fee of 0.11 Crs, Modification fee of 0.02 Crs. and restructuring fee 0.10 Crs. (i.e., a total of 0.23 cr or 9.5% of restructured amount as processing fee (which by all logic is very high for a small company like Sankhya). The company has paid all the fee mentioned above. The bank has also debited the legal processing fee for 0.01 Crs.
The above restructuring package was valid until 23rd May, 2018 as per the sanction.
The company has conveyed in its letters that it has complied with the sanction terms and requested the bank to complete the documentation, besides the above the company has also written several emails indicating the above message.
The company received no response to any of the above correspondences.
Notwithstanding the above lack of response, the bank continued accepting the payments being made by the company as per the restructured package sanction letter without demur. The bank on several occasions has also given statements clearly showing the dues as per the restructuring package.
As per the statements the bank has clearly and unambiguously has shown the amounts received as of January 2018 (9 months from the date of Sanction) and the balance due.
The company on its side has responded to the above statement and showing the compliance of payment of all the dues. On its side the company has been continuing to make the payments of WCTL principal and interest and was servicing the CC interest at reduced rates as per the restructuring package regularly between April 2017 and May 2018 i.e., a full 14-month period.
It is important to note that the bank continued to accept the payments as per the restructuring package even beyond the validity of the sanction letter of 23rd May, 2018 mentioned above.
However, the bank has all of a sudden decided to unilaterally withdraw its own sanction letter that was duly signed and delivered by the company, promoters and guarantors after the validity has expired.
The company therefore submits the following:
a. That the bank has taken a very harsh step and dishonoring its own sanction letter without informing or the acceptance of the Company, after the validity of the Sanction letter has expired.
b. That the bank has not responded to the several letters and emails written during the entire period nor has responded to any of them or indicated in any manner that the restructuring package was not implemented or was considering the withdrawal of the package.
c. That the bank explicitly informed the company, during various interactions with company for more than 15 months that the restructuring package was accepted and was receiving prompt payments from the company.
d. That the bank has accepted the letter given by the company about adequate security cover that was available for the loan.
e. That the bank has not given any response to the letters given by the company and has not given any chance to represent itself before withdrawal of the restructuring package.
f. This singular act of the bank was the fundamental reason for the company to have slipped into an NPA.
g. This reason is full and sufficient reason for the companys financial planning to be thrown into out of gear.
h. Unexpectedly the company is now required to pay the entire amount of the restructuring that it was intending to pay in installments.
i. The company was forced to pay the interest at higher rates.
j. The company was forced to pay penal interest even for the period where it was in compliance of the restructuring package.
k. The company is forced to pay higher interest and further penal interest for the entire loan amount even though there were no overdues if the restructuring package was not withdrawn.
l. As per the sanction letter, the bank has agreed to transfer 5,53,268 shares of the promoters and repledge the same as a collateral after 6 months of satisfactory conduct of account, the bank has not done so and without assigning any reason.
m. The bank has not protested at any time nor indicated in any manner whatsoever that it was likely to withdraw the restructuring package that was sanctioned.
n. The bank quoted that the 12th Feb, 2018 RBI circular to be the basis of the withdrawal of the restructuring package. It is important to note that (a) the said RBI circular was annulled by the Honble Supreme Court of India and (b) this circular was NOT applicable for loans below 25Crores.
o. Further, despite the fact that the Govt. of India has given banks independence to restructure the loans IDBI refused to accept the companys request.
II. Non-assessment of limits through annual renewal process.
The companys limits were sanctioned in the year 2011 and therefore since then the working capital limits assessment of the company should have been done through an annual renewal process. However, working capital limits were renewed only on two occasions, during the entire period of approximately 7 years of its operations, whereas barring the past 2 years of NPA the companys working capital limits should have been reassessed and renewed at least on 5 occasions.
III. No increase in Working Capital limit despite increase in turnover:
(1) Each year the turnover of the company has increased as below however the working capital limits remained at 20 crores.
|Financial Year||Turnover||W.C. Limit||T/L Ratio||T.Loan||BG Limit|
(2) It can be seen from the above table that despite increase in the turnover of over four times, there was no increase in the working capital limits.
(3) The company has been regular in payment of all its dues during 2010-2015.
(4) The company has paid the following amounts during the period upto 2019 considering non-renewal on annual basis.
|Details||Sanctioned Amount||Interest Paid||Principal Repaid||Unutilized Limits||Total paid to IDBI|
TOTAL AMOUNTS PAID
9) This forced the company to dig into its own internal accruals and increase in share capital that was done as below for bridging the working capital gap.
10) Between the period 2010-11 the company has raised an amount of 9 Crs. Through a preferential issue of equity shares.
11) Between the period 2015-2017 the company has raised 10.65 Crs. Again, by issuing fresh equity through a preferential issue of equity warrants.
12) This has resulted in severe and undue pressure on the companys cashflows and the company had to resort to external borrowing by borrowing from associates and relatives of promoters at a high interest rate.
13) Therefore, no increase in working capital by the bank is the second important reason for the companys account to have slipped into an NPA.
IV. Further steps
The companys promoters worked on multiple angles to bring financial stability to the company.
They borrowed money by pledge of personal shares and paid the banker to avert any problems from the bankers. The management after sustained efforts the company won a most prestigious contract from an American Defense Corporation. Based on the long-term contract and with good margins the company hoped to raise capital with reasonable premium. However, the companys stock came under ASM-1 and later categorized under XT category dampened the interest of the investors and the company could not raise capital in time.
Even after serving interest in time some of the lenders who funded based on the pledge of shares invoked the shares. This has hit the company very hard as investors confidencewas eroded and thus pushing the company further into deeper problems.
V. Coercive Actions
The company has offered several alternatives to regularize the account and has paid 3.0 Crores after being declared as an NPA. Despite these tangible demonstrations of serious intent to regularize the account certain coercive actions have been taken by IDBI.
Rejection of our application for restructuring
Filing of a case under Debt Recovery Tribunal
Conducting Forensic Audit
Filing of a case under NCLT
Forensic Auditor writing to the customers directly shook the confidence of the customers who suspendedcontracts.
While the company had great plans to leverage the experience and knowledge of industry leaders who were on the board, those plans could not take off as the financial situation of the company started to become very precarious. The company records its appreciation to the board members who resigned following personal reasons that unfortunately happened immediately after the company was taken to NCLT.
Shareholders must be informed of the fact the promoters, that including those in management have no other business or interests and more than their money they have invested their lives into the company.
Therefore, they are doing everything within their power and energy to get the company back on rails including trying for options of One Time Settlement with the creditors including bankers.
Barring one customer the remaining customers have not shown any inclination to terminate the contract and are waiting for the situation to become stable, considering the relationship with them has been going on for more than 15 years. The company has a long history of over 22 years, it has good customers, however, due to the current situation there are very ominous signs however, due to sustained efforts the management is confident of turning around within short period of time.
Industry structure and developments:
Aviation and Defense industry has been growing at a faster pace, and consequent to which is the demand for training. Many of the legacy training technology providers are forced to transform their product offerings and business models. Asset light technologies with immersive training have made inroads in both aviation and defense training.
Several disruptive technology innovations have been seen during the year with an emphasis on creating an immersive training experience to trainees. According to Citibank report on Virtual and Augmented Reality, immersive training is poised to be hundreds of billions of dollars market. Your company stands to gain from this large opportunity with rich domain experience and backedby its product with high precision analytics of training. Use of AI and Machine Learning has increased the demand for predictive training tools. The goal being to prevent failure of any kind on a mission critical function.
Opportunities and Threats:
Your company has been working very closely with some of the Industry leading customers, whose demands reflect the changing landscape of technology-based training. Your company has seized these opportunities and delivered leading edge technology solutions for its customers. Further your company has been receiving a lot of positive response after receiving the Global Award.
Successful implementation of Evidence Based Training, through data driven approach to analyze training data and on the job performance data, using Artificial Intelligence and Machine Learning has given your company an edge over competition.
Several disruptive technologies that create a higher degree of immersive experience are also emerging in the market. These technologies could disrupt the normal. However, since these technologies lack the distinct advantage of domain knowledge that your company has an edge in adopting these technologies. Your company is constantly vigilant and looking for adopting path breaking solutions that can help it further increase the existing gap with the competition.
Segmentwise consolidated performance: (Rs. In Lakhs)
| Defense||: 5,262.60|
| Non Defense||: 11,142.13|
Highlights of FY18 vs. FY19
Revenue from operations at Rs. 164.04 cr v/s Rs. 177.98 cr (7.83%)
EBITDA before exceptional items of Rs. 12.83 cr v/s Rs. 21.88 cr (41.36%)
PAT at Rs. (1.61) cr v/s Rs. 9.00 cr (117.88%)
EPS of Rs. (1.22) v/s EPS of Rs. 6.85 (117.81%)
The revenue of the Company for the financial year under Rs. 17,798.01 Lakhs in the FYE18, Profit Rs. (160.57) Lakhs, as against Rs. 900.69 Lakhs in the FYE 18. EPS is (1.22) against 6.85 in previous year.
Risks and Concerns:
Risks of a global financial or economic crisis is significant, this could impact all industries across the spectrum. Trade wars and insular policies could hamper free movement of goods, services and people for jobs. Significant increase in prices of crude oil could dampen growth of civil aviation industry. However, increase in territorial threats could increase defense expenditure and can havesignificantadvantage for the company as there would be more defense spending for rapid and quality training.
Finally, your company is unlikely to face the risks of technology obsolescence as there is a continuous vigil on the technology trends and demands of customers.
Internal control systems and their adequacy:
Your Company has a proper and adequate system of internal control in all spheres of its activities. Moreover, the Companys Internal Audit & Control team defines and reviews the scope, coordinates and conducts Risk Based Internal Audits. Statutory and Standard Auditing Practices employed include, among other compliances to adhere to accounting and auditing standards, consideration of Laws and Regulations in an audit of financial statements, Governance and Compliance to ensure compliances, risk assessment etc. and reporting them to the Audit Committee, etc. continuously upgrades these systems in line with the best available practices.
Discussion on financial performance with respect to operational performance:
There has been a significant delay to fully accomplish its goal of stabilizing its cashflows as described in detail in overview. However, the new plan for growth takes into account the current situation and has a strategy to bring financial stability in a gradual manner.
Material developments in Human Resources /Industrial Relations front, including number of people employed:
People remain the most valuable asset of the Company. Your Company is professionally managed with senior management personnel having rich experience and long tenure with the Company. Your Company follows a policy of building strong teams of talented professionals. The Company encourages, appreciates and facilitates long term careers and maintains cordial and harmonious relationships with its employees.
Following are ratios for the current financial year and their comparison with preceding financial year, along with explanations where the change has been 25% or more when compared to immediately preceding financial year:
|S. No.||Ratio Description||March 31st, 2019||March 31st, 2018||Change %||Explanation|
|1.||Debtors Turnover (in days)||138||134||3%||-|
|2.||Inventory Turnover (in days)||NA||NA||NA||-|
|3.||Interest Coverage Ratio||0.64||2.64||(76%)||Due to decrease in Total Income on account of operational Revenue and Foreign Exchange Fluctuation there has been a steep decrease in the Interest coverage Ratio|
|5.||Debt Equity Ratio||0.49||0.44||13%||-|
|6.||Operating Profit Margin (%)||0.02||0.08||(78%)|
|7.||Net Profit Margin (%)||(0.01)||0.05||(119%)||Due to decrease in Total Income on account of Operational Revenue and Foreign Exchange Fluctuation and increase in Depreciation there is an impact on operating profit, Net profit and Retun on Networth Ratios.|
|8.||Return on Net Worth (%)||(0.01)||8.22%||(100%)|
The Board of Directors has reviewed the Management Discussion and Analysis prepared by the Management, and the Independent
Auditors have noted its contents. Statement in this report of the Companys objective, projections, estimates, exceptions, and predictions are forward looking statements subject to the applicable laws and regulations. The statements may be subjected to certain risks and uncertainties. Companys operations are affected by many external and internal factors which are beyond the control of the management. Thus, the actual situation may differ from those expressed or implied. The Company assumes no responsibility in respect of forward looking statements that may be amended or modified in future on the basis of subsequent developments, information or events.