south west pinnacle exploration ltd share price Management discussions


ANNEXURE-III

INTRODUCTION

Mining sector in India is presently highly unexplored in comparison to the world standard and the mineral reserves India possess. There is ample scope to boost the exploration activities to unlock the reserves. This will help in boosting our GDP, present contribution is less than 2% enhance employment opportunities and the per capita income. This will also reduce the dependence on imports, which would save our colossal foreign exchange.

The Government of India is taking effective steps to gradually enhance the mining activities as much as possible. Present policy of opening up of coal and other mining sectors for private sector players are few steps in that direction.

Infrastructure development, power and cement industries are also aiding growth for the sector. Demand for iron and steel is set to continue, given the strong growth expectations for the residential and commercial building industry.

Besides, Governments efforts to reduce dependence on imports of oil and gas will pave way for opening up of more and more tracks of land for exploration and production in oil and gas sector.

The good part is your company operates in most of the exploration domains and is well placed to take up all kinds of exploration and mining activities across sectors, matching with the requirement as summarised in the following paragraphs.

A. EXPLORATION AND ALLIED SERVICES OFFERFED

COAL & NON-COAL MINERAL DRILLING SERVICES

SWPE offers Core Drilling, Large Diameter Core Drilling and non-core drilling through RC (Reverse Circulation), DTH (Down ?the-Hole) & Mud Rotary technologies.

SWPE has completed more than 2.3 Million Meters of drilling through all above mentioned technologies till date.

2D/3D SEISMIC EXPLORATION SERVICES

SWPE has the knowledge and ability to handle challenges involved with Land 2D/3D seismic exploration, Coal, Oil & Gas. We supply seismic solutions including

• 2D/3D LAND SEISMIC DATA ACQUISITION

• 2D/3D LAND SEISMIC DATA PROCESSING

GEOLOGICAL & GEOPHYSICAL SERVICES

SWPE has a strong Geological & Geophysical Services Division with a team of 15 experienced Geo scientists capable of providing on-site integrated exploration services, both for coal and other mineral resources like?Limestone, Atomic Minerals, etc.

MINING SERVICES

We are equipped to provide Mining Services for Coal including OB, Ferrous and Non-ferrous minerals.

SWPE has already commenced Copper/Gold Mining Services through JV in Oman.

CBM EXPLORATION SERVICES

We are leading CBM exploratory drilling service provider in the country, having provided services to some of the prominent customers like ? Reliance Industries, Oil India, Dart Energy.

Completed more than 60 CBM core wells to date - the highest in the country. SWPE has a fleet of 2 CBM Exploratory Drill Rigs which are capable of drilling up to 2000 m depth.

CBM PRODUCTION SERVICES

SWPE has accomplished the feat of having drilled 184 nos. of CBM production wells up to 1,200m depths, for its customer ? Reliance Industries Ltd. During the year the company has bagged a new order from Reliance Industries Ltd. valuing over Rs. 84 Crores with a potential to go upto 270 crores over a period of 3-4 years. The company has imported a special rig and other equipments to accomplish this project.

GEOTHERMAL AND SHALE GAS EXPLORATION SERVICES

SWPE is the leading company to drill 4 numbers of wells each for Shale Gas & Geothermal Exploration respectively.

Development of Geothermal Energy is present day focus area for our Government.

AQUIFER MAPPING SERVICES

SWPE envisions to identify & map aquifers across the country to quantify the available groundwater resources and to propose plans appropriate to the scale of demand and aquifer characteristics. A recent order win from Central Ground Water Board with two- three more in pipeline is a very welcome development.

We are equipped with multiple disciplines and scientific approaches, including remote sensing, hydro geology, geophysics, hydro chemistry, drilling, groundwater modelling, and management for providing time bound & cost effective services for completion of Aquifer mapping studies.

B. COAL BLOCK ACQUISITION

As reported earlier we have won a partially explored coal block in the state of Jharkhand by participating in forward auction conducted by Ministry of Coal, Government of India during FY 2021-22. The mine development activities are presently underway and we expect to start the coal production well within the stipulated timelines.

Details of the coal block are depicted below:

The coal block is situated in Ramgarh and Bokaro District of Jharkhand;

Total Geological block area is 2.66 Sq. Km. with an estimated Geological reserve of 84 MT;

Grade of coal is W-IV;

Process for getting clearances and other Mine development activities are going on at full swing ;

Plan to start coal production within next 24 to 30 months;

GOVERNMENTS IMPETUS ON COAL PRODUCTION

• The Government of India has made a significant policy change sometime back allowing commercial coal mining by private players to cater to the ever-increasing coal demand of the country.

• Private players are free to sell coal in the open market after winning the coal block by going through the auction process.

• The Government is putting more & more coal blocks for auction regularly for faster development of mines by private players to accelerate coal production.

• The Government of India has targeted to accelerate the pace of coal production so as to reach 1 billion ton level by 2024 and is about to touch this milestone soon.

• Ministry of Coal has reengineered and simplified the Mining plan preparation and approval process and is facilitating the private players by providing single window clearance besides other industry-friendly measures to attract investment in this sector.

COAL AS AN ENERGY SOURCE

India has estimated geological coal reserves of ~300 Billion Tons

Total coal production in India at present is around 950 Million Tons per Annum

Coal continues to be the biggest energy source with more than half of power generation is from coal- based plants at present

Coal is a preferred source of energy due to its abundant availability and affordability

By 2029-30 the total installed capacity of power generation is estimated to be more than double

Besides, power generation, Coal supports many non power industries as well viz. Cement, Fertilizer, Sponge Iron, Aluminum and host of other industries in organized and unorganised sector

PRESENT MARKET SCENARIO

01 There is an ever increasing demand of coal for power generation by thermal plants

02 The Government of India is putting all-out efforts to enhance the coal production and is carrying out various policy changes for the same

03 To accelerate the coal production, the Ministry of Coal has also set up a committee to review/bench- mark the timelines in the execution of coal Mining projects

SIGNIFICANCE OF COAL IN INDIAN CONTEXT

India cannot do away with coal at least for the next 3 to 4 decades, as India is endowed with large reserves of coal which can last for over 200 years at the current rate of production.

135 coal fired power plants in the country meet more than half of its energy needs.

Hydro power potential is about 1.5 lakh MW of which only 30 per cent has been exploited so far due to environmental issues, hence, hydro power may not contribute in a major way to future capacity addition.

Solar and wind will be the main contributors to renewable energy. It is a myth that renewable can meet all of the ever increasing energy needs of our country.

Increase in nuclear power is uncertain since it depends upon environmental and safety issues and peoples support.

Thus, coal is inevitable in the energy mix of the country in the foreseeable future.

Till new sources of energy are developed, India has no option but to depend on coal.

Phasing out of coal fired power plants cannot be done quickly as much of Indias electricity is generated using coal.

C. OPERATIONS IN OMAN AND NEARBY REGION

South West Pinnacle Exploration Limited has won a contract through its Joint Venture company named Alara Resources LLC, Oman. The aggregate value of contract is around Rs. 125 Million USD. The contract is to be executed over a period of next 11 years. The mining operations in Oman have been started since last one year and are going on well and smooth.

The mining operations are broadly include: -

• Plan the mine and its development and construction to the reasonable design standards;

• Clear land, remove and store top soil for reuse and prepare banks;

• Mine and extract ore in accordance with the production schedule;

• Implement and comply with the obligations with the Envoi mental management system (EMS);

• Construct and maintain all excess ways and haul ways.

Seeing the potential in that region, the company has recently set up a step down subsidiary of ARL in Saudi Arabia. We have also signed an MOU for forming another company in Oman to explore new businesses in the field of exploration and mining.

NEW AVENUES/ OPPORTUNITIES FOR THE COMPANY:

Your Company has various new avenues/ opportunities of drilling & exploration in various sectors as summarized below: -

1. Drilling and Exploration of Coal

• Significant scope for drilling and exploration as India has a large number of unexplored new mines of coal, iron or and bauxite and considerable opportunities exists for future discoveries of sub-surface deposits.

• With the availability of such a large coal reserve in India and Governments thrust to enhance its production, there is a vast scope of drilling & exploration in the coal sector.

2. Drilling and Exploration of Non-coal Minerals

• Over 500 non-coal mineral blocks, partially or minimally explored under current leases are now up for grabs now through competitive bidding.

• Reallocation of several non-producing blocks of the state-run companies, is a move that is giving a lot of enthuse to the private players as many of these blocks have abundant proven resources.

• This way, the employment-intensive but highly under-invested sector is getting fillip to do away with end-use restrictions, and those with captive leases are allowed to sell the minerals in the open market as per the new provisions.

3. Oil & Gas Exploration

• The Government has adopted several policies to fulfill the increasing oil demand. It has allowed 100% FDI in many segments of the sector including natural gas, petroleum products, and refineries. Today, it attracts both domestic and foreign investment.

• To reduce our countrys dependence on imports, the OLAP pronounced by the Government is reaping results. The Government has recently launched the OLAP Bid for International Competitive Bidding.

• Such a scenario of oil and gas in India throws open lots of opportunities for exploration in the sector.

4. Unconventional Sources of Energy

• India has many unconventional sources of energy and most of them are highly unexplored giving us many opportunities in this area.

• These unconventional sources of energy mainly include

• Geothermal Power

• Shale Gas

• Coal bed Methane (CBM)

5. Infrastructure Projects

• Infrastructure sector is a key driver for the Indian economy. With the Governments impetus to create infrastructure, the demand for steel and cement is bound to increase, which will help in creating opportunities for exploration and mining.

6. Coal Block for Commercial Mining

• Government of Indias policy announcement regarding the opening up of coal blocks for commercial coal mining by private payers is reaping results.

• Being natural extension to what we had been doing, we participated and won such coal block namely Jogeshwar and Khas Jogeshwari located in the state of Jharkhand through forward auction for the said coal block.

• The process of mine development is underway. We strongly believe that this has great potential and throws open immense opportunity for growth of the Company.

7. Aquifer Mapping & Hydro Geological Services

• The importance of groundwater for national development has deemed it necessary to be more specific and hence “groundwater management” has become “aquifer management”. CGWB has taken up National Project on Aquifer Management to formulate a sustainable aquifer management plan.

• CGWB has accordingly, launched the aquifer mapping projects on PAN India basis. Our company is also beneficiary of such projects. We expect to get some more projects in the times ahead.

8. Mining and Exploration Activities in Oman and nearby region

• Oman is the second largest country after Saudi Arabia in the Gulf Cooperation Council region with huge resources of copper, Gold, Silver, Chromite, Lead, Nickle Manganese, and Zinc. These reserves are highly undeveloped due to preference for oil sector growth.

• In 2014 Omani Government has decided to diversify and move away from dependence on oil reserves and has created public authority under the Ministry of Commerce and Industry named Mining Development Oman (MDO) to regulate and expand the mining activities and to strengthen the private sector involvement and investment in the sector. Seeing the potential there, we have recently signed an MOU for tapping those new opportunities. The MOU is amongst Alara, Al Tasnim, Al Hadeetha Investment and Al Hadeetha Resources LLC and us.

• To reduce dependence on oil revenue, Saudi Arabia Government is throughing open lot many opportunities to tap their non-oil mineral reserves which are in abundance. The creation of step down subsidiary to our JV in Oman is a step taken by us to exploit the opportunities there.

OUTLOOK

Exploration and Allied Services

• As on August 2023, the current order book position in this vertical stands at Rs. 290 Crores.

• We have already participated in tenders worth Rs. ~422 Crores till August 2023.

• We expect our core exploration service business continue to grow at about 15%-20%- p.a. over the near to medium term.

• We expect EBITDA Margins to be in the range of 20% to 22%.

• Opening up of 500 non-coal minerals block for private players by Central Government will give a boost to Drilling and Exploration business in India.

• Oil and Gas Sector is among the eight core sectors in India and plays a major role when we talk about energy demand in India.

• Impet us to explore Oil & Gas through seismic technology is a welcome step and brightens prospects of our exploration business in the times ahead.

• Un-explored Non-conventional source of energy further enhances the potential of drilling and exploration business in future.

Coal Mining

• We won coal block namely Jogeshwar and Khas Jogeshwari located in the state of Jharkhand. The mine development activities are underway. We plan to start coal production over the next 24-30 months.

• We expect revenues to kick in from FY2026.

• Expect ~Rs. 700 ? 800 crores of revenue between FY26-FY28.

• We expect EBITDA Margins to be in the range of 40% to 42%.

• Driven by the improved domestic economic outlook and significant infrastructure development, demand for coal is expected to grow in coming years.

Operations in Oman and nearby region

• The mining services operations in Oman are going on well since last over one year. We expect net margin in the range of 5% - 6% annually.

• As the Oman Government looks to diversify and move away from dependence on oil revenue and to create jobs for Omani nationals, growth is anticipated in the mining sector following the discovery of significant reserves of minerals including gold and copper. The recently signed MOU will enhance scope in getting new mining licences.

The way things are progressing in Saudi Arabia, we expect to garner good amount of business there too through our step down subsidiary of ARL.

SWOT ANALYSIS

1. Strengths: -

a. Presence across almost all domains of Drilling & Exploration.

b. Capability to deliver the Projects successfully within timelines.

c. Qualification Credentials.

d. Experienced Management Team.

e. Client Retention.

f. Robust Order Book.

G. Renowned Clientals from both Public & Private Sector.

2. Weakness: -

a. Being Tender based business, sometimes we have to win a contract on a relatively lower rate to beat the competition.

b. Our business needs forest/environment clearances in most cases which sometimes takes longer than expected time.

c. Weather plays a vital role in project completion.

3. Opportunity: -

a. Over 500 Non- coal Mineral Blocks are now available for Drilling and Exploration through competitive bidding

b. A large number of unexplored/partly explored coal blocks for Drilling and Exploration of Coal are available in the wake of new policy of Government of India.

c. The policy announcement of GOI, allowing 100% FDI in Oil & Gas Sector throws open many opportunities in the sector

d. The OLAP pronounced by the government is reaping results for us.

E. The ground water management has become aquafer management now. CGWB has launched the aquafer mapping projects in a big way and we are able to win some of the contracts.

4. Threats: -

a. Stringent Environment laws & probability of change in those laws.

b. Change in Government Policies & GST Act/rules.

c. Local unrest and non- cooperation by local villagers which sometimes may result in delay in completion of projects. FINANCIAL PERFORMANCE:

The financial performance of the company during the year was little subdued. We have clocked a turnover of Rs. 12809.25 Lacs on standalone basis and Rs. 12845.05 Lacs on consolidated basis registering a modest growth of 6.17% and 6.46% respectively. The company has achieved profit before tax of Rs. 1105.18 Lacs on standalone basis and Rs.1130.98 Lacs on consolidated basis. The margins during the year where under pressure mainly due to increase in input cost namely increase in steel prices coupled with increase in finance cost due to revision in repo rates by Reserve Bank of India three four times during the year.

RATIO ANALYSIS

Particulars

Numerator Denominator For the year ended March 31, 2023 For the year ended March 31, 2022 Variance

Current Ratio

Current assets Current liabilities 1.94 1.87 3.47%

Debt Equity Ratio

Total Debt Shareholders Equity 0.53 0.45 19.11%

Debt Service Coverage Ratio

Earnings available for debt service Debt service 1.50 1.43 4.71%

Return on Equity*

Net Profit after taxes Avg. shareholders equity 7.32% 11.74% -37.64%

Inventory Turnover Ratio

Revenue Avg. Inventory 3.24 3.49 -7.22%

Trade receivable Turnover Ratio

Revenue Avg. Trade receivables 2.06 1.87 10.07%

Trade payable Turnover Ratio**

Purchases+ Other operating expenses+ Other expenses Avg. Trade payables 4.49 3.50 28.28%

Net Capital Turnover Ratio

Revenue Avg. Working Capital 2.12 2.26 -5.83%

Net Profit Ratio*

Net Profit Revenue 6.71% 10.32% -34.94%

Return on Capital employed*

Earnings before interest and taxes Capital employed 9.68% 13.62% -28.93%

Return on Investment

Interest and Rental Income Investment 12.52% 12.47% 0.44%

*Two of the projects met with rough weather resulting in loss of revenue. This has also effected the profitability and the return on equity.

**Better Realisation of Trade Receivables led to better cash inflows, entailing faster payments to supplier, resulting in improvement in ratio.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The company has adequate internal control systems in place, commensurate with its size and complexity of its operations. There are pre-defined systems and processes with authorization matrix to deal with variety of transactions in different situations. The company has qualified internal auditor and other qualified personnel who monitor the operations of the company very closely and ensure that the transactions/operations are done in accordance with the standard operating procedures formulated by the company from time to time. The internal auditor makes a report of his observations periodically which is discussed with the management and finally with the Audit Committee and Board Members.

The internal auditor also interacts regularly with the statutory auditors for proper recording of transactions and physical verification of inventory as well as fixed assets of the company.

HUMAN RESOURCE AND THEIR CONTRIBUTION:

Biggest strength of any Company is the human resource specially in the service company like us. SWPE has the privilege of having excellent work force with very talented employees. The present strength of our employees is around 650 with a very minimal attrition rate as compared to industry average. The hallmark of our company is timely completion of projects, most of the credit for the same goes to our employees who work tirelessly to accomplish the given task with in the permissible timelines. Many clients have given very rich tributes for the for our employees commitment and professionalism. There is a complete culture of open discussion of employees with Management and views and suggestions of employees are given due weight age by the Management. We certainly take pride in saying that we are having one of the best work force in the industry.

RESPONSIBILITY FOR THE MANAGEMENT DISCUSSION AND ANALYSIS REPORT:

The Board of Directors have 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.

For South West Pinnacle Exploration Limited
Sd/-
Vikas Jain
Place : Gurugram Chairman & Managing Director
Date : August 14, 2023 DIN: 00049217