Techno Electric & Engineering Company Ltd merged Management Discussions

INDIAN ECONOMY

The Indian economy experienced one of the most challenging slowdowns as seen in a decade. This resulted from global contractionary headwinds, domestic macroeconomic imbalances and fiscal policy reversals. The result is that GDP growth in 2013-14 was estimated at 4.7 per cent as compared to 4.5 per cent in 2012-13 (Source: CSO).

POWER SECTOR OVERVIEW

With a production of 1,006 terawatt hours (TWh), India is the fifth largest producer and consumer of electricity in the world. Over FY07-13, power generation expanded at a compound annual growth rate of 5.5 per cent. There are multiple drivers such as industrial expansion, and growing per-capita incomes which are leading to an increase in power demand, a reality that is expected to sustain. For instance, power consumption is estimated to increase from 821.2 TWh in 2013 to 1,433.2 TWh by 2022.

India’s power sector attracted sizeable FDI inflows into India touching US$ 7.8 billion during april 2000-March 2013. This inflow accounted for 4 per cent of the total FDI inflow into India. The Government of India chalked out an encouraging blueprint; it targeted capacity addition of 89 GW in the Twelfth Five Year Plan (2012–17) corresponding to US$ 223.9 billion investment, followed by around 100 GW proposed to be commissioned in the Thirteenth Five Year Plan (2017–22).

Market Size: Electricity production in India stood at 911.6 terawatt hours (TWh) in FY13, a 4 per cent growth over the previous fiscal. Over FY07–13, electricity production expanded at a CaGR of 5.5 per cent. The Planning Commission’s Twelfth Five Year Plan projects that total domestic energy production could reach 669.6 million tonnes of oil equivalent (MTOE) by 2016–17 and 844 MTOE by 2021–22.

ELEVENTH FIVE YEAR PLAN REVIEW

During the Eleventh Five Year Plan period, the Electricity act of 2003 was operationalised. Even as the Eleventh Five Year Plan aimed at capacity addition of 78,700 MW, the actual achievement of 54,964 MW was still twice more than the addition in the Tenth Five Year Plan. More importantly, about 90,000 MW of generation capacity was under construction which has started commercial production in the Twelfth Five Year Plan. If these projects proceed to completion as scheduled, and a strong effort is made to initiate new projects in the first year of the Twelfth Five Year Plan, India could well add 80,000–100,000 MW in the Twelfth Five Year Plan.

• Capacity addition during the Eleventh Five Year Plan period has been at 54,964 MW which is 69.8 per cent of the original target and 88.1 per cent of the reduced target of 62,374 MW set in the mid-term appraisal. It is more than 2.5 times that of any of the earlier Five Year Plans.

• Total installed capacity as on 31 March 2012, including renewable energy sources, was 1,99,877 MW. The share of renewable energy capacity was about 12.2 per cent

• Approximately 69,926 circuit km (ckm) of transmission line, 1,50,362 MVa capacity of alternating current substations and 1,750 MW capacity of high-voltage, direct current (HVDC) substations were added.

• The number of villages electrified till March 2012 was about 5.6 lakh, indicating that more than 93 per cent village electrification had been achieved.

• Works relating to 18 units for life extension aggregating to 1,931 MW and 69 units for repair and maintenance (R&M) aggregating 17,435 MW were completed during the Eleventh Plan.

TWELFTH FIVE YEAR PLAN OUTLOOK

Addition to generation capacity: The Working Group on Power estimated a capacity addition requirement of 75,785 MW corresponding to 9 per cent GDP growth during the Twelfth Five Year Plan period. However, in order to bridge the gap between peak demand and peak deficit, and provide for faster retirement of old energy-inefficient plants, the target for the Twelfth Five Year Plan has been fixed at 88,537 MW. The share of the private sector in the additional capacity is expected to be 53 per cent (as compared to only 19 per cent in the Eleventh Five Year Plan). The Working Group for the Twelfth Five Year Plan after taking into account energy conservation measures and demand-supply management has estimated a requirement of 1,403 BU by the year 2016-17. Without such measures, the generation requirement is projected at 1,463 BU. Even if the moderate level of 1,403 BU is taken as the Twelfth Five Year Plan target, the projected growth rate in power generation requirements is placed at 9.8 per cent.

Captive power plants: Capacity addition of around 13,000 MW of captive power is likely to be commissioned during the Twelfth Five Year Plan. The installed capacity of CPPs increased from 22,335 MW at the beginning of the Eleventh Five Year Plan to 36,511 MW (provisional) in March 2012.

Renewable energy: Renewable energy is emerging as a major power source. Within the area of renewable power, wind energy is the largest source of renewable energy in India; it accounts for an estimated 87 per cent of total installed capacity in the area of renewable energy. The country intends to increase the importance of wind power; there are plans to double wind power generation capacity to 20 GW by 2022. In 2013, India moved from the ninth to seventh position among the most attractive countries for the development of renewable energy as per the Renewable Energy Country attractive Index. The National Wind Energy Mission targets 100 GW of wind power by 2022, a third of India‘s estimated wind energy potential. Recent government plans for a 5 GW solar project in the Ladakh region emphasize the scale of India’s renewable ambitions. Techno Electric intends to capitalise on this sectoral outlook through an ongoing presence in renewable energy hubs like Tamil Nadu.

TRANSMISSION AND DISTRIBUTION

Growth in industrialization, increasing per-capita income and rapid urbanisation has led to a ~50% growth in the installed power generation capacity over the last five years even as transmission capacity has only grown by ~30%.

Power Grid is the Central Transmission Utility (CTU) responsible for the wheeling of power generated by the Central Generating Utilities (CGUs) and inter-state Mega Independent Power Producers (MIPP). The country has been demarcated into five transmission regions (Northern, Eastern, Western, Southern and North-Eastern).

EVOLUTION OF THE TRANSMISSION SECTOR

India’s power generation sector was opened to private participation in 1991. The Electricity (amendment) act, 1998, defined transmission as a separate activity and led to the creation of the CTU (currently PGCIL) and STUs. The Regulatory Commission act 1998 mandated the setting up of an independent regulatory mechanism at the Central and State Government levels. The Electricity act 2003 rationalised the approach for privatisation of the power sector. For the transmission sector, some projects were to be earmarked for tariff-based competitive bidding.

The National Tariff Policy 2006 introduced mandatory tariff-based competitive bidding for all transmission projects with the objective of promoting competitive procurement of transmission services, encouraging greater investment from private players in the transmission sector and increasing transparency and fairness in the process. Moreover, the policy further pushed to make the power sector not only financially viable but investment-worthy. It restructured the tariffs and guaranteed a 16% rate of return on investments made between 2001 and 2004, and a 14% return on investments made after 2004.

TRANSMISSION CAPACITY DEFICIENCY

Despite more than 225 GW of installed generation capacity in 2012-13, India continued to be power-deficit. One of the major reasons was that transmission capacity was incompatible with generation capacity and load requirements.

In FY12-13 the domestic power exchanges, Indian Energy Exchange and Power Exchange of India, failed to consummate sales-purchase deals worth Rs. 1,350 crore, amounting to 15% of the total traded volume of power, due to transmission constraints. Power evacuation is turning out to be a bigger problem than power generation. Plants supplying electricity to SEBs under long- term Power Purchase agreements (PPa) lost 1.93 billion units of generation due to transmission capacity bottlenecks. With an expected power generation capacity in excess of 30,000 MW by the end of the Twelfth Five Year Plan, against the state’s peak demand requirement of about 3,300 MW, there was only 7,000 MW of transmission capacity available to evacuate power from the state.

additionally, the state had a net deficit of electricity and had to purchase power from costlier sources. Going forward, the demand side capacity is expected to increase with the industry moving towards open access. Open access will allow end-users to choose from available transmission lines, increasing transmission load across the country. If India’s transmission capacity is not augmented then this problem could be aggravated.

DELAYS IN TRANSMISSION CAPACITY ADDITION

With India’s power generation capacity expected to increase to 388 GW by 2022, the country’s transmission sector will be required to catch up. One of the major reasons for delays in capacity addition is right-of-way (ROW) issues.

Though the Electricity act 2003 empowers the licensee with the right of way (ROW) under the Telegraphic act 1885, it is rare for a transmission project to be executed without delays in land acquisition. In 2011, the Central Electricity authority (CEa) estimated that more than 120 transmission projects faced delays because of the developer’s inability to get access, acquire land or get timely clearances from stakeholders (Forest Department, aviation department, Defense and Power and Telecommunication Coordination Committee).

FUTURE INVESTMENTS AND ADVERSE SPIRAL EFFECTS

Despite USD 75 billion worth of investments being planned for the Twelfth and Thirteenth Five Year Plans, transmission sector investments are still not adequate. For every dollar invested in power generation, at least 50 cents need to be invested in power transmission (in India, the ratio is 30%). To make up for this investment deficit, India needs to invest more than 0.5 times of prospective investments in generation in the area of transmission. also, as per the Twelfth Five Year Plan, the investment required in the power transmission sector is about USD 35 billion, out of which about USD 19 billion is expected to come from the Power Grid Corporation of India Limited while the remaining USD 16 billion (~46% of the total investments) will have to be secured from private players. In order to ensure true open access, the investment required may increase manifold over the planned numbers for the Twelfth Five Year Plan. This makes PPP projects imperative though the response in this area has been weak.

OUTLOOK

Transmission investments have not kept pace with generation in the last few Five Year Plans resulting in insufficient transmission capacity. The country has been marked by power surplus and deficit regions. More than 46% of the total investment required (in excess of Rs. 200,000 crore) in the Twelfth Five Year Plan needs to be sourced from the private sector, which makes successful PPPs in the transmission arena vital.

RURAL ELECTRIFICATION

India’s rural electricity has lagged interms of service (hours of supply) and penetration. Not only do merely 31% of India’s rural households have access to electricity; this supply suffers from frequent power cuts and fluctuations in voltage and frequency.

The Rural Electrification Corporation Limited (REC), a Navratna Central Public Sector Enterprise under Ministry of Power, was incorporated on July 25, 1969 under the Companies act 1956. Its main objective is to finance and promote rural electrification projects all over the country. It provides financial assistance to the State Electricity Boards, the State Government Departments and the Rural Electric Cooperatives for rural electrification projects as are sponsored by them.

The REC provides loan assistance to SEBs/SPUs for investments in rural electrification schemes through its corporate office located at New Delhi and 20 field units, which are located in most of the states.

Rural Electrification Corporation had targeted to raise Rs. 30,000 crore in the last fiscal, 2013-14. Of that, it raised close to Rs. 27,000 crore till December, 2013 including via Rs. 4,500 crore tax-free bond issue. Rural Electrification Corporation had issued tax free bonds worth Rs. 2,648.41 crore in the financial year 2012-13.

WIND POWER

Global investment in renewableenergy declined to USD 80.3 bn in 2013 from USD 80.9 bn in 2012. according to GWEC’s 2012 market statistics, the global wind power sector installed 47 GW of new wind power capacity in 2014 as compared to 44.7 GW installed in the previous year (Source: Global Wind Energy Council).

Wind power has emerged as one of the key renewable energy sources of power generation in India, contributing a sizeable share of 3-4 per cent to the country’s electricity generation mix. The total installed capacity of wind power in India by end-February 2013 was 18,634.90 MW. Worldwide the country stands fifth in terms of total wind power capacity installed. The total wind power capacity addition during 2013-14 has come up to 2,126 MW as against 1,700 MW in 2012-13.

OUTLOOK

India has an ambitious target of acquiring 15% of its power needs (80,000 MW) from renewable sources by 2020 with an investment of Rs. 1.5 lakh crore. The sector targets at building 15,000 MW of new capacity in five years. India has a total installed renewable energy capacity of 26,000 MW, of which wind power is a substantial proportion (18,275 MW).

Power Sector

Growth of installed capacity since 10th Five year plan

(IN MW)

Plan/year	Thermal				Nu- Clear	Hydro	Res (mnre)	Total
	Coal	Gas	Diesel	Total
End of 10th five year plan	71121.38	13691.71	1201.75	86014.84	3900	34,653.77	7,760.60	132,329.21
End of 11th five year plan	112022.40	18381.05	1199.75	131603.13	4780	38990.40	24503.45	199877.03
End of dec. 13	138213.40	20380.85	1199.75	159793.99	4780	39893.40	29462.55	233929.94

All India Annual Per Capita Consumption Of Electricity Since 2009-10

Year	Per capita consumption (kwh)
2009-10	778.6
2010-11	818.80
2011-12	883.63
2012-13	917.18*
*Provisional

Electricity Generation (Mu) Targets And Achievements

Sector	Target (2013-14)	March’14			April’13-march’14
		Programme	Achieve- Ment*	% achieve- Ment	Programme	Achieve- Ment*	% achieve- Ment
Thermal
central Sector	307,048.00	27,789.00	27,093.79	97.50	307,048.00	299,203.63	97.45
State Sector	311,211.00	29,186.00	24,768.00	84.86	311,211.00	276,888.66	88.97
pvt. ipp Sector	169,396.00	16,092.00	18,053.71	112.19	169,396.00	192,907.00	113.88
pvt. Utl Sector	25,082.00	2,152.00	1,831.55	85.11	25,082.00	22,839.39	91.06
Total	812,737.00	75,219.00	71,747.05	95.38	812,737.00	791,838.68	97.43

* Provisional based on actual-cum-assessment

Generating capacity addition (mW)

	April’12 – march’13	April’13 – march’14
All india	20,622.80	17,825.01

Transmission lines added (ckms)

Voltage level	April’12 – march’13	April’13 – march’14
+/- 500 kV hVdc	0	0
765 kV	1,209	4,637
400 kV	11,361	7,777
220 kV	4,537	4,334
all india	17,107	16,748

All India Installed Capacity (Mw) As On 30-03-2014 Region -Wise

Region	Thermal				Nuclear	Hydro	Res	Total
	Coal	Gas	Diesel	Total
Northern	35,283.50	5,281.26	12.99	40,577.75	1,620.00	16,330.76	5,729.62	64,258.13
Western	58,019.51	10,139.31	17.48	68,176.30	1,840.00	7,447.50	9,925.19	87,388.99
Southern	26,582.50	4,962.78	939.32	32,484.60	1,320.00	11,398.03	13,127.33	58,329.99
Eastern	25,327.88	190.00	17.20	25,535.08	0.00	4,113.12	417.41	30,065.61
North-east	60.00	1,208.50	142.74	1,411.24	0.00	1,242.00	252.65	2,905.89
Islands	0.00	0.00	70.02	70.02	0.00	0.00	10.35	80.37
All india	1,45,273.39	21,781.85	1,199.75	1,68,254.99	4,780.00	40,531.41	29,462.55	2,43,028.95

All India Plant Load Factor* Sector-Wise For March’13 And March’14

	% PLF
Sector	March’13	March’14
Central	83.12	79.91
State	66.07	60.01
Private	74.45	63.65
All india	71.96	66.58

Capacity addition targets and achievements in the 12th plan

Targets

(Mw)

Type/sector	Central	State	Private	Total
Thermal	14,878.00	13,922.00	43,540.00	72,340.00

Achievements upto march 2014 during 12th plan

TYPE/SECTOR	CENTRAL	STATE	PRIVATE	TOTAL
Thermal	6,683.30	7,233.00	22,972.50	36,888.80
Achievement (%)	30.45	47.23	49.42	43.43

"At Power Grid, the emphasis has shifted to commissioning. Normally, government companies work on budgets. Up to the Eleventh Five Year Plan (before I joined) Power Grid spent Rs. 50,000 crore. In the last two-and-a-half years, we have invested Rs. 39,000 crore. So about 77 per cent of what was done in 21 years has been done in the last 30 months." - R. N. Nayak, Power Grid Chairman and Managing Director

"Power Grid Corporation and the transmission sector in general have not at all been impacted due to a slowdown in the economy. During 2010-11 it was Rs. 12,000 crore which rose to Rs. 17,000 crore in 2011-12 and Rs. 20,000 crore in 2012-13 and a projected Rs. 22,150 crore in 2013-14. We will be able to achieve our target of Rs. 1,10,000 crore by end 2016-17." - R. N. Nayak, Power Grid Chairman and Managing Director.

Managing Risks At Techno

Risks lie at the core of every business. Their mitigation translates into success. at Techno Electric, we have instituted relevant processes and controls to manage our risks effectively.

Demand risk: a Slowdown in the industry Demand could impact The company’s business Sustainability.	Mitigation: the power ministry has set a target for adding 76,000 mw of electricity Capacity during the twelfth five year plan (2012-17) and 93,000 mw the thirteenth Five year plan (2017-2022).
	The international energy agency (iea) estimates usd 6.1 trillion of investments in t & d Sectors during 2005-2030. The ministry for renewable energy (mnre) in the twelfth Five year plan period 2012-17 has fixed a capacity addition of 15,000 mw for wind Power alone.
Project completion Risk: any delay in the Completion of project Could hamper the Company’s profitability.	Mitigation: the company has completed more than 250 projects on time and has Completed every single one of them in time. Based on our track record and experience We expect to deliver future projects as per deadlines.
Price-based competition Risk: an inability to Remain cost-competitive Could mean the company Losing out on contracts to Its sectoral peers.	Mitigation: the company has a competitive bidding strategy in place that ensures That the company is given preference by its clients over and above its sectoral peers.
Segment risk: presence In a single business Segment may hamper the Growth of the company.	Mitigation: the company widened its presence across three spaces - epc contracting Services, green energy generation and development, operations and maintenance Of transmission network to de-risk from an excessive dependence on one business Segment. The company emerged as an owner of green power generation assets; Revenues from this segment stood at 19.48 per cent in 2013-14.
Liquidity risk: any delay In receivables could affect The company’s viability.	Mitigation: techno electric works with financially robust clients with comfortable Liquidity. Some of the company’s clients include of large indian companies. It Generally works with clients on projects that have achieved financial closure. It also Selects to work with clients that have been favourably appraised by rating agencies. Besides, techno electric enjoys an attractive gearing of 0.57, has been consistently Cash-positive, and employs a modest working capital of 17% of its employed capital.
Internal control systems And their adequacy	Techno electric has an adequate internal control system, commensurate with the size And nature of business, with regard to purchases of inventory and fixed assets and For sale of goods and services. The system is being upgraded continuously in order to Meet and adapt to statutory requirements and changing business conditions.
Financial performance	During the year, techno electric’s consolidated gross revenues stood at h 708.49 crore As compared to Rs. 700.12 crore in 2012-13. The company’s consolidated net profit Stood at Rs. 87.49 crore in 2013-14 as compared to Rs. 120.35 crore in 2012-13.
Human resource Development and Industrial relations	Over the years, techno electric invested in competencies through recruitment, training And retention. The company had an employee base of 400 as on march 31, 2014.
Cautionary statement	Statements in the management discussion and analysis describing the company’s Objectives, projections, estimates, expectations may be forward-looking statements Within the meaning of applicable laws and regulations. Actual results could differ Materially from those expressed or implied. Factors that could make a difference to The company’s operations, inter alia, include the economic conditions, government Policies and their related/incidental factors.