techno electric engineering company ltd Management discussions

INDIAN ECONOMY

The Indian economy grew at a GDP of 7.1% in FY 2016-17 amid a sluggish global economic landscape. Despite uncertainties in global capital markets, India was a preferred destination for foreign direct investments (FDIs). A decent monsoon, reduction in inflation rates and a 3.5% fiscal deficit helped Indias economy grow. Moreover, the Government of India rolled out several bold reforms to balance the inflation, improve both current and fiscal deficits and enable the country reach its true potential.

The consumer price index (CPI) inflation rate was the lowest at 3.8% since 2012, which was primarily due to a slowdown in food prices. Further, the Reserve Bank of Indias (RBIs) tightly controlled Repo Rate that remained unchanged at 6.25% in the last monetary policy review in April 2017 too, helped to discipline the CPI inflation rate.

Major government reforms and schemes that influenced Indias economy in FY2016-17:

Demonetisation

The Government of India announced Indias biggest economic reform in FY 2016-17 by demonetising high value currency notes. The decision was targeted against corruption, circulation of fake currency and black money. Moreover, it aimed to increase the inflow offinancial savings into the banking system. Although retail trade was influenced in November and December post demonetisation, demand picked pace January onwards. Going forward, demonetisation is expected to have a positive impact on GDP growth with greater tax obedience, digitalisation and formal channelling of the savings system.

Goods and Services Tax (GST)

The Goods and Service Tax (GST) bill has been implemented w.e.f. 1st July, 2017. The reform is intended to streamline the current tax structure and achieve simplification and transparency in indirect taxes. It is expected to contribute significantly to the growth of GDP. However, making projections for GST revenue in its first year of implementation will be mere speculation.

Make in India

The manufacturing sector of any emerging economy is its core driver; and the Government has shown strong intent to make India a global manufacturing hub through the Make in India

initiative. The campaign aims to build best-inclass manufacturing infrastructure by enabling investments, promoting innovation, encouraging skill development and strengthening intellectual property protection. Consequently, India is expected to become the fifth largest manufacturing country in the world by the end of CY2020.

Other government initiatives such as Digital India, Skill India, Start-up India, and Stand-up India are expected to lead the country to a higher GDP growth, greater digitalisation and strengthen its manufacturing sector.

Indias GDP growth

			(%)
Sector	2014-15	2015-16	2016-17*
Agriculture, forestry and fishing	1.1	1.1	4.1
Industry	5.9	6.1	5.2
Services	10.6	10.9	8.8
GDP at market prices	7.4	7.6	8%

Source: Economic survey, 2016

WORLD POWER SECTOR

After the Paris Agreement in November 2016, international communities are committed towards decreasing their carbon footprint and achieving a sustainable infrastructure. Besides, countries are focused on leveraging technology and diversifying their energy resources to cater to the rising energy needs. The growth of renewables in the electricity sector has been pronounced across the world.

However, access to electricity remains a major challenge for over 17% ofthe worlds population. Going forward, the demand for energy will increase globally and it is imperative that a transition is made to a more sustainable, affordable, secure and inclusive energy system.

INDIAN POWER SECTOR

Indias power sector is a diverse mix ofconven- tional and non-conventional energy sources. Power generation resources range from non-renewable sources such as coal, lignite, natural gas, oil, hydro and nuclear power to renewable sources like wind, solar, agricultural and domesticwaste. Overtheyears, Indias demand for electricity has increased rapidly and is expected to rise further as Indias population is likely to surpass China by 2019. Indias power sector is gradually undergoing a significant change that has redefined the industry outlook. Sustained economic growth continues to drive electricity demand in India. The Government oflndias ambitious plans for providing energy for all under its campaign Power for all by 2019 has accelerated capacity expansion in the country. Simultaneously, there is an increased competition at both the market and supply sides (fuel, logistics, finances, and manpower).

Total Installed Capacity as on 31.03.2017

Sector	MW*	% of Total
State Sector	103,967	32.53
Central Sector	80,257	25.11
Private Sector	135,382	42.36
Total	3,19,606

Source: Government of India, Ministry of Power (*MW - Megawatts)

GENERATION

The total power generated in FY 2016-17 was 1,160.14 billion units (BU) against a target of 1,178 BU at a growth of 4.7% vis-a-vis 5.64% of FY 2015-16. The annual growth rate in conventional energy generation is 18% and 27% in renewable energy. The Government added 8.5 GW of conventional generation capacity during the 9M FY17 period, thereby adding a total of 93.5 GW of power generation capacity.

Generation and growth in conventional power generation in India during 2009-10 to 2016-17

Year	Energy Generation from Conventional Sources (BU*)	Growth (%)
2009-10	777.551	6.6
2010-11	811.143	5.56
2011-12	876.887	8.11
2012-13	912.056	4.01
2013-14	967.150	6.04
2014-15	1,048.67	8.43
2015-16	1,107.82	5.64
2016-17	1,160.14	4.72

Source: Government of India, Ministry of Power, *BU-Billion Units

Installed Capacity

As of 30th April 2017, the total thermal installed capacity was 220 GW, while hydro installed capacity stood at 44.59 GW. The nuclear energy capacity marginally rose to 6.78 GW compared to 5.78 GW. Other renewable energy sources including small hydro power projects, biomass gasifier, biomass power, urban and industrial waste power and wind energy stood at 57.26 GW. Indias solar power

capacity grew at a phenomenal rate to 12.29 GW. The Government plans to double the solar park capacity to 40 GW in the next three years; and it is expected to increase the business opportunity worth up to 20,000 crores for power transmission companies. Going forward, adding new 50 ultra-mega solar parks across 21 states will significantlywiden Indias green energy corridor.

Total installed capacity (sector wise)

Sector	Megawatts	% of Total
State sector	1,04,303	31.58
Central sector	81,167	24.58
Private sector	1,44,790	43.84
Total	3,30,261

Source: Government of India, Ministry of Power Total installed capacity (region wise)

Sector	Megawatts
Thermal	2,21,626
Nuclear	6,780
Hydro	44,594
RES*a	57,260
Total	3,30,261

installed capacity in respect of RES (MNRE) as on 31.03.2017

ARES - (Renewable energy sources) include Small Hydro Project, Biomass Gasifier, Biomass Power, Urban & Industrial Waste Power, Solar and Wind Energy.

Source: Government of India, Ministry of Power

Demand-Supply Scenario

The peak deficit for Indias power sector remarkably reduced to 0.7% in FY 2016-17 from 2.1% of FY 2015-16. This was primarily due to rising coal stock availability at major power stations and an increase in the installed power capacity. There was significant contribution from renewable energy sources to enhance power generation capacity in India. The peak power requirement stood at 159 GW, of which 157 GW was supplied.

A sustained economic growth continues to be a key driver for electricity demand in the country. The Ministry of Power has set a target of 1,229.4 billion units (BU) of electricity to be generated in the financial year 2017-18, which is 69 BU higher than the target for 2016-17.

Power supply position of India from 2009-10 to 2016-17

Sector	Energy				Peak
Year	Requirement Availability		Surplus (+)/ Deficits (-)		Peak Demand	Peak Met	Surplus (+)/ Deficits (-)
	(*MU)	(MU)	(MU)	(%)	(**MW)	(MW)	(MW)	(%)
2009-10	8,30,594	7,46,644	(83,950)	(10.1)	1,19,166	1,04,009	(15,157)	(12.7)
2010-11	8,61,591	7,88,355	(73,236)	(8.5)	1,22,287	1,10,256	(12,031)	(9.8)
2011-12	9,37,199	8,57,886	(79,313)	(8.5)	1,30,006	1,16,191	(13,815)	(10.6)
2012-13	9,95,557	9,08,652	(86,905)	(8.7)	1,35,453	1,23,294	(12,159)	(9.0)
2013-14	10,02,257	9,59,829	(42,428)	(4.2)	1,35,918	1,29,815	(6,103)	(4.5)
2014-15	10,68,923	10,30,785	(38,138)	(3.6)	1,48,166	1,41,160	(7,006)	(4.7)
2015-16	11,14,408	10,90,850	(23,558)	(2.1)	1,53,366	1,48,463	(4,903)	(3.2)
2016-17	11,42,929	11,35,334	(7,595)	(0.7)	1,59,542	1,56,934	(2,608)	(1.6)

Source: Central Electricity Authority (CEA) *MU - Million units, **MW- Megawatts

The Government has targeted a capacity addition of around 100 GW under its 13th Five-Year Plan (2017-22) as power consumption is estimated to increase from 1,174.07 Terawatt-hour (TWh) in 2015 to 1,894.7 Terawatt-hour (TWh) in 2022. Key drivers for the increase in demand are:

• Expanding industrial activity and increase in per-capita usage

• Growing population, and increasing penetration of electricity

• Rising Foreign Direct Investment (FDI) inflows in the power sector with 100% FDI

allowed - total FDI inflows in the sector reached USD11.58 billion during April 2000

to March 2017, accounting for 3% of total FDI inflows in India

• Sanctioning seven new transmission systems that include strengthening of national grid

• Escalating investments across the value chain and ambitious projects

• Multiplying growth avenues owing to diversification into renewable sources

• Implementing schemes like Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY) and Integrated Power Development Scheme (IPDS) for rural and urban areas

(Source: Central Electricity Authority, Department of Industrial Policy and Promotion, TechSci Research)

Challenges of the power sector Fuel security: Thermal capacity addition is deeply affected by issues around availability of fuel. Coal supplies by Coal India Limited (CIL) are restricted to around 65% of actual coal requirement for coal-based thermal plants. This leads to an increased dependence on imported coal and results in high power generation costs.

State DISCOMS: Politically driven tariff schemes, operational efficiencies, and Aggregate Technical and Commercial (AT&C) losses have adversely impacted the financial health of State DISCOMS as they suffer from very high debts.

Under-procured power: Increase in power generation costs due to limited fuel availability, poorfinancial health ofstate DISCOMS, and high AT&C losses have contributed in supressed demand projections by state DISCOMS.

Financial environment: Lending rates increase significantlyfrom the time of project appraisal resulting in higher costs for running projects and higher tariffs.

Absence of robust policy: Policies governing the fuel cost pass-through bidding guidelines; and mega power policy are not in sync with the National Electricity Policy.

Porters five forces analysis of Indias power sector

Competitive rivalry	Threats of new entrants	Substitute products	Bargaining power of suppliers	Bargaining power of customers
• Oligopoly structure prevents intense rivalry	• Capital intensive industry makes it difficult for new players to enter	No substitutes	• Bargaining power of suppliers is high as presence of bigger players block the new entrants	• Medium - for retail consumers, government sometimes interferes to regulate prices. However, prices are not regulated for industrial customers
• In India, the projected demand is already above the supply levels	• Regulatory approvals and land remain a major problem
• Competitive rivalry is likely to increase due to government encouraging private players to enter the sector

(Source: IBEF)

Government strategies encouraging the power sector

• Developing captive coal fields by companies to reduce price volatility and ensure uninterrupted supply of fuel to control power generation cost

• Reducing cost of transport fuel by establishing power companies near the energy source

• Securing adequate fuel supplies by targeting domestic and overseas resources

• Enabling swapping of coal supplies by power utilities with the nearest sources, to save miscellaneous costs and decongest the rail network

• Utilising multiple generation technologies by companies for their projects

• Piloting smart grid mission with 14 DIS- COMS

• Incorporating smart metering for high-end users of electricity

• Generating additional revenues through sale of carbon credits by employing super-critical technology

Government initiatives Spinning reserve

To meet the peak load shortages and grid stability, spinning reserves have been created. A spinning reserve is a generation capacity that is on-line but unloaded and that can respond within 10 minutes to compensate for generation or transmission outages. Frequency-responsive spinning reserve responds within 10 seconds to maintain system frequency. Spinning reserves are the first to be used when a shortfall occurs.

Energy conservation campaign

The Government has been encouraging replacement of nationwide street lights with LED lights to promote energy conservation. Within one year, one crore bulbs in Delhi have been replaced. As per research estimates, saving 10% energy will help India light up 11 crore lives.

National Mission on Enhanced Energy Efficiency(NMEEE)

The National Mission for Enhanced Energy Efficiency (NMEEE) was launched in August 2014 with an investment of USD 128 million. It aims to strengthen the market for energy efficiency by creating conducive regulatory and policy regime. NMEEE seeks to upscale the efforts to unlock the market for energy efficiency, which is estimated to be around 74,000 crores. And help fuel savings of around 23 million tonnes per year and reductions in greenhouse gas (GHG) emissions of 98.55 million tonnes per year at its full implementation stage.

Project UDAY

The Ujwal DISCOM Assurance Yojana (UDAY) was implemented to enable electrification of all villages by reducing losses through programmes that involve public participation. Under the scheme, the state governments would take over 75% of the debt of their respective state DISCOMS and pay the lenders by selling bonds. The remaining 25% of the debt would be paid by bonds issued to the DISCOMS. The UDAY scheme is in line with the Governments vision ofproviding affordable and unrestricted power for all across India; and 27 states have signed up for it

National tariff policy (2016)

The Government oflndia amended the National Tariff Policy for Electricity injanuary 2016; and aims to achieve the objectives of UDAY scheme. The policy focuses on renewable energy and has proposed to increase solar Renewable Purchase Obligation (RPO) to 8% by 2022.

Ultra Mega Power Projects (UMPP)

The Government plans to increase the generation capacity and the development of UMPP projects will significantly contribute towards meeting the requirement of power across states. These are large projects of 4,000 MW each involving an estimated investment of about 25,000 crores. The projects will substantially reduce power shortages in the country. The Central Government has accordingly taken the initiative for facilitating the development of a few Ultra Mega Power Projects of about 4,000 MW capacity each. These projects will remain under tariff-based competitive bidding route using super critical technology on build, own and operate basis.

The projects are aimed to address the energy needs of a number of states; and distribution companies located in these states are being developed on the basis of develop, build, finance and operate and transfer (DBFOT) formats. In the last two fiscal years, the Government of In

dia re-introduced generation-based incentives for wind power projects to motivate capacity addition in the sector. Moreover, it introduced a deduction of 2% excise duty on the import of capital goods. A total of USD 147.3 million has been allocated to Ministry of New and Renewable Energy(MNRE). To reduce the dependency of imported coal, a public private partnership (PPP) policy framework would be devised with Coal India to increase coal production.

(Source: Government of India, Ministry of Power)

TRANSMISSION

The natural resources for electricity generation in India are unevenly distributed and concentrated in a few pockets. Hydro resources are mostly located in the Himalayan foothills of North Eastern Region (NER). Coal reserves are concentrated in Jharkhand, Odisha, West Bengal, Chhattisgarh, parts of Madhya Pradesh, whereas lignite is located in Tamil Nadu and Gujarat. Moreover, many power stations have been installed in various parts of country using gas and renewable energy sources like solar, wind, biogas, and so on.

Powergrid Corporation of India Limited (POWERGRID), a central transmission utilities (CTU), is responsible for planning inter-state transmission system (ISTS). Similarly, there are State Transmission Utilities (STU) (namely State Transco/ SEBs) engaged with development of Intra State Transmission System.

An extensive network of transmission lines has been developed over the years for evacuating power produced by different electricity generating stations and distributing the same to consumers. Depending upon the quantum of power and the distance involved, lines of appropriate voltages are laid. The nominal Extra High Voltage lines in use are 800 kV HVDC and 765kV, 400 kV, 230/220 kV, 110 kV and 66kV AC lines. These have been installed by all State Electricity Boards (SEBs), and by generation, transmission and distribution utilities including those in under the Centres control.

Between April and May 2017, 4,027 circuit kilometers (ckm) of transmission lines have been commissioned, which includes 17.4% of the annual target of 23,086 ckm fixed for 2017-18. Similarly, 9,170 MVA of transformation capacity of substations have been added that constitute 17% ofthe annual target of 53,978 MVAfixed for 2017-18.

(Source: Government of India, Ministry of Power) DISTRIBUTION

The financial health ofthe power sector is dependent on the scale of its distribution; thus, making it the most important link the value chain of the power sector. The responsibility of distribution and supply of power lies with the states. Unlike generation and transmission, distribution of power is a daunting task as consumers are varied, numerous and disparate. The Government of India has introduced several schemes for assisting states improving the distribution sector. They are:

Integrated Power Development Scheme (IPDS)

The scheme was approved on 20th September 2014, with a total outlay of 32,612 crores, which includes a budgetary support of 25,354 crores by the Government. The objectives of scheme are:

• Strengthening of sub-transmission and distribution networks in urban areas

• Metering of distribution transformers / feeders / consumers in urban region

• Incorporating IT to enhance distribution sector and strengthen distribution network

The component of IT enablement programme of the distribution sector and network approved in June 2013 in the form of Restructured Accelerated Power Development and Reforms Programme (RAPDRP) for 12th and 13th Five-

Year Plans got subsumed in this scheme. And the programme has an approved outlay of 44,011 crores including a budgetary support of 22,727 crores carried over to the new scheme of Integrated Power Development Scheme (IPDS).

Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY)

This scheme aims at rural electrification. The other primary objectives ofthe scheme include:

• Separation of agriculture and non-agriculture feeders

• Strengthening of sub-transmission and distribution networks in rural areas

• Metering distribution transformers / feeders / consumers in the rural region

The scheme has an approved cost of 39,275 crores including a budgetary support of 35,447 crores carried over to the new scheme of DDUGJY.

National Electricity Fund (NEF)

The Government oflndia set up a National Electricity Fund (Interest Subsidy Scheme) in March 2012 to promote investment in the distribution sector; and provide interest subsidy on loans disbursed to distribution companies (DISCOMS) in both public and private sector. The scheme is focused to improve the distribution network for areas not covered by Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) and Restructured Accelerated Power Development and Reforms Programme (R-APDRP) project areas. The

pre-conditions for eligibility are connected to reform measures of state governments, while the amount of interest subsidy is linked to the progress achieved in reforms-linked parameters.

RENEWABLE ENERGY

Renewable energy is steadily emerging as a major source of power in India. Wind power is Indias largest source of renewable energy and accounts for approximately 64.77% of the total renewable power installed capacity. Biomass is considered as the second largest source of renewable energy and contributes to 12% of total installed capacity. Moving forward, the Government plans to double wind power generation capacity to 20 GW by 2022 and increase solar power generation capacity target to 100 GW by 2022. The Ministry of New and Renewable Energy(MNRE) plansto launch an integrated bio-energy mission with an investment of 10,000 crores (USD 1.5 billion) between FY 2017-18 to FY 2021-22. This will be aimed at enhancing the use of bio-fuels like ethanol and biogas on one hand, and reduce consumption of fossil fuels, on the other. The MNRE plans to generate over 310 gigawatts of green energy and will collaborate with the Development Bank to fund the 300 crores (USD 45 million) solar project in Maharashtra and Kerala.

GOVERNMENT INITIATIVES

• Introduction ofafixed-cost component to the tarifffor electricity generated from renewable energy sources like solar or wind

• Rationalise various categories of electricity consumers across states. This move is expected to bring transparency and efficiency in billing, improvetariffcollection and improve the health of distribution companies in the country

• Launch of the new app and web portal, Ta- rang - Transmission App for Real Time Monitoring and Growth - for electronic bidding for transmission projects

• Install as many as 10,000 solar, wind and biomass power projects in nextfiveyears, with an average capacity of 50 kilowatts per project, thereby adding 500 megawatts to the total installed capacity

• Provide 24*7 affordable electricity to every home in India by 2020

• Launch of the app - GARV-II in March 2017 to provide real time data related to rural electrification regarding all un-electrified villages in India

• Shift towards renewable energy resources due to a fall in the prices of solar power caused by international companies interested in building capacities

(Source: IBEF.org - June17)

ABOUT TECHNO ELECTRIC & ENGINEERING CO. LTD.

Established in 1963, Techno Electric & Engineering Company (Techno) is one of the leading players in the countrys power-infrastructure space. It is engaged in three types of business - EPC, Asset Ownership, and Operations and Maintenance. Techno provides its expertise to all three industry segments - generation, transmission and distribution. Over the years, it has grown its business to include Green Power, and Build Own Operate and Transfer (BOOT) and Build Own Operate and Maintain (BOOM) project segments as well.

Techno provides complete solutions for captive power plants, balance of plant (BOP) for thermal and hydro power projects. The Company extended into the captive waste heat recovery segment in 2006 through the delivery of integrated turnkey solutions. Technos capabilities comprise basic engineering, design, detailed engineering, civil-cum-structural works, commissioning and stabilisation. Over

the decades, the Company has established a formidable record in the execution of up to 100 MW captive projects in record time.

Techno has demonstrated its excellence in the transmission and distribution segment. Within the EHV substation segment, Techno services comprise the EPC delivery of air-insulated and gas insulated substations (GIS).

The Company entered into the distribution and rural electrification sector in 2004. Over time, it has executed large rural and urban distribution packages across three districts in Assam and six districts in Bihar and Maharashtra. Techno has provided distribution services under the Accelerated Power Development and Reform Programme (APDRP) scheme and executed rural electrification projects underthe Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY).

FINANCIAL PERFORMANCE

During the year,Techno Electrics consolidated gross revenue stood at 1,356.72 crores as compared to 1,097.20 crores in 2015-16. The Companys consolidated net profit stood at 192.96 crores in 2016-17 vis-a-vis 119.69 crores in 2015-16.

RISK MANAGEMENT

Technos risk management policy has ensured a sustainable business growth with a nimble approach in identifying, evaluating, and resolving risks associated with the business. The policy helps in informed decision making, monitoring the associated business risks and protects the organisation. Moreover, it ensures compliance with appropriate regulations, wherever applicable, through the adoption of best practices.

HUMAN RESOURCE DEVELOPMENT AND INDUSTRIAL RELATIONS

Techno Electric has invested in its human capital by a consistently recruiting, training and retaining talent. The Company had an employee base of 500 as on 31st March, 2017.

It has a bottom to top approach to train and retain its people, thereby minimising the attrition rate. Technos manpower is a talented mix of experienced engineers and technicians with a vast knowledge about the industry which reflects in the success ofthe organisation.

During FY 2016-17, the Company organised various training sessions, workshop, seminar for knowledge upgradation of employees.

INTERNAL CONTROL SYSTEMS

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.

CAUTIONARY STATEMENT

Statements in the management discussion and analysis describing the Companys objectives, projections, estimates, expectations may be forward-looking statements within the meaning of applicable laws and regulations. Actual results could differ materiallyfrom those expressed or implied. Factors that could make a difference to the Companys operations, inter alia, include the economic conditions, government policies and their related/ incidental factors.