Sadbhav Engineering Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

CAVEAT

Certain statements in this report are "forward-looking statements" that reflect managements expectations regarding Sadbhav Engineerings future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are presented for the purpose of assisting the stakeholders and financial analysts in understanding the Companys operating environment and may not be appropriate for other purposes. Such forward-looking statements reflect managements current beliefs and are based on information currently available to management. However, such forward-looking statements involve a certain number of risks and uncertainties, including those discussed under the heading "Risks and Uncertainties" and elsewhere in this report. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. Although the forward-looking statements contained in this report are based on what management believes to be reasonable assumptions, Sadbhav Engineering Limited can not assure investors that actual results will be consistent with these forward looking statements. Actual results, performances, achievements or subsequence of events may differ materially from those expressed or implied. The case of data and information external to the Company, though the same are based on sources believed to be reliable, no representation is made on its accuracy or comprehensiveness. Therefore, all concerned are requested to caution themselves from putting undue reliance on these statements and are advised to conduct their own investigation and analysis of the information contained or referred to in this section before taking any action with regards to their own specific objective.

Furthermore, the discussion following herein reflects the perception on major issues that could influence the Companys operations substantial downside risks are as on date and the opinions expressed herewith are subjected to change without prior notice. The Company undertakes no obligation to publicly update or revise any of the opinions or forward-looking statements expressed in this report, consequent to any new information, future events or otherwise. Hereby, we at Sadbhav Engineering Limited present our report for the financial year 2022-23.

ABOUT SADBHAV ENGINEERING LIMITED

Since its inception in 1988, Sadbhav Engineering Limited (Herein after referred to as SEL) has implemented and executed projects of national significance including construction of roads and highways, bridges, mining and irrigation supporting infrastructure. SEL has successfully constructed 9621 lane kms of roads and highways (both state and national highways) and are among the top most infrastructure companies in India. SEL is also listed on both National Stock Exchange of India Ltd. (NSE) and BSE Ltd. (BSE) and have had privilege to work for and with NHAI, Coal India, GIPCL, GHCL, L&T, HCC, Punj Lloyd, Sardar Sarovar Narmada Nigam, among various others. SELs foundation moves on the growth chart keeping in view various factors, such as patterns of key emerging markets in advanced economies, rising policy, geopolitical uncertainties, additional growth disappointments, and many more.

1. INDUSTRY STRUCTURE AND DEVELOPMENT

While, Indian Economy has significantly benefited from its infrastructure sector, Indias population growth and economic development require improved transport infrastructure, including through investments in roads, railways, and aviation, shipping and inland waterways. Infrastructure is a key enabler in helping India become a US $26 trillion economy. Investments in building and upgrading physical infrastructure, especially in synergy with the ease of doing business initiatives, remain pivotal to increasing efficiency and costs. The infrastructure segment can divided at the macro level into urban-centric and rural-centric segments and can be further segmented into beneficiary segments like Social Infrastructure, Transportation Infrastructure, Extraction Infrastructure, Manufacturing Infrastructure, and Utilities Infrastructure.

Production incentives under AatmaNirbhar Bharat incentivize foreign investments for domestic production. The last eight years have seen further liberalization of the policy towards foreign investors, with most sectors now open for 100% Foreign Direct Investment (FDI) under the automatic route. This has resulted in a visible structural shift in the gross FDI flows to India during the last decade. Indias gross FDI has increased from an average of 2.2% of GDP during FY05-FY14 to 2.6% in FY15-FY22 with the highest-ever annual gross FDI inflow of USD 84.8 billion recorded in FY22. These trends are an endorsement of Indias status as a preferred investment destination amongst global investors.

2. GLOBAL ECONOMIC OVERVIEW

After the severe impact on economy during past years, the global economy is set to expand in 2023. The global economy has started growing exceptionally but recovery is imbalanced. While economies of developed nations or larger economies are looking more unstable due to the continuation of the Russia-Ukraine war and the disturbed global supply chain thereto. Global GDP growth in 2023 is projected to be 2.7%, the lowest annual rate since the global financial crisis, with the exception of the 2020 pandemic period. A modest improvement to 2.9% is foreseen for 2024. Annual OECD GDP growth is projected to be below trend in both 2023 and 2024, although it will gradually pick up through 2024 as inflation moderates and real incomes strengthen. Many of the worlds poorest countries are being left behind and still struggling to minimize human as well as economic losses due to the pandemic. Neighbor Countries like Pakistan, Sri Lanka, and Nepal are undergoing major political and economic imbalances and uncertainties which also affect many consumer product industries in India. However Recently, India has become the 5th Largest economy in the world by surpassing Britain which is a very positive sign for upcoming economic development and financial projects in the Country.

3. PANORAMA OF INDIAN ECONOMIC SITUATIONS

During, 2022-23 India has shown its potential to lead the global economy as when the developed countries are struggling to come out from the economic aftershocks, the Indian economy has surprisingly bounced back in spite of the Continuation of war and many other global challenges which is a positive sign for all the industries in the country. While betting on consumption-driven growth is obvious given Indias large, young, and rising share of the upper middle-income population (with a high propensity to spend), increasing investment will play an important role in the near future. It is investments that will provide India with the necessary momentum to take off on a path of sustained domestic demand-led growth for decades to come.

The government is developing enabling infrastructure for making India a cost-effective production hub. The National Logistics Policy (2022) has been launched to create an overarching logistics ecosystem for lowering the cost of logistics and bringing it to par with other developed countries. This would boost economic growth, provide employment opportunities, and make Indian products more competitive in the global market. Moreover, opening the strategic sectors, such as defense, mining, and space, for the private sector has enhanced the business opportunities in the economy. Investment incentives and easing business compliances have created an ecosystem for startups to nurture. The number of recognized startups has increased from 452 in 2016 to 84,012 in 2022.

In FY 22-23, Indias real GDP expanded by an estimated 6.9 percent. Growth was underpinned by robust domestic demand, strong investment activity bolstered by the governments push for investment in infrastructure, and buoyant private consumption, particularly among higher-income earners. The composition of domestic demand also changed, with government consumption being lower due to fiscal consolidation.

4. OUTLOOK OF OPPORTUNITIES AND STRENGTHS Roads and Highways

India has the second largest road network in the world about 63.32 lakh KMs, which comprises 1,44,955 KMs long National Highways, 1,67,079 KMs long State Highways, 60,19,757 KMs long Village & other roads. The Government of India has launched major initiatives to upgrade and strengthen National Highways through various phases of the National Highways Development Project (NHDP) and is taking the initiative forward through the umbrella program of Bharatmala Pariyojana Phase-I and other schemes and projects.

Overall road projects exceeding 65,000 km in length, costing more than Rs. 11 lakh crore, are in progress, of which work in respect of projects of more than 39,000 km length has been completed and in balance length of more than 26,000 km works are in progress. National Highways of 5,774 km in length have been constructed during the first nine months of FY2022-23. India has a total of 226 ports including 12 Major ports. Out of this, 55 port connectivity and associated hinterland projects with a total length of 2,779 km have already been initiated by the Ministry of Road Transports and its implementing agencies. Post completion of these projects, 45 maritime ports will be provided with National Highway or 4 Lane+ connectivity. The 59 projects (1,249 km) will be taken up under PM GatiShakti National Master Plan for improving last-mile connectivity to ports in the country.

In addition to the thrust on road and infrastructure building, the Government of India is also putting extra emphasis on E-initiatives to fast-pace the processes. These E-initiatives include BhoomiRashi - Land Acquisition Portal, E-tolling, Acceptance of Electronic Bank Guarantees (E-BGs) by NHAI etc.

Bharatmala Pariyojana envisages 60% projects on Hybrid Annuity Mode, 10% of projects on BOT(Toll) Mode, and 30% of projects on EPC mode respectively. A total aggregate length of 25,713 km with a total capital cost of Rs. 7,81,845 crore has been approved and awarded to date under Bharatmala Pari yojana. Out of the total approved 25,713 km, an aggregate length of 14,317 km has been approved in EPC mode, an aggregate length of 10,989 km on HAM mode and an aggregate length of 408 km in BOT(Toll) mode.

Irrigation

Agriculture sector is one of the key sectors contributing to the nations economic growth and an important one in shaping the countrys vision to create a sustainable future. To nourish its growth, irrigation is the most vital infrastructure. During the union budget 2023-24, Rs. 5,300 crore given as central assistance to Upper Bhadra Project to provide sustainable micro irrigation and filling up of surface tanks for drinking water. The Ministry of Jal Shakti has been allocated Rs. 97,278 crore in 2023-24. The Department of Water Resources has been allocated Rs. 20,055 crore, 43% higher than the revised estimates of the previous year. The Department of Drinking Water and Sanitation has been allocated Rs. 77,223 crore, which is a 29% increase over the revised estimates for 2022-23.

The Department of Drinking Water and Sanitation has been allocated Rs. 77,223 crore for 2023-24, a 29% increase over the revised estimates for 2022-23. From 2013-14, budgetary allocation to the department has grown by about 18%. However, a significant increase was seen in 2021-22, when the budgetary allocation was more than three times the revised estimates of the previous year. Jal Jeevan Mission aims to provide drinking water through tap connections to every household by 2024. It also promotes grey water (used water) management, water conservation, and rainwater harvesting. The Swachh Bharat Mission was launched as a nationwide campaign to achieve universal sanitation coverage by 2019. 91% of the budgetary allocation for the department in 2023-24 is for the Jal Jeevan Mission and 9% for Swachh Bharat Mission.

Use of treated waste water has not gained much momentum in the country, though some of the States are using it for industrial, landscaping and irrigation purposes to a certain extent. Considering the pace of urbanisation, quantity of treated wastewater will increase over the years and has to be put to beneficial use. Keeping this in view, Niti Aayog is preparing a strategy paper covering different aspects of utilising treated wastewater for irrigation in peri-urban areas which is expected to be a step ahead in the governments vision to herald sustainable growth.

Mining

Mining is the core sector that catapults Nations economic growth ambitions and performance. As of FY22, the number of reporting mines in India was estimated at 1,245, of which reporting mines for metallic minerals were estimated at 525 and non-metallic minerals at 720. Being the third largest energy-consuming country in the world, there is always increased demand for power and electricity in the country, and hence the surge in demand for coal. Demand for steel is also likely to grow by ~10% as the governments augmented focus on infrastructural development continues with increased construction of roads, railways, airports, etc. India aims to become atmanirbhar in its requirements for special steel by fortifying its steel value chain as holds a fair advantage in cost of production and conversion costs in steel and aluminum.

The index of mineral production of mining and quarrying sector for the month of January, 2023 at 135.9, is 8.8% higher as compared to the level in the month of January, 2022. As per the provisional figures of Indian Bureau of Mines (IBM), the cumulative growth for the period April- January, 2022-23 over the corresponding period of the previous year is 5.8%.

Furthermore, enactment of Mines and Minerals (Development and Regulation) Amendment Act, 2021 has enabled captive mine owners to sell up to 50% of their annual mineral including coal production in the open market. This policy change is expected to make a positive impact on the growth of the mining sector in times to come.

5. THREATS

For a company like, Sadbhav Engineering Limited having a diverse EPC project portfolio across the country, major threats could emanate from our technical or financial operations or could be from the environment in which we operate. We have a well-structured risk identification & mitigation process in place which has been elaborated in detail in succeeding item no. 6 below.

6. RISKS & ITS MITIGATION:

The management of company has identified risks in two categories i.e. (1) Internal and Business Risk and (2) External Risk.

Internal and Business Risks:

These are the risks that arise out of processes which are managed internally.

1) The successful completion of projects also depends upon the performance of entire value chain that includes our joint-venture partners and/or sub-contractors. Therefore, before entering into any such agreement, we thoroughly analyze their credentials and maintain real time monitoring through systems like SAP S/4 HANA. Irrespective of the partners and/or contractors status of association (old as well as new), we always insist on having a performance guarantee and quality assurance from our collaborators.

2) Various situations such as; cost overrun of projects due to problems of land acquisitions, removal of encroachment, compliance with environmental standard, penalty for delay in completion of the project in time, insurance coverage and other provisional measures may not adequately protect us against all possible risk of losses. Therefore, we elaborately plan to execute all our projects before the scheduled time. Also, we have contractors all risk insurance policy and workmens compensation polices as a precautionary measure at our disposal. We take Advance Loss of Profit (ALOP) Policy for each project and always appoint an Insurance Consultant / Professional to assess all at stake.

3) The estimates of increase of raw materials for BOT projects are made at the time of bidding, since there is no provision for cost escalations. However, our vast experience in the infrastructural sector enables us to keep the associated risks to a minimum.

4) With respect to risk of shortage in supply of raw materials, we ensure continuous supply of raw-materials through our supply value chain by entering into long term arrangement with our suppliers before every single project.

5) Preventive Maintenance is less costlier than the non-maintenance or break-down costs of equipment that cause a major hindrance in complete execution of projects. Therefore, our team of technical experts regularly overhauls and repairs the machines, thereby minimising the chances of any break-downs. We also set up mechanical divisions at each project site, wherein the regular maintenance and interim repairs are undertaken.

6) Mishandling of machines and equipment can result in being a liability. Therefore, we have Standard Operating Procedures (SOPs) in place and have designed training programmes for handling the sophisticated equipment and machinery used at our project sites. We have taken insurance coverage for any mishap claims that may arise under the Workmans Compensation Act.

7) Any negligence in employees health, safety and regulatory measures can affect our performance. We, therefore, have an HSE Policy monitored and adhered religiously by central HR Team. In case of mining projects, we are required to provide a proper medical certification under the Medical Certificate Form O as prescribed by DGMS. All employees are, thereby, sufficiently covered by Workman Compensation Insurance. We also provide the employees with necessary safety gadgets such as helmets, boots, and more.

8) Being a broad organisation with personnel in abundance, we have strong systems to ensure minimal dependence on any individual. Our operations may suffer a temporary setback if any of our key managerial personnel were to leave. Therefore, successful completion of projects is ensured by properly planning the delegation of work and succession planning among teams.

9) Sadbhav uses a mix of debt and equity to finance its fund requirements as it needs substantial working capital and financing to meet the requirements of large scale operations. Over the years, we have built a healthy relationship with our lenders which consolidate the difficulty in the process of obtaining debt for our business needs.

External Risks:

Risks that arise out of changes in the external environment are classified under this head. These are mostly outside our control. E.g. changes in interest and exchange rates, increase in material cost, and various others. Our efforts has always been in taking proactive measures to mitigate these by creating sufficient barriers in the pricing, making suitable provisions in books, and providing insurance cover upon entering derivative transaction for hedging our obligation in foreign currencies.

Any further change in government policies, tax structure, geopolitical and political situation, pandemic and civil disturbances may have adverse effect on SELs business. Mitigation of insurance coverage for natural risks (for example: adverse weather condition, fire, floods, and earthquakes) has been worked. A manifold competition from large national as well as international organisations and deviation from estimated traffic volume is also an area of concern for the Company.

This risk management exercise identifies risks, and also mitigates risks to an acceptable level. Your Company has risk management policies to manage and overcome these risks to ensure smooth functioning of its business operations which are reviewed periodically by the Directors of the Company. Being infrastructure project company, your company is also subject to high risk of delay in the projects due to land acquisition issues or rising land acquisition costs adversely impacting the total project costs.

An internal control for business processes across departments is required to not only ensure efficient operations but to also comply with internal policies, applicable laws and regulations, protection of resources and assets as well as accurate reporting of the financial transactions. Aiding the effectively of this system of internal control is extensive internal audits, regular reviews by the management team and standard policies and guidelines to ensure the reliability of financial and all other records. Therefore, the ERP-SAP system of the company, which is already operative, was established. It connects all the project sites with the corporate office by providing real time information to the top management of the Company. Ideation to centralize the entire data process is being acted upon by Sadbhav Engineering Limited so as to assure transparency to each and every stakeholder of the Company.

Risk Mitigation:

Identifying risk is an important first step. It is not sufficient though. Taking steps to deal with risk is an essential step. Knowing about and thinking about risk is not the same as doing something about risk. Your Company is aware of such risks, and all our strategies, policies and SOPs (Standard Operating Procedures) have been designed with risk mitigation as an intrinsic element. This approach helps to avert undesirable situations to arise rather than troubleshooting later. Our equipment maintenance policies designed to avoid the project delays due to break down, procurement policies are framed to mitigate the sudden hikes in the procurement or acquisition costs. We meticulously study each and every contract, document or legal paper to avoid litigations later. Our financial strategies have been formulated keeping in view the long term and short term financial risks. Our top management, investor communication and corporate communication professionals meticulously plan communication with stakeholders, government and public to avert the reputation risk. Before entering into any joint venture agreement we thoroughly analyse the prospective venture partners past performances and credentials. We plan elaborately to execute all our projects before the scheduled time. We have a proven track record of completing work within the stipulated time. Work without stoppages or no significant labour disruptions during its operational history was paved way for by our extensive employee welfare scheme which looks after their health and safety. We have taken contractors all risk insurance policy in respect of projects and workmens compensation polices to protect against losses caused to workmen through accident. Most of the critical work during the operation period is done by us and only against losses caused to workmen through accident. Most of the critical work during the operation period is done by us and only very minimal portion of the work is sub-contracted. We always insist to have a performance guarantee and quality assurance from them. As a company, our ability to foresee and manage business risks plays a crucial role in achieving positive results even from the downturn of economic situations. We also regularly conduct third audits of the toll management systems and toll collection systems in order to identify lacunas and improve our operational performance.

7. SEGMENT WISE PERFORMANCE

As on March 31, 2023 the Company has a reportable business segment of construction, engineering and infrastructure development on Stand Alone basis.

8. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACIES

An internal control for business processes across departments is required to not only ensure efficient operations but to also comply with internal policies, applicable laws and regulations, protection of resources and assets as well as accurate reporting of the financial transactions. Aiding the effectively of this system of internal control is extensive internal audits, regular reviews by the management team and standard policies and guidelines to ensure the reliability of financial and all other records. Therefore, the ERP-SAP system of the company, which is already operative, was established. It connects all the project sites with the corporate office by providing real time information to the top management of the Company. Ideation to centralize the entire data process is being acted upon by Sadbhav Engineering Limited so as to assure transparency to each and every stakeholder of the Company.

9. FINANCIAL OVERVIEW - STANDALONE

a) Income Analysis:

The Companys revenues for the current year stood at Rs. 889.17 crores as against Rs. 1226.24 crores in the previous year, thereby registering an decrease of 27.49 %.

b) Expense Analysis:

Manufacturing and Construction expenses Material consumed for the year ended March 31, 2023 amounted to Rs. 122.94 crores, construction expenses decreased from Rs. 730.32 crores incurred during 2021-22 to Rs.635.95 crores in the year 2022-2023.

c) Depreciation, Interest and Finance Cost:

Depreciation during 2022-23 amounted to Rs. 44.47 crores as against Rs. 69.20 crores recorded in 2021-22. Finance cost decreased from Rs.187.88 crores in 2021-22 to Rs. 164.98 crores in 2022-23.

d) Profit (Loss) Analysis:

Profit (Loss) Before Tax during 2022-23 stood at Rs. (318.96) crores as against Rs. (696.08) crores recorded during 2021-22. Profit (Loss) after tax for 2022-23 stood at Rs. (346.48) crores as compared to Rs. (716.32) crores during 2021-22.

e) Net Worth:

The Networth of the company in the year Rs. 1082.32 in the year 2022-2023 Compared to Net worth in the year Rs. 1428.53 in the year 2021-2022.

Key Financial Ratios: Stand Alone Basis

FINANCIAL RATIOS	FY 2023	FY 2022
Debtors Turnover	0.63	0.80
Inventory Turnover	1.75	1.70
Interest Coverage Ratio	0.98	1.36
Current Ratio	1.07	1.30 ;
.Debt Equity Ratio	1.07	0.81
Operating Profit Margin	8.64%	12.93% ;
Net Profit Margin .	-32.87%	-54.16%
Return on Networth	-32.01%	-50.14%

Consolidated Financial

On consolidated basis, the Total revenue stood at Rs. 2176.49 crores during the financial year under review as compared to Rs. 2827.74 crores in the previous year, Loss before tax was Rs. 713.34 crores as compare to Loss of Rs. 734.95 crores in the previous year and Loss after tax was Rs. 699.39 crores as compare to Loss of Rs. 728.39 crores in the previous financial year. Net worth of the Company stand to Rs. 175.22 crores as of 31st March, 2023 as compared to Rs. 801.53 crores as on 31st March,2022.

10. DEVELOPMENT OF HUMAN RESOURCE

Employees are one of the most important stakeholders for Sadbhav Engineering Limited. Sadbhav considers its Human Capital as its core strength in achieving the sustainable growth path charted by our strategic apex. Sadbhav is among a very few companies having implemented SAP S4 HANA, world renowned system to manage payroll & HR activities. We have systems in place for identifying the right talent, training them, performance management, monitoring, appraisals, rewards and recognitions for our employees. Our policy entails all our employees to the benefits like Medical Expense, Provident Fund, Gratuity, and Leave Travel Allowance etc. We frequently organise medical check-up camps and safety training, mock drills across all project sites as per our health and safety policy. A dedicated Human Resource team at Sadbhav Engineering Limited, keep on engaging with employees at sites and address their concerns. We put major thrust on ergonomics for their comfort while they perform their duties and invest in latest technologies and amenities as well as safety gadgets. We continuously upgrade employees skills and knowledge to keep them updated on the best practices from across the world. Our growth strategy and value driven approach and congenital environment has led us build an excellent team. We are 316 people strong organization as on March 31, 2023.