Pennar Engineered Building Systems Ltd Merged Management Discussions

A. INTERNATIONAL PERSPECTIVE.

• The World Bank in its most recent "Doing Business 2018" Annual Report India is ranked 100 among 190 countries.

• The International Monetary Fund (IMF) projected a growth rate of 7.3% in 2018 and 7.5% in 2019 for India as against 6.7% in 2017, making it the fastest growing country among major economies.

• As per World Economic Forums Global Competitiveness report, India is ranked at 40 among other countries, the position stabilizes this year after its big leap forward of the previous two years. The score improves across most pillars of competitiveness, particularly infrastructure (66th, up two), higher education and training (75th, up six), and technological readiness (107th, up three), reflecting recent public and private investments in these areas.

B. INDIAN ECONOMIC OVERVIEW

• The GDP grew at 6.3 per cent in the second quarter of 2017-18 and is expected to grow at 72-7.5 per cent in the second half of 2017-18. Growth for 2018-19 is forecasted at 7.4 per cent by the International Monetary Fund (IMF).

• Fiscal deficit target for 2018-19 is set at 3.3 per cent of the GDP.

• Fiscal deficit for 2017-18 is revised to Rs 5.95 lakh crore (US$ 93.54 billion) at 3.5 per cent of the GDP.

Infrastructure

• Investments in excess of Rs 50 lakh crore (US$ 786.02 billion) are required in the countrys infrastructure to increase the growth of GDP and connect and integrate countrys transport network.

• Budgetary allocation for infrastructure is set at Rs 5.97 lakh crore (US$ 93.85 billion) for 2018-19. Alltime high allocations have been made to the rail and road sectors.

• Under the Smart Cities Mission, projects worth Rs 2,350 crore (369.43 million) have been completed and projects worth 20,852 crore (US$ 3.82 billion) are under progress. A total of 99 cities have been selected under the mission with an outlay of Rs 2.04 lakh crore (US$ 32.07 billion).

Railways

• Capital expenditure in the railways sector for 2018-19 is set at Rs 148,528 crore (US$ 23.35 billion). 12000 wagons, 5160 coaches and around 700 locomotives will be procured during 2018-19. Redevelopment of 600 major railway stations will be taken up.

Manufacturing Sector

• A vibrant manufacturing sector is a must for a vibrant economy and budget 2018 provides the Finance Ministry with a unique opportunity to further push for reforms and boost the manufacturing sector.

In the past the government has stated that it wants and expects 25% of the Indias GDP to come from the Manufacturing sector by the year 2022, up from the current 16%.

• Also under the PM Narendra Modis Make in India scheme the government expects that the manufacturing sector will create 10 crore jobs by 2020. Although in India the manufacturing sector has grown over the years yet the growth has been slower when compared to the rivals in the neighbourhood.

• By 2020, it is expected that India will become the fifth largest manufacturing hub in the world. For Indias manufacturing sector to compete and outshine the likes of China much work will be required by the government in the Budget 2018-19.

Expectations of the Manufacturing Sector from Budget 2018

Budget 2018-19 is the governments last full budget. To provide relief and the required impetus to the corporate and the manufacturing sector, the government can announce some big ticket announcements in the budget.

According to sources, a rate cut in the MAT (Minimum Alternative Tax) and Corporate Tax are being considered. Experts believe that the corporate tax rates may be reduced to 25 percent; also Special Economic

Zones may get relief from MAT. Many players are also expecting relief from Dividend Distribution Tax (DDT) and cess.

The first and foremost necessity of the manufacturing sector is that in the Budget the Finance Ministry should take steps to revive demand. The manufacturing sector is both struggling with excessive capacity and is also inhibited to add extra capacity due to slow demand. Thus improving the confidence and purchasing power of the consumer but steps such as reduction in personal income tax rates can help put extra cash in the pockets of the consumers and thus enhance demand.

Another expectation of the industry from the government is to continue and add anti-dumping duties of certain goods from China to protect the local manufacturing industry. Cut in GST rates and import duty on equipments used in the manufacturing units will also help reduce manufacturing cost thus help cut product prices and boost demand.

How Budget 2018 can boost the Manufacturing Sector: One of the concerns with regards to the manufacturing sector has been that even though the sector has been able to clock decent growth rates but the growth has been jobless. Although big manufacturing plants and increase in FDI in manufacturing sector is welcome but a special focus in Budget 2018 should be given to small and medium sized enterprise (SMEs) as they are the real job creators.

Government should ensure that manufacturing units that are employment intrinsic, export oriented manufacturing units and new-age hi- tech manufacturing should have simpler setup process and easy access to credit facilities. Certain manufacturing segments such as that of electronics and semiconductors manufacturing should be offered incentives and tax breaks just as their software development counterparts. Consistency in long-term policy formulation, steps to bring the unorganized manufacturing sector under the organized one and increase in public spending and capital investment will also help provide impetus to the manufacturing sector. Government schemes such as MUDRA, skill development, push for Digital economy, nationwide road-building program, further improvement in power supply especially in the rural areas and building of 10 million homes for the underprivileged under the Housing for All scheme can also be used to boost the manufacturing sector.

Solar Power

• The Indian budget announced a series of measures in Budget 2017-18 to promote clean energy, access to power and energy security, that will result in 20 gigawatts (GW) of solar capacity addition, higher spending on rural electrification, two new strategic oil reserves and lower import duty on liquefied natural gas (LNG) and items used in making solar cells and panels.

• The budget advocated for electrification of 18,452 villages identified in 2015 will be achieved by 1 March 2018, for which Rs4,814 crore will be spent in the next financial year, a 43%jump from what is estimated to have spent this fiscal. Of this, so far, close to 12,000 villages have been electrified.

• The Budget announced setting up of 20 GW of solar power capacity and feeding 7,000 railway stations with solar power, giving a major impetus to the shift to clean energy. Over the last two years, the share of solar power in the countys energy mix has been gradually increasing, while that of thermal power has been declining. As on 31 December, thermal power capacity accounts for 69% of the countrys 310 gigawatt (GW) power generation capacity, while solar power account for 2.7%.

C: COMPANYS STRATEGY:

The Company aspires to be leaders in sustainability by promoting their idea of Green Buildings, by this way the company will continue to excel by providing turnkey green and spacious building solutions to their customers. High rise buildings has been one of the key growth segment and the company will continue to focus on it as the market is still nascent in India. We have already developed superior capabilities in design and project amangement and we are best poised to develop and disrupt this market segment.

The Company is focused on providing quality product and services by keeping up to date with latest technology and manufacturing processes. The company is already a market leader in the preengineered building systems and commands one of the highest market share. To keep the momentum of growth, the Companys strategy is to undertake related diversification and explore complementary markets and diversify its product portfolio. This will help the company to add additional revenue segments and increase its footprint across the value chain while offering end to end solution to our customers. In this way the Company also aims to bring in significant synergies to their existing products which will help them be more competitive in terms of cost and services offered and consolidate its position as a market leader.

At present the Company has the following business verticals:

1. Pre-Engineered Buildings

2. High Rise Buildings

3. Solar Module Mounting Systems

4. Engineering Services

5. Structural Fabrication

D: RESULTS OF OPERATIONS AND THE STATE OF COMPANYS AFFAIRS:

• The company reported a Gross Revenue of Rs.601.05 Cr (including all taxes), 5.57% higher than FY 2016-17. EBIDTA of Rs.45.59 Cr, 0.30% over FY 2016-17; PAT of Rs.15.80 Cr, 7.89% decrease over FY 2016-17.

• The decrease in profitability is mainly attributable to high volatility in raw material prices. The company was successful in implementing several cost saving measures and will continue such initiatives.

• The company saw tremendous growth in

Engineering Services and Solar verticals clocking 49% and 56% growth respectively over FY 2016-17.

• The company has a healthy order book and current order backlog of 353 Crores.

• The Company reported an ROCE of 20.34% in FY 2017-18.

• We remain committed to the growth potential in the market and we have expanded the capacity at Sadasivpet Plant by constructing a new building (bay) with the required equipment to augment the current capacity to 1,10,000 MT Per Annum

Particulars	FY 2017-18	FY 2016-17
Gross Revenue from Operation (Incl of Taxes)	601.05 Cr	569.32 Cr
Less: Taxes and Duties	90.69 Cr	67.70 Cr
Revenue from Operations (incl other income)	510.36 Cr	501.62 Cr
Expenses	494.56	484.47
PAT	15.80	17.15 Cr

E. HUMAN RESOURCE AND INDUSTRY RELATIONS

• The Company upholds the value of Respect for individual, open work culture, effective communication, fair and equitable treatment and welfare of employees and draws its strength from a highly skilled and engaged workforce whose collective commitment has helped the organization to scale new heights in its 10(Ten)

• The total human capital of the Company as of 31st March 2018, stood at 621. 57% of the companys human resource is below 30 years, 32% of employees have completed 5+ years of service with the company, while women employees accounts for 12%. About 75% of the companys workforce comprises of technically qualified engineers.

• The company continued with its initiatives for automation of HR systems and processes as well as cost reduction, resulting in improved human capital effectiveness

• Learning and Development continued to be the focus area. In addition to new employee induction, several external training programs were initiated for skill and knowledge enhancement. The Company has provided extensive practical training on safety and undertaken a large number of safety measures, safe construction techniques at projects sites.

• In order to ensure that the employees connectwith the organization is strong several initiatives such as health check-up camps, celebrations around important festivals and 10th Anniversary celebration etc. were undertaken.

• Its pride moment for Company , Mr. PV Rao (Managing Director) being Member of Board of Studies stressed the need of familiarizing PEB concepts to engineering students and as a result new courses were adopted by autonomous colleges like VNR Vignana Jyothi Institute of Engineering &Technology-Hyderabad and RVR&JC College of Engineering-Guntur. Also, the Company has established proactive, harmonious industrial relations and inclusive practices with all bodies.

F. RISK MANAGEMENT

The company acknowledges that their customers are a part of their overall growth and hence the company feels obliged to give its customer a complete picture of their business approach and dependencies. Following are the measures taken by the company to mitigate risks and any other concerns: -

1. Stagnation: The company introduced new segments in their business to diversify clients, products and Expertise in order to overcome and form of slowdown which may affect margins, working capital requirements and profitability.

2. Capability &Execution: In a fast evolving market it is necessary that people have the right skill and execute projects within target deadlines and cost. The company through its continuous tracking of processes at every level and monitoring along with extensive learning & training programs aims to minimize any risks involved due to any inefficiency of its employees.

3. Raw material and Suppliers: The business being sensitive to raw material prices it is important for the company to protect its margins in case of increase in prices by suppliers. In spite of maintaining a diversified sourcing strategy to get the best available prices, the company has to increase the contract value and charge its customers if raw material prices increases above certain thresholds.

4. Returns on Asset: As the steel industry requires a considerable amount of investment to set up plants, the Company aims to keep utilization of its capacity at a maximum by diversifying its product portfolio and entering new market segments.

5. Operational: In order to keep a check on the various operations, the Company very closely monitors every step of its operational processes by assigning budgets and timelines to work accordingly. The company is increasingly automating payments and order management processes and has a dedicated Order Management Department to address any operational issues