Simplex Projects Ltd Management Discussions.

Introduction

Simplex Projects Limited (SPL) is Indias one of the premier Construction and Engineering Companies, straddling over two decades in all departments of civil, mechanical and engineering construction activities with pan India presence. SPL has constructed over 70 Road and Rail-over-Bridges, over half a million square feet of residential and commercial buildings, power plants to chemical factories, multiplexes to shopping malls and emerged as a reputed player in Piling and Foundation, Transportation Engineering, High-rise Buildings, Residential Housing Complexes, Commercial Complexes and Shopping Malls, Hospitals and Educational Institution Buildings, Irrigation, Water Supply & Sewerage Schemes and Installation & Operation of Multi-level Car Parking systems.

We always strive for innovative ideas in the field of civil and mechanical engineering and thereby adding several milestone achievements in the field of civil construction. Having a strong foothold in the Indian Construction industry, SPL also forayed into International market for mega projects.

Macroeconomic Review

In a backdrop of global uncertainty and slowing economic growth, India was a bright spot in 2016-2017 with robust macroeconomic fundamentals. The year was marked by two major domestic policy developments: passage of the Constitutional amendment which paved way for implementing the transformational Goods and Services Tax (GST), and the action to demonetise the Rs. 500 and Rs. 1,000 bank notes in the country.

The GST will create a common Indian market, improve tax compliance and governance, and boost investment and growth. It is also a bold new experiment in the governance of Indias cooperative federalism. The bill to implement GST has been passed in the Parliament and the country is poised to move to a GST regime from the second quarter of 2017-2018.

Demonetisation had short-term costs. Contemporary evidence tended to suggest significant disruption for the first six to eight weeks due to unprecedented cash constraints throughout the economy. However, the national income data published by the Central Statistics Office (CSO) does not suggest any significant reduction in growth in the third quarter of 2016-2017, which coincided with demonetisation. The third quarter tends to be muted. In 2015-2016, the growth rate of real gross value added (GVA) in Q2 was 8.4%; while in Q3 it was 7%, or a sequential drop of 1.4 percentage points. In 2016-2017, GVA growth in Q2 was 6.7%, and in Q3 it was 6.6%. Thus, despite the effects of demonetisation for much of Q3 financial year 2017, the negative effect — as reported by the CSO — has been only 10 basis points. What the data so far suggests is that the demonetisation effect was more moderate than what the critics claimed it would be. And it looks as if its effects have been transitory.

Although growth in 2016-2017 was expected to be less than 7.8%, it needs to be stated that 6.7% GVA will be the highest among developed and large emerging markets of the world.

(Source: Ministry of Statistics and Programme Implementation (MOSPI), Government of India.) Unless there are some serious unforeseen crises, India is now well placed to clock 7.3% to 7.5% growth in 2017-2018. Moreover, reforms such as overhauling the bankruptcy laws and giving banks more teeth to deal with their non-performing assets (NPAs), sustained increase in public infrastructure spending and continuing tight supervision of monetary policy suggests that India is again well placed for a period of sustained growth in excess of 7% per annum.

Other major macroeconomic parameters like inflation, fiscal deficit and current account balance have also exhibited distinct signs of improvement in 2016-2017. Inflation measured by the Consumer Price Index (CPI),which averaged 4.9% during April-December 2016 has displayed a downward trend since July,2016 when it became apparent that the kharif agricultural production would be bountiful and reached 3.65% by February 2017. Core inflation has also been quite stable, hovering around 4.5% to 5% for most of 2016-2017.

There was also some improvement in Governments fiscal condition. Revised estimates suggest that with gross tax revenues increasing from 10.6% in 2015-2016 to 11.3% in 2016-2017, the fiscal deficit has reduced from 3.9% of GDP in 2015-2016 to 3.5% in 2016-2017.

On the external economic front, the trade deficit declined by 23.5% in April-December 2016 over the corresponding period of 2015-2016. This was driven by a contraction in imports, which was far steeper than the fall in exports. Thereafter, during October to December, both exports and imports started a long-awaited recovery, growing at an average rate of more than 5%.

In 2016-2017, therefore, not only has India established itself as the worlds fastest growing major economy, underpinned by a stable macro-economy with declining inflation and improving fiscal and external balances, but it has also emerged as one of the few economies enacting major structural reforms that have strong long term implications.

Indias Construction and Infrastructure Sector

The infrastructure sector is at the heart of growth of India. Estimates suggest that the country needs close to Rs. 31,000 billion to be spent on infrastructure development over the next five years, with 70% of funds needed for power, roads and urban infrastructure segments. Despite this need, Indias rank on infrastructure development in the Global Competitive Index was at 68 in 2016-2017 — an improvement of only 19 places compared to 2014-2015. Notwithstanding an enormous demand for physical infrastructure, the sector is facing significant challenges, as the developers, the financial community and the government grapple with stalled projects, non-performing loans and widening gap between performance and targets. Consequently, Indias construction growth in GDP terms has tapered off substantially since 2011-12. After an impressive 10.8% growth in 2011-12, the sector has seen much lower activity since and grew by only 3.1% in 2016-2017. The worrying factor is that growth in overall Gross Fixed Capital Formation (GFCF) has also reduced significantly from 6.1% in 2015-2016 to 0.6% in 2016-2017.

The slowdown in construction activities has adversely affected Engineering, Procurement and Construction (EPC) companies across India. Several unforeseen issues impacted projects at various stages of their lifecycle from planning to operations, which have made several of them unviable. The sector is plagued with significant cost overruns, regulatory bottlenecks and aggressive bidding positions taken by a few market players resulting in financial losses. Another important element is the massive build-up of claims that are receivable from various government entities.

These are on account of several factors, such as change of 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. The entire claims resolution mechanism has been substantially delayed and, consequently, blocked up large amounts of cash severely affecting liquidity across the value chain.

The Government of India has two very different challenges. First, it has to deal with and 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 government has made some headway in 2016-2017. However, these are initial steps and much of the developments on the ground are expected in the next few years.

In an important development, the central government has finally managed to break the choke-hold of stalled projects, by giving faster clearances and closely monitoring these at the highest levels. According to data released by the Centre for Monitoring of the Indian Economy, only 24 projects that were under some stage of implementation were stalled during the quarter ended March, 2017. This is the lowest number of stalled projects under implementation in any quarter since December 2008. Investment in such stalled projects has reduced from Rs. 92,000 crore in the quarter ended March, 2016 to Rs. 25,700 crore in the quarter ended March, 2017. According to this data, projects worth only Rs. 4,400 crore were abandoned during the March, 2017 quarter. This was the lowest number of abandoned projects in a given quarter over the past eight years. Their total value is just a tenth of the average value of abandoned witnessed over the past eight years. In the present business environment, owing to the existing high levels of debt, the construction companies are left with limited opportunity to raise further capital to fuel growth. 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. These include:-a) PSUs/departments may seek the consent of the contractors/ concessionaires to transfer the arbitration cases initiated under the pre-amended Arbitration Act to the amended Arbitration Act, wherever possible.

b) In case of claims where the PSU/departments have challenged the Arbitration Award, 75% of the award amount may be paid by the PSU to the contractor/ concessionaire against margin-free bank guarantee.

c) All PSUs/departments issuing public contracts may consider setting up Conciliation Committees/Councils comprising independent subject experts in order to ensure speedy disposal of pending or new cases.

d) Item-rate contracts may be substituted by EPC (turnkey) contracts, and PSUs/ Departments may adopt the model EPC contracts for construction works.

e) Department of Financial Services, in consultation with the Reserve Bank of India (RBI), is formulating a onetime package for the construction sector which is expected to be announced shortly.

These initiatives are expected to infuse appropriate liquidity into the construction sector and other infrastructure projects, which have been stranded and support the entire process of dispute resolution in relation to construction and real estate.

Opportunities & Threats

The Company has a well diversified business portfolio viz., Buildings & Housing, Roads, Bridges, Tunnels, flyovers, Electrical, Irrigation, Power, Water & Environment, Mining and Railways. The Company straddling over two decades in all departments of civil, mechanical and engineering construction activities with pan India presence and is recognized as one of the key construction players in the country. The Company has successfully executed complex engineering projects across the country and also in international geographies. The Company is recognized for timely completion of projects within budgets. Our core strength is our people who carry several years of industry experience in various domains including engineering, design, construction, procurement, planning, etc.

Opportunities:

l Demand for world class infrastructure in India

l "Make in India" initiative would demand good infrastructure specifically roads, railways, etc thus offerings opportunities for construction companies

l Governments "100 Smart Cities initiative".

l Higher budgetary allocation for infrastructure sector

l Pro-industry policies and initiatives such as lowering of corporate tax, setting up of REITs and Infrastructure Investment Trusts would drive investment in infrastructure sector, etc.

l Strong and diversified order book.

Threats:

l Most of the measures taken up by the Government are yet to translate into development work on the ground.

l Revival of stalled projects which have accumulated due to the freeze in decision making over the years.

l Infusion of liquidity into the entire infrastructure and construction sector which is highly cash strapped as long as these issues exist, there is very little scope of revival in the sector as most of the companies do not have the financial strength to absorb the past losses & simultaneously continue financing new projects.

Outlook

The Union budget 2017-18 has given a major boost to the infrastructure sector. In the FY18 budget, the government has allocated a record Rs. 3.96 lakh crore to the infrastructure sector which should spur economic activity. A majority of this allocation has been ear-marked to build Metros, Bridges, Hydro Power Projects and Tunnels. The Government intends to build an effective infrastructure system to make domestic economy more competitive as compared to those of other emerging countries. With macros improving, and measures to revive infrastructure sector through new forms of awarding (Hybrid Annuity Model/ Swiss Challenge Mode) and new forms of financing (REITs and InVITs), it is believed there will be a revival of stranded projects and easing of cash flows which will provide long term growth visibility.

The Government is committed to introducing structural reforms to revive the investment cycle, boosting tax revenues through widening of the tax base, strengthening indigenous manufacturing and bringing about infrastructure development in rural and urban areas. Implementation of GST is expected to have far reaching effects by inducting large parts of the informal economy into the formal system, ultimately leading to increased tax revenues. Introduction of GST is considered as progressive and a step in the right direction. Your Company does not see any adverse impact due to GST implementation.

The domestic economy is expected to steadily improve in the current year on the back of Structural reforms and supportive monetary policy. The Government has reiterated its emphasis on Infrastructure build-out in the areas of transportation, augmentation of water resources, power, affordable housing and smart cities. Increased private sector participation in the Defence business affords strong business opportunities for your Company. Various upcoming projects provide the Company with a broad perspective of the opportunity basket opening up in 2017-18.

Risk and Concerns

The Company is exposed to uncertainties, owing to the sectors in which it operates. The key issues like shortage of qualified workers and labours, technology adoption, Environ sustainability and project complexity were challenging during the year. However, your Company has surpassed all the internal challenges like, technology upgrades, lack of skilled labour, supply chain, etc. to continue the momentum in business operations. The external challenges can be met as economic reforms will get in placed because of a stable government.

The Directors of your Company has formed a Risk Management Committee and also adopted a policy on the same which enables the Company to proactively manage uncertainties from changes in the internal and external environment and also capitalize on the opportunities.

Internal Control System and their adequacy

The Company has adequate system of Internal Controls commensurate with the size and nature of operations which ensure that the resources of the Company are used efficiently and effectively, all assets are safeguarded and protected against loss from unauthorized use or disposition and the transactions are authorised, recorded and reported correctly, financial and other data are reliable for preparing financial information and other data and for maintaining accountability of assets. The internal control is supplemented by extensive programme of internal audits, review by management, documented policies, guidelines and procedures.

In compliance with Section 143(3)(i) of the Companies Act, 2013 the Statutory Auditors have issued a report on Internal Financial Controls which forms part of the Independent Auditors Report forming part of this Annual Report.

Financial Performance

From a financial perspective, On Consolidated basis, for the financial year ended March 31, 2017, your Company has achieved a Gross Turnover of Rs 49,996.12 Lacs as against Rs 43,227.12 Lacs for the previous period. The turnover of the Company has thus shown an increment of 15.66%.

On Standalone basis, your Company has achieved a Gross Turnover of Rs. 49718.64 Lacs for the financial year 2016-17 which has shown an increment by 16.52% over last year (Rs. 42671.30 Lacs in financial year 2015-16). The company has incurred a profit of Rs 273.65 Lacs (after interest and depreciation charges) as against a loss of Rs. 8533.51 Lacs for the previous year, thus showing a increase of Rs 8,807.16 Lacs.

Our focus area continues to be the execution of civil engineering projects with specialization in piling, building, roads, bridge and flyovers. Further your Company had been successful in bagging various contracts for execution of Infrastructure Projects. Our order book position as on 31st March 2017 was in tune of Rs 886.73 Crores, of which approx Rs 697.98 Crores were domestic projects, while the balance amount of Rs 189.35 Crores were overseas. The Company expects substantial increase in the order book position in next financial year.

Human Resources (HR)

The Company did a lot of consolidation in the area of Human Resource. Human Resource continues to be one of the biggest assets of the Company. Your Companys business is managed by a team of competent and passionate leaders, capable of enhancing your Companys standing in the sector. External hiring was done for junior & senior levels in the organisation. Efforts have been made to induct fresh talent inducing more and more professionalism. The management is paying special attention to various aspects like training, welfare and safety and thereby further strengthening the human resources. Learning and Development continued to be a focus area. Safety related training also remained as one of the primary focus areas.

At the end of the year, the number of Engineers/Officers employed by the Company was 196.