Walchand Peoplefirst Ltd Management Discussions

Economic Trends:

After a relatively buoyant period of sustained performance, the year 2019-20 saw a sluggish period for the global economy with world output growth estimated to grow at its slowest pace of 2.9 per cent since the global financial crisis of 2009, declining from a subdued 3.6 per cent in 2018 and 3.8 per cent in 2017. Uncertainties had faded, but remained elevated due to protectionist tendencies of China and USA and rising USA-Iran geopolitical tensions that had reached a tipping point of possible military conflict threatening even a potential nuclear exchange. The tariff wars, volatile oil prices, and a weakening US economy meant that the predominant mood was less expansionary. India was impacted by the global conditions as well as its own inability to boost aggregate demand and thus its underperformance continued. Finally the coronavirus induced lockdown crashed businesses in many countries, including ours, to a standstill in the last weeks of the year.

Indias GDP growth was seen falling to an 11-year low of 4 per cent in the current fiscal, mainly due to poor showing by manufacturing and construction sectors, particularly automobiles and real estate. According to NSO estimates, the manufacturing sector output growth would decelerate to 2 per cent in 2019-20, down from 6.9 per cent in the previous financial year. However, these numbers do not capture the calamitous collapse of global economies once the COVD-19 impact became widespread. Likewise, the construction sector growth was earlier estimated at 3.2 per cent as against 8.7 per cent in 201819. The huge migrant crisis which saw a massive exodus from cities to the states of Uttar Pradesh, Bihar, West Bengal and Jharkhand following the lockdown imposed by the government may have completely upended March 2020 figures. The end FY 2019-20 GDP might even go below 4% once the final numbers are arrived at. The previous low in economic growth was recorded at 3.1 per cent in 2008-09.

The deceleration in GDP growth can be understood within the framework of a slowing cycle of growth with the financial sector acting as a drag on the real sector. In an attempt to boost demand, 2019-20 witnessed significant easing of monetary policy with the repo rate having been cut by RBI repeatedly but that did not boost fresh investments. Having duly recognized the financial stresses built up in the economy, the government took significant steps this year towards speeding up the insolvency resolution process.

Although the government did reduce corporate tax-rates ( Rs. 145,000 crores), simplified GST, and gave a significant fiscal stimulus of Rs. 1.7 lakh crores to mitigate the humongous crisis following the pandemic, it appeared certain that India would be headed southwards for FY 20. The scandals, illiquidity and insolvency of the NBFC sector had compounded the problems of the financial services industry already reeling under the NPA burden. For India, the flip side is that oil prices have nosedived, and this means both a lower current account and fiscal deficit, and a substantial savings in foreign exchange. On the other hand, our export sector is in doldrums.

Opportunities and Challenges

It will be reasonable to forecast that India is going to experience its lowest GDP in decades with some believing that we will be fortunate to achieve 2% GDP growth rate. Accordingly, the biggest challenge for companies will be to draw a contingency plan for the short-term, and prepare for a medium-term upturn. The long-term appears extremely difficult to budget for given both the uncertainty and the consequent volatility that is likely to follow. Economists who earlier believed that the recovery could be a sharp V curve are now being more circumspect and are predicting a U curve with a prolonged base that will be flat or even a W curve with the recovery having an up and down pattern. As a result, most companies are lowering their expectations of a sustained and robust recovery. The negative repercussions of a disrupted supply chain and a reduced demand (oil prices have crashed) could be severe and long.

With practically all sectors reporting underperformance, we see opportunities in government-business as public expenditure is going to be the crucial component to revive consumer and investment demand, and education, pharmaceuticals and healthcare and wellness industry which will get a significant tailwind.

Outlook, Risks and Control

It is likely that following the dangerous pathogen of coronavirus freezing production, supply, distribution and sales of goods and services worldwide, we might see a global depression set in by the second half of the calendar year of FY 20.

The short-term outlook is bearish as we do not see any visibility of any business of scale to happen in the first quarter. By implication, it implies a combination of rightsizing and maintaining an optimal balance of necessary resources so that the company is able to create a Plan B and remain cash flow positive. We also have to be prepared to seize the opportunity in case a turnaround is sighted. We believe we must keep the balance-sheet neutral by making cost adjustments.

Our initial experience suggests that our training model is unsustainable given two mandatory conditions; a classroom and participants face-to-face with an instructor. This violates both mandatory government notifications on gathering size and social distancing norms that will prevent spread of Covid 19. Thus, until the lockdown is totally lifted we are unlikely to see any momentum in our conventional business model.

We are leveraging this sudden crisis to pivot our business model to virtual instructor led training through live online platforms during this time until things normalize. While many companies have started using digital learning, it is an opportunity for us to develop this as an alternative revenue stream by creating a strategic plan. In the long run, this will mean a big shift and could supplement our traditional model, instead of substituting it.

Cautionary Statement

Your Company endeavors to perform and attempt to deliver the best at all times. However, the statements made in this report describing the Companys objectives, expectations or predictions shall be read in conjunction with the government policies as issued and amended from time to time, the micro as well as macroeconomic scenario prevailing at that time, global developments and such other incidental factors that may extend beyond the control of the Company and Management. Keeping this in view, the actual results may materially vary from those expressed in the statement.

Internal Control Systems

Your Company ensures that appropriate risk management limits, authorizations /approvals processes, control mechanisms and mitigation strategies are in place through its efficient and effective Internal Control System and the same completely corresponds to its size, scale and complexity of operations. The Company strives to put several checks and balances in place to ensure that confidentiality is maintained. Effective procedures, processes and IT systems and mechanisms are rolled out by a full-fledged Internal Audit System to ensure that the interest of the Company is safeguarded at all times. In addition to this, the Risk Assessment policy of the organization is reviewed on a quarterly basis by the Audit Committee/ Board of Directors of your Company.

Financial Performance

Total income achieved during the year under review is INR 2,433.86 lakhs as against INR 2,695.23 lakhs in the previous year. Income from operations of the Company has been INR 2,224.93 lakhs against INR 2,547.55 lakhs in the previous year, showing a decrease of 13% on account of acute slowdown in the economy and unprecedented healthcare crisis in the last quarter. Owing to extensive cost control along with Other Income of INR 208.93 Lakhs the Company have achieved total EBITDA of 8% on total income as compared to 5% last year.

After providing for taxation of INR 56.38 lakhs and deferred tax asset of INR 2.56 lakhs, the net profit of the Company is INR 40.96 lakhs as against the profit after tax of INR 89.15 lakhs in the previous year resulting in total PAT of 2% as compared to 3% last year.

Human Resources

The forthcoming recession poses a critical challenge for us. We have limited options (given that HR costs are 70% of our total costs) and have to reduce our overheads significantly keeping in mind lower forecasted revenues. In our business, recovery of lost human assets is a big cost as replacement is a time-consuming process. The training industry hiring has a gestation period and just- in-hiring often results in poor quality recruitment. We see this predicament to be fairly challenging.

Our work culture will be a priority this year as high employee morale is critical in tough times until robustness can be predicted with a certain degree of certitude. We do intend to pursue employee engagement with rigor and passion to make sure that our employees are motivated, committed and determined to battle this unprecedented situation.