Zodiac Energy Ltd Management Discussions.
The discussion hereunder covers Companys performance and its business outlook for the future. This outlook is based on assessment of the current business environment and Government policies. The change in future economic and other developments are likely to cause variation in this outlook.
The cyclical upswing in global economic activity, which began since the last quarter of 2016 continued until the middle of 2018. However, the momentum in global GDP began to wane thereafter, amid broad-based moderation in activity, spanning developed and emerging economies. According to the International Monetary Fund (IMF), the global economy expanded by 3.6% in 2018. The growth rate was impacted by multiple headwinds, including weaker sentiments in financial markets, escalating trade tensions between the US and China, macroeconomic issues in Argentina and Turkey and volatility in crude prices. The US economy expanded on the back of strong external demand, private investment, neutral unemployment and minimal inflation. The GDP of the US economy grew by 2.9%, a rise of 70 basis points vis--vis 2.2% growth registered in 2018. A strengthening US Dollar, neutral unemployment and minimal inflation were the primary growth catalysts. Euro zone registered a 1.8% GDP growth during the year, down from 2.4% in 2017, largely due to sluggish demand in the domestic market. Chinas economic engine is gradually losing its steam; at 6.6%, the countrys economic growth was lower than the 6.9% level recorded in 2018 .
Buffeted by multiple downside risks, the global economy is projected to expand by 3.5% in 2019. The International Monetary Fund (IMF) has revised downwards global growth estimates, following tariff uncertainties between the US and China, as well as weaker momentum seen in Europe during the second half of 2018. Additionally, major economies such as Germany and Japan may also be indirectly impacted by trade tensions. Notwithstanding challenges, emerging and developing economies excluding China will continue to steer the worlds growth engine. Although Central Banks across the world have largely adopted an accommodative stance, the investment cycle may remain constrained for the medium term.
Although India remained in the esteemed club of the worlds fastest growing major economies in FY2018-19, domestic economic activities remained sluggish in the second half of the year. Unfortunately, when the economy began to gain momentum from the impacts of demonetisation and Goods and Services Tax (GST) related transition, liquidity crisis cast its shadow on consumption demand and market sentiments. The result was that economic growth rate was marginally impacted. As economic activities decelerated towards the end of 2018 due to a slowdown in both public and private consumption, expectations for the real GDP growth were sequentially revised downwards. Consumer confidence gradually improved, inching up for two straight quarters ending 31 December, 2018 and31 March, 2019. Inflation as measured by the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) remained in low single digits for most part of the year. Consequently, the Reserve Bank of India (RBI) reverted to neutral stance from calibrated tightening (briefly adopted between October and December2018). The apex bank announced a 25 basis points cut in repo rate in its last policy of the financial year to accelerate economic growth and usher in enhanced liquidity in the ecosystem. The Government of India (GOI) adopted prudent policies to restrict fiscal deficit in a narrow band during the year.
Even as global factors will continue to impact the economic landscape, domestic factors such as economic growth, consumption patterns, policy stimulus, inflation and government revenue flow are expected to play an important role in projecting the countrys growth trajectory. While paying attention to the requirements of rural areas and agriculture, appropriate measures were announced for reinforcement of important sectors such as infrastructure, healthcare and investments. Although the RBI is focusing on injecting additional liquidity into the ecosystem, the availability of capital from PSU banks for private investment will remain a challenge. The NPA overhang is expected to continue at least in the near term and the NBFC liquidity position is an issue and will constrain the availability of funds for infrastructure projects. The fiscal position of the economy is likely to limit the spending on infrastructure. The Union and state governments will need to undertake in-depth study of the industrys capabilities, ensure smooth implementation of policy changes, enable financing and expedite structural reforms to inject life into infrastructure projects.
In a rapidly developing economy like India, power remains a crucial facilitator for economic growth and social wellbeing. The demand for power continues to grow as a large proportion of the population aspires for a better quality of life. Interestingly, the countrys power sector is one of the most diversified in the world. Power is generated from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power; and from renewable sources such as wind, solar, agricultural and domestic waste. Coal continues to remain the backbone of the power sector and the economy in general, but there is growing focus on green energy. Exponential growth in power demand, coupled with improved access to electricity is catalysing the countrys per capita power consumption. It is expected that per capita electricity consumption will increase at 5% CAGR betweenFY19 and FY23, from 1,149 units in FY18 to 1,450-1,470 units by FY23. This is due to improvement in electricity access in terms of quality and reliability on account of intensive rural electrification and reduction in cost of power supply, resulting in realization of latent demand from the residential segment. Robust GDP growth is expected at an average of 7.5% to7.7% from FY19 to FY23. To facilitate this growth, energy requirement is expected to rise at a CAGR of 6.5% to 6.8%during this period.
Climate change is one of the biggest challenges of the 21st century and India is committed towards the global climate change initiative; and has ratified the Paris Agreement on Climate Change. As part of the Nationally Determined Contributions (NDC), the country is committed to reduce the emissions intensity of its GDP by 33-35% by 2030 from the 2005 level. The countrys renewable energy sector has been at the forefront of growth in capacity development. To provide clean and affordable energy to all, the Government of India has set an ambitious target of 175 GW energy from RE sources by 2022. The target is further enhanced to 227 GW. This drive for cleaner energy supply is set against a framework of sweeping economic and demographic change. The countrys population is growing fast and by 2025 is likely to overtake China with more people than ever living in urban areas. The convergence of rapid urbanisation and one of the worlds fastest economic growth is likely to quadruple Indias electricity demand by 2050.
According to CEA, the total installed generation capacity in India as on March 31, 2019 was 356 GW, of which approximately 113 GW of capacity was added in the past five years (FY14 to FY19), with most of this capacity addition coming from new renewable plants. Coal-based installed power generation capacity has maintained its dominant position over the years and accounted for approximately56% of capacity.
Renewable energy installations have more than tripled to approximately 78.32 GW capacity as on March 31, 2019, compared with 25 GW as on March 31, 2012, constituting approximately 22% of total current generation capacity. Following the declaration of large hydro as renewable energy source by the Government of India (GOI) on March19 renewable energy (including Large Hydro i.e> 25 MW) constitutes 34.7 % of total current generation capacity Investments in the Indian power sector is expected to continue to grow over the next few years, but with a shift away from conventional power generation towards renewable power generation.
|Opportunity and Threats:|
|o Demand for electricity is expected to increase at a CAGR of 7 per cent to 1,894.7 TWh over the next few years.||o Change in Policy and Regulations|
|o New entrants in the market and intense competition by existing players|
|o Current production levels are not enough to meet demand; annual demand outstrips supply by about 7.5 per cent.||o Technology may become obsolete due to Innovation in Technology|
|o Various reforms being undertaken by the government are positively impacting Indias power sector. In wake of the surging domestic coal production, the countrys power sector is becoming increasingly stable.|
|o Liberalized the reformed policy on renewable energy and FDI Policy.|
Indias energy landscape is rapidly evolving to support an expanding economy, accelerate access of electricity to rural areas, fuel the evolution in mobility including EVs and develop the infrastructure required to meet the demands of one of the worlds most populated countries. In the last few years, India has evolved from lingering power shortages into a near energy-surplus scenario.
Indias energy consumption is expected to grow the fastest among all major economies by 2040. This paradigm change will increasingly influence the development narrative, unfolding across the economy. The Government of India is committed to increased use of clean energy sources and is already undertaking various large-scale sustainable power projects and promoting green energy heavily. In addition, renewable energy has the potential to create many employment opportunities at all levels, especially in rural areas. The Ministry of New and Renewable Energy (MNRE) has set an ambitious target to set up renewable energy capacities to the tune of 175 GW by 2022 of which about 100 GW is planned for solar, 60 for wind and other for hydro, bio among other. As of June 2018, Government of India is aiming to achieve 225 GW of renewable energy capacity by 2022, much ahead of its target of 175 GW as per the Paris Agreement. Indias renewable energy sector is expected to attract investments of up to US$ 80 billion in the next four years. It is expected that by the year 2040, around 49 per cent of the total electricity will be generated by the renewable energy, as more efficient batteries will be used to store electricity which will further cut the solar energy cost by 66 per cent as compared to the current cost. Use of renewables in place of coal will save India Rs 54,000 crore (US$ 8.43 billion) annually.
Achievements in the sector
Solar capacity has increased by eight times between FY14-18. India added record 11,788 MW of renewable energy capacity in 2017-18. A total of 47 solar parks with generation capacity of 26,694 MW have been approved in India up to November 2018, out of capacity of 4,195 MW has been commissioned. Inter-state distribution of wind power was started in August 2018. Power generation from renewable energy sources (excluding large hydro) in India reached record 101.84 billion units in FY18 and has reached 107.22 billion units between April 2018-January 2019.
Risk and Concerns:
Operating in a dynamic operating scenario, the Company is exposed to various business risks, which may be internal and external. It has put in place a comprehensive risk-management system, tailored to the specific requirements of the business, considering various factors such as size and nature of inherent risks and the Companys regulatory environment. The risk management system recognises and analyses risks early and takes appropriate action. The Companys senior management regularly reviews the risk management processes for regular effective risk management and mitigation.
Internal Financial Control Systems and their adequacy:
Internal Control system and adequacy Internal Control measures and systems are established to ensure the correctness of the transactions and safe guarding of the assets. Thus, internal control is an integral component of risk management. The Internal control checks and internal audit programmers adopted by our Company plays an important role in the risk management feedback loop, in which the information generated in the internal control process is reported back to the Board and Management. The internal control systems are modified continuously to meet the dynamic change. Further the Audit Committee of the Board of Directors reviews the internal audit reports and the adequacy and effectiveness of internal controls.
Financial Performance and Review of Operations
|Financial Highlights:||(Amount in Lakhs)|
|Particulars||F.Y. 2018-19||F.Y. 2017-18|
|Revenue from Operations||6328.00||3838.97|
|Less: Total Expenses before Depreciation, Finance Cost and Tax||5850.87||3531.49|
|Profit before Depreciation, Finance Cost and Tax||491.38||314.74|
|Less: Finance Cost||27.86||26.80|
|Profit Before Tax||452.24||274.93|
|Less: Current Tax||140.85||78.45|
|Less: Deferred tax Liability||(2.82)||(6.10)|
|Less: Pervious year tax adjustment||4.10||2.99|
|Profit after Tax||310.12||199.60|
Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor:
|Ratios||2018-19||2017-18||Difference||Change in %||Remarks|
|Debtors Turnover Ratio||4.49||4.97||-0.48||-9.5%||Due to increase in trade receivables|
|Inventory Turnover||11.09||11.98||-0.89||-7.44%||Due to increase in inventory|
|Interest Coverage Ratio||66.49||19.24||47.25||245.55%||Due to increase in operating profitability of the Company.|
|Current Asset Ratio||3.53||6.66||-3.13||-46.97%||Due to increase in current Assets|
|Debt Equity Ratio||0.20||0.04||0.16||350.20%||Due to increase in short term borrowing|
|Operating Profit Margin (%)||7.43 %||7.89 %||-0.46||-5.82%||In absolute amount terms our operating margins have increased however due to increases in material cost|
|Net Profit Margin (%)||4.90%||5.20%||0.3%||-5.79%||Operating Profit Percentage has reduced. In absolute amount terms our Net Profit margins have increased however Due to increase in material cost Net|
|Return on Net Worth||15.14%||11.49%||3.65%||31.85%||Profit is Reduced. Due to increase in net profit as compared to previous year.|
The Company believes in establishing and building a strong performance and competency driven culture amongst its employees with greater sense of accountability and responsibility. The Company has taken various steps for strengthening organizational competency through the involvement and development of employees as well as installing effective systems for improving their productivity and accountability at functional levels. The Company acknowledges that its principal asset is its employees. Ongoing in-house and external training is provided to the employees at all levels to update their knowledge and upgrade their skills and abilities. As on March 31, 2019, the Company had total 45 full time employees. The industrial relations have remained harmonious throughout the year.
Statements in this Report, describing the Companys objectives, projections, estimates and expectations may constitute forward looking statements within the meaning of applicable laws and regulations. Forward looking statements are based on certain assumptions and expectations of future events. These statements are subject to certain risks and uncertainties. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The actual results may be different from those expressed or implied since the Companys operations are affected by many external and internal factors, which are beyond the control of the management. Hence the Company assumes no responsibility in respect of forward-looking statements that may be amended or modified in future on the basis of subsequent developments, information or events.