spml infra ltd share price Management discussions


MANAGEMENT DISCUSSION AND ANALYSIS

The Honble Prime Minister of India has laid down Indias vision to become a US$5 trillion economy by 2025 and to achieve this goal the country needs to shift its gears to accelerate and sustain a GDP growth rate of 8% and above for the coming years. Such growth can be sustained by catalyzing investment in sectors of growth including special focus on infrastructure development, water supply, transportation and electricity and supported by a favourable demographic phase. Investment drives demand, creates capacity, increases productivity, introduces new technology, allows creativity, and generates jobs. Hence, the focus of the government is continued to push for transformative reforms to attract more investments and make India an economic powerhouse in Asia and beyond.

COVID-19 Disruption

COVID-19 brought massive disruption to the world, highlighting the vulnerability of human life, medical infrastructure and spurring changes in business models and consumer behavior. All economies from largest to developed or even meagre ones have been facing the heat of lockdowns, disruption and unfortunate mounting cases and deceases.

It is difficult to exactly calculate the economic damage caused by the pandemic globally, but there is widespread agreement among economists that it indeed have damaged the global economy severely. The forecast and emerging trends suggest that there is a real GDP loss of 4.5%. To put this number in perspective, global GDP is estimated at around 93.86 trillion USD in 2021 and 8 months of the year already passed by with virus still spreading in several large countries, a 4.5% drop in economic growth results in almost 4.22 trillion USD of lost economic output.

• 2nd largest population (18%)

• can facilitate skilling working age population which can power economic growth

• one of the Fastest Growing Major Economy in the world with a GDP of over US$2.78 trillion (expected 3.05 trillion in 2021)

• India jumps 79 spots in World Bank Doing Business ranking in five years

• By 2030:

o estimate suggest India will become the worlds third largest economy

o average age of Indias workforce will be 32 years o urban India will account for nearly 75% of the GDP and Indian cities will act as engines of economic growth

o expected 40% Indias population will live in urban regions

o targeting about 450 gigawatts of installed renewable energy capacity including 280 GW (over 60%) from solar alone

o upward income will make it a big market o better infrastructure and accessibility will transform rural India

o over 1 billion will be connected digitally o technology-enabled new business models will shape the economy

In India, as per the official data released by the ministry of statistics and program implementation, the Indian economy contracted by 7.3% in the April-June quarter of this fiscal year. This is the worst decline ever observed since the ministry had started compiling GDP stats quarterly in 1996.

The drop was much sharper in FY 21 as Indias GDP dropped by a massive 24.4% during the Q1 of FY 21. According to the national income estimates, in the second quarter of the 202021 financial year, the economy contracted by a further 7.4%, with the third and fourth quarters seeing only a weak recovery with GDP rising 0.5% and 1.6%, respectively. This means that overall rate of contraction in India was 7.3% for the whole FY 21. This means that 2020-21 financial year is the worst year in terms of economic contraction in the countrys history.

Government support

Despite the clear danger that the global economy is in, there are also reasons to be hopeful that this worst-case scenario can be avoided. Governments across the world have learned from previous crises that the effects of a demand-driven recession can be countered with government spending. Consequently, many governments are increasing their provision of monetary welfare to citizens, and ensuring businesses have access to the funds needed to keep their operations alive throughout the pandemic. In addition, the specific nature of this crisis means that some sectors may benefit from it. E-commerce, food retail, and the healthcare industry provide at least some economic growth to offset the damage. Also, a crisis-induced movement to online activities (working from home, purchasing goods online, contacting family, etc.) can be observed. It gives an opportunity for IT solution providers to increase their market shares.

Vaccinated World

There is a hope that the pandemic crisis may have a clear end date when all restrictions can be lifted - this seems to be possible when the majority of the global population is vaccinated. It could then enable the global economy to experience a sharp rebound once the pandemic is over. The growing vaccine coverage lifts sentiments and latest report as on August 23, 2021 shows that 32.7% of the world population has received at least one dose of a COVID-19 vaccine, and

24.6% is fully vaccinated. 5 billion doses have already been administered globally, and 33.56 million are now administered each day. India has administered 588.9 million populations with at least one dose of the vaccine and almost 130 million people are fully vaccinated. It is currently vaccinating around five million people every day.

There are still many variables that could affect such an economic recovery - for example, a reduced supply of goods and services to meet lower demand could create mid-term shortages and price increases, but there are right mix of appropriate government responses with resource mobilization and increased spending that help in restoring the situation much earlier than previously estimated.

World Economy

The growing vaccine coverage lifts sentiments, but the global economic outlook still witnessing the uncertainty. The reason for this could be attributed to new virus mutations and rising concerns due to the accumulating human toll. Economic recovery varies across countries and sectors, due to difference in pandemic-induced disruptions and the extent of policy support.

Core inflation in all the major economies recorded a mixed trend in June 2021 as compared to the previous month. The inflation in United States, United Kingdom and Japan increased to 5.4%, 2.5% and 0.2% in June 2021 as compared to the previous month. Whereas the inflation in Germany, China and South Africa decreased to 2.3%, 1.1% and 4.9% in June 2021 as compared to the previous month. Inflation in India stood at 6.26% in June 2021 as compared to 6.30% in the previous month.

Trade balance in major economies in the global ecosystem recorded a mixed trend. The trade surplus of China, Russia, Brazil and UK increased; Canada, US and Indias trade deficit increases. Future developments will depend on the path of the health crisis, including whether the new delta variants of COVID-19 strains prove susceptible to vaccines or they prolong the pandemic along with effectiveness of policy actions and the adjustment capacity of the economy.

The major economies have also recorded a decreasing trend in their GDP growth as per the latest data. GDP growth rate of US and Eurozone improved in Q1 2021. The GDP growth rate of UK, Germany, Japan and Russia decreased in Q1 2021 to (-)1.6%, (-)1.8%, (-)1.0% and (-)0.2%as compared to 1.3%, 0.5%, 2.8% and 0.6% in the previous quarter. The GDP growth rate of China increased in Q2 2021 to 1.3% from 0.4% in the previous quarter. US recorded an increase in growth rate of GDP to 6.4% in Q1 2021 as compared to 4.3% in the previous quarter.

Indian Economy

The Indian economy expanded 1.6% year-on-year in Q1 2021, accelerating from an upwardly revised 0.5% growth in Q4 and beating market forecasts of 1%. It was the 2nd straight quarter of growth since the country exit a pandemic-induced recession. On the expenditure side, both private and public spending rebounded while gross fixed capital formation rose faster. Meantime, net trade contributed negatively to growth as exports climbed 8.8% (vs -3.5% in Q4) but imports jumped at a faster 12.3% (vs -5% in Q4). On the production side, output rose for manufacturing (6.9%); construction (14.5%) and utilities (9.1%). In the last fiscal year, the economy contracted a record 7.3%, less than earlier estimates of an 8% drop. Asias 3rd largest economy is expected to grow at the worlds fastest rate

The Insolvency & Bankruptcy Code (IBC): Nearly 4376 insolvency cases have been admitted for resolution. 2653 cases has been decided and closed and 1723 is currently under the process. The resolution plans recovered US$58.4 bn in last four years.

Goods & Services Tax: One Nation, One market, One tax: Expanded Indias tax base to a large extent and strengthened the financial ecosystem, while aiding productivity.

Bolstering Real Estate with RERA: The introduction of Real Estate (Regulation and Development) Act, 2016 seeks to protect home-buyers as well as help boost investments in the real estate industry.

Reducing Corporate Tax from 30% to 22%

FDI reforms has triggered record FDI inflows: US$ 81.72 billion during 2020-21, 10% more than the last financial year.

Indias VIBRANT Start-up ecosystem with 21 companies already achieved unicorn status by August 2021 and expected the number to increase to 54 by 2024

Governments inclusive Digital program has transformed India: India is the second fastest digitizing economy

among 17 leading economies in the world, Economic value of Indias digital economy is US$200 bn, India can create USD 1 trillion of economic value using digital technology by 2025. this year despite projections for the current quarter being more pessimistic amid the 2nd flare-up of infections in April.

India Growth Rebound

Domestic economic activity started showing normal trends with receding of the second wave of the coronavirus and phased reopening of the economy. The growth indicators suggest that consumption, investment and external demand are all on the path of regaining traction. Further easing of restrictions and increasing coverage of vaccinations are likely to boost private spending on goods and services including travel, tourism and recreational activities, propelling a broad-based recovery in aggregate demand. The robust outlook for agriculture and rural demand would continue to support private consumption. Urban demand is likely to accelerate with recovery in manufacturing and non-contact intensive services, release of pent-up demand and the pace of vaccination.

The recent encouraging movements in several high frequency indicators, viz. sale of automobiles, electricity consumption, non-oil non-gold imports, consumer durable sales and hiring of urban workers.

The results of the July round of the Reserve Banks consumer confidence survey suggest that one year ahead of the predictions, sentiments returned to optimistic territory from historic lows. Early results from listed firms show that corporates have been able to maintain their healthy growth in sales, wage growth and profitability, led by information technology firms. This will also support aggregate disposable income of consumers.

Although investment demand is still anaemic, improving capacity utilisation, rising steel consumption, higher imports of capital goods, congenial monetary and financial conditions and the economic packages announced by the union government are expected to kick-start a long-awaited revival. Innovation and working models adopted during the pandemic by businesses will continue to reap efficiency and productivity gains even after the pandemic recedes. This should help trigger a virtuous cycle of investment, employment and growth. Strong external demand is an opportunity for India and further policy support should help in capitalising on this. Global commodity prices and episodes of financial market volatility, together with vulnerability to new waves of infections are, however, downside risks to economic activity.

Taking all these factors into consideration, RBI has projected of real GDP growth at 9.5% in 2021-22 consisting of 21.4% in Q1; 7.3% in Q2; 6.3% in Q3; and 6.1% in Q4 of 2021-22. Real GDP growth for Q1 2022-23 is projected to be at 17.2%.

Rolling Back of Retrospective Tax

In an unprecedented move in the first week of August, India amended the Income Tax Act to put an end to the contentious retrospective tax law that had caused so much damage to its reputation as a destination conducive for business for overseas investors. The clause had put India in the crosshairs with two major British firms-Vodafone and Cairn, and by finally doing away with it, the government has given the clearest signal to world that India means business.

"The decision to get rid of retrospective taxation shows our commitment and consistency in policies. It sends a clear message to all investors that the decisive government of India is not only opening doors to new possibilities but also has the will to fulfil its promises," said the Honble Prime Minister.

While addressing the heads of Indian missions abroad, the PM referred the development as he sought to make a clear distinction between the India of the past and the one reenergised over the last 7 years. The basic message was simple - India knew its rightful place in the world and unlike in the past it would not hesitate to take any step needed to get there.

Construction Sector Conundrum

Construction industry is the important growth driver of Indias economy, an integral part of countrys social and economic development. With a contribution of about 8% in Indias GDP, construction sector employs around 16% of the nations working population for their livelihood directly or through associated services. The rising population especially the trends of urbanisation and urban expansion has necessitated the revamp and development of new infrastructure in cities and towns of India.

The government has focussed to accelerate the economic growth momentum through construction projects that provide the needed thrust to the beleaguered economy of the country. Through national infrastructure pipeline, government has announced an ambitious plan to spend Rs.111 Lac Crore (US$ 1.4 Trillion) by the year 2025 and have so far identified and listed 8,151 projects across sectors such as energy, social and commercial infrastructure, communication, water and sanitation, roads, airports and ports etc. Another 1870 projects are under development stage. The total outlay of the NIP consists of projects in various stages; the conceptualization stage amounting to USD 44.8 billion, the implementation stage worth USD 58.6 billion and the development phase worth USD 36.5 billion.

Government initiatives such as Swachh Bharat, developing smart cities, world-class highways and shipping infrastructure, housing and urban development, water and energy infrastructure, metro rail, bullet train etc. has attracted huge investments through FDI, private players apart from the allocation through government budgets.

Construction is the biggest industry in the world and have been severely hit by the wide spread pandemic that has created mayhem in almost every country. India has faced the disruptions at higher level with increasing cases and casualties and a longer period of lockdowns. The restrictions on construction activities, migration by the workforce and supply chain interruptions had a cascading impact on construction projects. This sector is amongst the worst-hit by the pandemic and for some companies it has even become an existential crisis. Government has put on hold a large number of development projects and deferred major spending on already planned and on ground projects. With a complete washout quarter and earnings downgrades, construction companies are scurrying for resources and projects to remain in business and survive through the worst phase of the business crisis.

India is at a decisive point in its journey with firm potential to reach the $5 trillion economy, cannot afford to lose on the momentum of economic growth. A sudden economic crisis globally sparked by the pandemic has posed unprecedented challenges in social and commercial environment and many business continuity plans are being put to test.

The pandemic spread in the country has become a matter of great concern as more than 32 million reported cases and the casualty graph reaching higher with every passing day. It has significantly affected the construction and economic activities and abruptly halted the projects execution and reforms initiatives. The construction work for almost all construction projects were stopped due to nationwide lockdowns causing great concern and challenging financial stability of many companies beyond the current fiscal. Many construction companies in India are facing liquidity crunch with pending payments and mismatch in fund inflow and outflow. As the focus of government has shifted towards the welfare and safety of citizens in the wake of pandemic, investment on infrastructure development has been deferred. Several projects announced by government of India has been put on hold or shelved completely.

But it is going to be a defining event as long-awaited measures in the areas of infrastructure development, labour policy reforms, digitization of business, technological advancement in project execution, privatization of assets and utility services and more resilient business models could be implemented. Although, government is taking necessary steps to protect Indian industry from the threat and announced Rs.1.7 Lakh Crore relief packages for those being impacted by the COVID-19 lockdowns. The state governments have been asked to use the building and construction workers welfare funds to provide relief to construction workers. Reserve Bank of India are taking steps to combat the slowing GDP growth and helping the industries with restructuring of loans and deferring payments to arrest the falling economy and declining construction sector which also forms the backbone of several other sectors.

Optimism

Despite the Q1 traction, India is taking swift remedial action and all international financial organisations are also positive about Indias growth prospects in coming times. A rapid and sustained economic growth with about 8% of GDP expansion annually fuelled by heightened productivity and critical reforms will enable the nation to achieve the ambitious target of becoming an economic power in the world order. McKinsey Global Institute has suggested that manufacturing and construction are the two sectors that would need to amplify the most, adding 9.6% and 8.5% annual GDP growth while creating 11 million and 24 million jobs respectively from 2023 to 2030 to strengthen the growth momentum.

In the current scenario when almost all sectors are on the declining spree, water sector is seen to be propelling the growth. With dedicated allocation and initiatives for several water infrastructure development schemes including the most ambitious Jal Jeevan Mission (rural+urban) having exclusive budgetary allocation of Rs.6.47 Lac Crore, the water is going to be the growth driver of construction sector for the next few years.

Technological Intervention

SPML Infra Limited have recognised the importance of digital technologies much earlier and implemented a number of technological initiatives such as core functioning is coordinated and controlled through SAP business suite-HANA, digitalization of old records and files and all current information is stored and organized electronically which is easily retrievable for quick decision making.

The digital transformation and technological intervention at SPML Infra Limited has been beneficial with comprehensive adaptation and innovation. The efforts of digitizing project and business operations have been fructified and helped the company significantly during the pandemic. With the support of technology, SPML Infra continued its activities in the pandemic period while addressing the health and safety concerns of the workforce. These technological interventions have positively impacted the working of the company including project execution, tendering, engineering, procurement, and operation & maintenance. The pandemic has overturned all traditional business models and has propelled a new set of challenges. In this changed business landscape, the technological intervention across SPML Infra rose to the challenge, supporting the business during this critical time.

Human Capital

With digitization of business operations, SPML Infra also focused on human capital management to develop and optimize the performance of every employee at all level from the corporate office to project sites. The overarching idea is to maximize the impact of each individual in day to day working and to get a comprehensive advantage for businesses the company is following. During the lockdowns and other restrictions effected by the authorities, the company was able to face the challenges primarily due to its committed employees and guidance from the leadership. With the talented and professional team having diverse experience, SPML Infra has a culture of excellence that provides the competitive edge to the organization. The development goals and people practices adopted by the company attracts best engineering and managerial talents that results in better project procurement and execution.

Environmental Consciousness

SPML Infra is intimately concerned about environmental issues and with high level of awareness; it is embedded in the corporate culture of the company. It has actively implemented the efforts to set stricter environmental standards in all project operations and corporate level since the very inception with dedicated resources. The company has been certified with ISO 14001:2015 along with other quality, health and safety certificates.

It is among the top priorities of the company to design, build and operate infrastructure projects in an environmentally responsible manner with sustainability. The companys commitment of improving human life goes beyond the regulatory compliance as it put conscious efforts of environmental safety and quality while reducing the water footprint and adopting energy efficiency practices.

Internal Control & Fraud Prevention

SPML Infra has an adequate and robust system in place for internal control, fraud prevention and to ensure that all the resources of the Company are used efficiently and effectively. The well-organized structure also ensures that all assets are safeguarded and protected against loss from unauthorised use or disposition, all significant transactions are appropriately authorised, recorded and reported correctly, all financial data are reliable for preparing financial information and other data are appropriate for maintaining accountability of assets. The internal control is supplemented by extensive programme of internal audits, review by management, documented policies, guidelines and procedures.

Cautionary Statement

Statements in this Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be ‘forward looking statements within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations include a downtrend in the infrastructure sector, significant changes in political and economic environment in the country, exchange rate fluctuations, tax laws, litigation, labour relations and interest costs etc.