Vascon Engineers Ltd Management Discussions.

Company Overview

Vascon Engineers Ltd, established in 1986, is one of the leading Construction Engineering Company in India with presence in Real Estate business having an asset light model and Clean

Room Partition manufacturing business. With a strong track record of 33 years, your Company has created a number of projects of eminence and splendor on a timely basis. The Company has executed over 200 projects with construction area of over 50 mn Sq ft and is known for maintaining high quality standards and timely execution of projects. Your

Company has a track record of successful & timely execution of Landmark projects such as Ruby Mills (Mumbai), Suzlon One Earth (Pune), Symbiosis College (Pune), IGI Airport Multilevel Car Parking (New Delhi), and many more.

Macro Economic Review

The Indian economy started the fiscal year 2018 19 with a healthy 8.2% growth in the first quarter on the back of domestic resilience. Growth eased to 7.3% in the subsequent quarter due to rising global volatility, largely from financial volatility, normalized monetary policy in advanced economies, externalities from trade disputes, and investment rerouting. Further, the Indian rupee suffered because of the crude price shock, and conditions exacerbated as recovery in some advanced economies caused faster investment outflows. Indian economy is likely to sustain the rebound in FY2018 19 with growth projected to be in the range of 7.2% to 7.5% range and is estimated to remain upward of 7% for the year ahead.

These projections could be attributed to the sustained rise in consumption and a gradual revival in investments, especially with a greater focus on infrastructure development. The improving macroeconomic fundamentals have further been supported by the implementation of reform measures, which has helped foster an environment to boost investments and ease banking sector concerns. Together, these augur well for a healthy growth path for the economy. With the key economic policieswith an outlay of USD 31.38being on track, the government is likely to focus on faster policy implementation in the year ahead, with a greater focus on infrastructure development that will enhance growth in Indian Economy going forward. (Source: Deloitte)

Indias Civil Construction & Real Estate Sector

The Indian construction industry is expected to touch USD 1 trillion by 2025. India is believed to become third largest construction market globally by 2030, increasing its contribution to GDP ratio to 15%. Construction Industry is poised to become the largest employer by 2022, employing more than 75 million people.

Construction sector in India will remain buoyant due to increased demand from real estate and infrastructure projects.

Government spending on Infrastructure development & upgradation has witnessed a strong growth in last 3-4 years and it is expected that USD 650 Billion will be required for urban infrastructure development over next 20 years.

Various Government Initiatives to Drive Growth

FDI Relaxation: The Central Government has permitted 100% FDI to attract more foreign investment through automatic route to support the development of townships, construction of residential & commercial premises, road or bridges, hotels, resorts, hospitals, educational institutes, recreational facilities, city and regional level infrastructure, townships. Also, it has raised the FDI Limit to 100% for real estate projects within Special Economic Zones (SEZs).

Urban housing: The construction and housing sector has huge potential with rapid urbanization. As per the 2011 census,

31% of Indias population lives in urban areas. This number is expected to rise to 50% by 2050, as a result of growing aspirations and opportunities in urban areas. The Ministry of

Housing estimated a housing shortage of 19 mn houses in the urban area.

Government launched an initiative, Housing for All by 2022, or Pradhan Mantri Awas Yojana (PMAY, Urban and Grameen) with a target of building 20 million affordable houses for urban poor; providing a financial assistance of र 2 trillion. As part of the initiative, the government granted infrastructure status to enable affordable projects to avail benefits such as lower borrowing rates, tax concessions (100 per cent tax immunity for developers) and increased private investment.

Increasing demand for housing is to be supported by the public and private sector investments in the construction of new residential buildings. In January 2019, the government allocated र 1.0 trillion to construct affordable houses in the country by 2022. Also, under Smart Cities Scheme, 99 cities the have been identified, scheme is projected to impact 99 million urban population.

Others: With rapid urbanization, government impetus on infrastructure development has increased. Upgradation and opening of new airport, government aims to spend र 250 billion for development of 20 plus airports over the next 5 years. Upgradation of healthcare services and hospital under Ayushman Bharat Scheme. Additionally, Government has enhanced focus on improving the infrastructure for education institutes under its control and approved the construction of permanent campuses for 7 IIMs for total cost of र 38 billion by 2021. Government body, Higher Education funding agency (HEFA) has outlay a funding of र 53 billion for several projects of IITs, IIMs, IISERs, IISc, NIT and 44 new KVs. Also, Indian

Railways is undertaking a र 1 trillion station redevelopment program to upgrade 204 stations.

Infrastructure sector has been receiving intense push from the Government since the last couple of years in the form of providing financial support and implementing initiatives to boost its growth. With a strong track record of execution of

EPC projects across the vertical with maintaining high quality standards and timely execution, Vascon is all set to capitalize on the growth opportunity ahead.

Real Estate Sector

Real Estate Sector is the second largest sector after agriculture, contributing 6-7 percent to the Indian Gross Domestic Product.

Indian Real Estate sector is estimated to grow to USD 650 billion by 2025 and surpass USD 850 billion by 2028 and expected to touch USD 1 trillion by 2030, becoming third largest globally; presently, employs over 50 million people. Housing sector is expected to contribute around 13% to Indias GDP by 2025.

Source: KPMG in India analysis, Assessing the Economic Impact of Indias Real Estate,CREDAI - CBRE Report, September 2017

In the last few years, the central government introduced several landmark reforms such as RERA, GST, Insolvency and Bankruptcy Code, adoption of REITs, etc to build a healthy ecosystem with greater transparency, accountability and customer assurance, which created a short term disruption in the industry. During the year, implementation of RERA and liquidity back to de-monetization level helped in boosting the consumer confidence which led to gearing up the momentum. In September 2018, Non- Banking Financial Companies

(NBFCs) got impacted by the liquidity shortage which impacted both demand and supply of real estate sector. To ease the liquidity situation, RBI eased bank exposure norms for NBFCs and pumped in liquidity of र 650 billion in two tranches through its open market operation, providing some respite to the sector. Calendar Year 2019, started on a positive note for the Real Estate sector. Government announced various incentives for buyers and developers in Interim Budget FY20, to boost growth. The benefit such as, extension of tax benefits by one year under 80-IBA Income Tax Act, 2 year exemption from levy of Tax on notional rent on unsold inventory, exemption of second home from capital gain, relieving second houses from income tax on notional rent, increasing the TDS threshold to र 2.4 lakh and full tax rebate upto an income of र 5 lakh will revive the demand for housing and provide more disposable income to buyers. Also, to further improve the demand in the real estate sector, GST council slashed tax rate of under-construction houses from 12% to 5% without input tax credit; and affordable housing from 5% to 1% without input tax credit, effective from April 2019.

Government effort through policy reforms is expected to drive the growth in India Construction and Real Estate Industry. Vascon Engineers has prepared a comprehensive strategy to capture opportunity in both the EPC and Real Estate Development Business.

COMPANY PERFORMANCE

During the Financial Year 2018-19, the total turnover on consolidated basis was at र 561.01 crores as against र 578.51 crores in Financial Year 2017-18. EBITDA for FY18- 19 was reported at Rs 43.99 crores as compared to Rs 44.6 crores in FY17-18 with the Company reporting Profit After Tax of Rs 5.28 crores for FY18-19 against Rs 4.65 crores in FY17-18.

Total Consolidated Debt as on 31st March 2019 is at Rs 263.33 crores with a Networth of र 690.24 crores.

During FY2018-19, your Company raised र 110 crore through private placement by issuing Non-convertible debentures at a coupon rate of 15.5% payable annually. The proceeds are utilized for the repayment of high cost debt and other operational requirement. This has helped your Company in effectively reducing the interest cost and improving near-term working capital requirement for the ongoing projects. During the year, the Company generated cash flow र 50 Crores through liquidation of the non-core assets. The proceeds are used for working capital requirement for on-going projects.

The key metrics of the year under review as per SEBIs regulations were as follows: debtors turnover ratio 2.60 times, interest coverage ratio 116.17 times, current ratio stood at 2.09 times, debt equity ratio at 0.37 times. The EBITDA and net profit margin stood at 8% and 1% respectively and return on net worth at 1%, for the year FY 2018-19

ENGINEERING PROCUREMENT & CONSTRUCTION

Your Company has received various EPC Contracts (Third Party Contracts) during the year under consideration exceeding a sum of over Rs 310 crores. The orders are from reputed developers and from various Government institutions.

In addition to this, the EPC arm of your Company also received internal orders of around Rs 100 crores from its recently launched real estate projects. Total order book of your Company stands at Rs 1,044 crores which includes the Third

Party contracts as well as internal order intake. In FY18-19, EPC segment contributed Rs 282.25 crores to consolidated revenues as against र 248.55 in previous year.

REAL ESTATE

In FY18-19, Real Estate segment contributed Rs 81.20 crores to consolidated revenues as against र 89.43 crores in previous year. With the adoption of Indian Accounting Standard 115 (Completion Contract Method), effective from 1st April 2018, FY19 figures are not comparable with previous period. Your

Company did new sale bookings of 4,20,998 square feet amounting to a total sales value of Rs 272 crores in FY18-19 against new sale bookings of 246,867 square feet for a total sales value of Rs 197 crores for the full Financial Year 2017-18.

During the year, your Company successfully forayed into the affordable housing segment through the launch of Vascon Goodlife, Companys first ever value housing project in May

2018. The Company was also able to successfully launch and sell more than 50% flats of Forest County, Kharadi in Sep 2018 and Xotech Phase II, a residential project of 36 units of exclusive smart 2BHK, Hinjewadi, Pune in Oct 2018.

ONGOING PROJECTS:

Platinum Square Ultramodern Boutique Offices inPune

Commercial project with office size from 800 sq.ft. having total area of 0.09 msft in Vascon Weikfleld IT / Corporate park. It shares excellent connectivity to Pune International Airport, IT, ITES parks and many of Punes prestigious hospitality landmarks.

Forest Edge Residential Project in Kharadi, Pune

Spread over ~ 1.7 acres, will be developed as a modern residential development comprising of 2 BHK apartments, modelled as Health Tech Homes, one of its kind in Pune.

Forest County- Residential Project in Kharadi, Pune

Residential Project located in the most rapidly developing area of Pune Kharadi. Launched two towers with 132 units comprises 2 and 3 BHK apartments with sizes of 1,150 sq.ft. to 1,685 sq.ft. The total saleable area of the project is 0.18 msft.

Windermere A Signature Luxury Residential Project in Koregaon Park, Pune

Windermere is a thoughtfully designed, premium quality home at Koregaon Park, Pune. The total area of the site is 4.75 acres and will be developed in 2 phases. The project has total saleable area of around 0.42 msft, which will be developed in phases. The saleable area of phase 1 of the project is of 0.38 msft.

The quality apartment comprises apartments of 3,000 Sq.ft, 3,800 Sq.ft & 8,500 sq. ft with its own private swimming pool.

The project has latest amenities such as renewable energy system, architectural design that ensure good ventilation and maximum natural light, water, conservation through maximum recycling organic waste management, rain water harvesting, etc. The Project is certified as platinum rating project from by ‘The Indian green building council (ICBG) green home the project is designed as a five star rated Eco housing project.

Vascon Goodlife First Ever Value Housing Project in

Katvi, Talegaon

Spread across 10 acres of land, the project that offers 1RK,

1BHK and 2BHK homes aims at providing not just affordable, but value homes with a strong focus on nurturing learning and growth making it a first-of-its kind learning infrastructure in a residential project. The project boasts of amenities for all age groups, such as library, study rooms in each tower, online education room with computers

Xotech Phase II, Hinjewadi, Pune

Residential Project amidst of IT Hub of the city with total saleable area of the project is 0.04 msft. The project comprises of 71 exclusive smart 2 BHK apartments, which intends to provide quality living and premium housing. The project is sprawled across 2 acres, offers over 85% of open space for a spacious, congestion free, living experience. Well surrounded by IT/BT companies, schools, colleges, bank, shopping arcades and Hotels. The project is developed with corner apartment which are vastu complaint to fit-in the criteria of new home buyers.

GMP TECHNICALS - CLEAN ROOM PARTITION BUSINESS

As a part of backward integration your Company had acquired GMP technical solutions, an integrated provider of engineering services, in August 2010. GMP is one of the largest manufacturers of Clean Room Partitioning Systems and Turnkey Solution Provider.

GMP had a CAGR of over 25% growth in the top line in the years after our acquisition. In FY18-19, your Company received an order from Tata Solutions Pvt. Ltd. to supply 1.24 lakh steel doors over a period of three years.

During the FY18-19, GMP Technicals contributed Rs 161.79 crores to consolidated revenues as against र 203.27 crores in previous year.

STRENGTh, OPPORTUNITIES, STRATEGY

Your Company continues to focus on core business that is Engineering, Procurement & Construction (EPC) and Real Estate Development business. With the Government impetus on Infrastructure growth by Housing for all, modernization of railways, development of airports, smart cities, Vascon is well-prepared to capitalize on this growth opportunity both in EPC and Real Estate Segment.

Your Company continues to make efforts to improve the cash-flow through liquidation of non-core assets identified by the Company for the growth of EPC & Real Estate division. In this year, your Company have raised र 110 crores through non-convertible debentures and generated cashflow ofर 50 crores through sales of identified asset. The proceeds are utilized for repaying high interest bearing debt and working capital requirement for ongoing project. The Company will continue to focus on improving operational efficiencies and strengthening of Balance Sheet. It is monetization committedtowards cash flow of identified non-core assets to improve liquidity in business and achieve higher growth.

THREATS, RISKS, CONCERNS

In EPC business delay in projects execution, stall of projects due to non-payment by developers, steep cost escalation in inputs affects the execution of project and results in significant cost overrun.

In Real Estate business financing,uncertainty on monetary and fiscal policy, changes in government regulations, foreign direct investments, approval processes, environment clearances and legal hassles & proceedings affects the execution project and results in significant cost overrun.

HUMAN RESOURCES

With capital infusion in the Company, we required strengthening of our current team across functions with industry leaders to reap the large opportunities available in front of us. In addition to leadership position, we are building team across function and across levels of both business verticals. Finally, it has been imperative to have appropriate persons for each role for their contribution to the organisation is maximized.

INTERNAL CONTROL SYSTEM

The Company‘s internal control procedures ensure compliance with various policies, practices and statutes in keeping with the organizations pace of growth and increasing complexity of operations. The extensive audits are carried out throughout the year, across all functional areas and reports to the Audit Committee of the Board of Directors.

RISK MANAGEMENT

The Company has developed a robust risk management framework. It has been identified as one of key enablers to achieve the company‘s objectives. Increased competition, pressures on cost and deliveries, forex & commodity price variations, impact of recessionary trends on the award of jobs and manpower attrition are some of the major risks faced by the Industry. The Company has however adopted risk mitigation steps right from pre-bid stage covering technical, procurement and financial risks. The measures such as advanced quantitative tools, global sourcing, standard operating procedures, and operational excellence initiatives have been implemented so as to protect the profitability of the business.