Let me start by sharing my views on the challenges the infrastructure industry isfacing today before penning various developments. The Indian macroeconomic environment haslooked turbulent during the past years consequent to a deceleration in global economicgrowth. Indias GDP growth rate has slowed down to a decadal low partly due toglobal factors but more on account of slow reforms and delays in implementation ofprojects in the country.
Over the last quarter the Government has taken various initiatives to boostdevelopment of infrastructure in the country. These include setting up of infrastructuretargets for various sectors putting in place an institutional mechanism to monitor andhasten the progress of PPP projects at the Central and state levels.
Let me begin this letter with a view of the Indian economy then move on to what ishappening in infrastructure and the construction industry and end with a brief discussionon your Company. According to the latest estimates of GDP and Gross Value Added (GVA)released by the Government of Indias Central Statistical Organisation the Indianeconomy is certainly getting back to a higher growth path. For 2015-16 real (or inflationadjusted) GDP has grown by 7.6% up from 7.2% in 2014-15. That makes India thefastest growing large country in the world with a growth that not only exceeds anydeveloped nation but also major emerging economies such as China. Besides I believe thatthe economy has not yet realised its potential as several reform measures are yet to takeoff and make a material impact. For instance several key initiatives such as the ones forstart-ups or the Make in India campaign are yet to be meaningfullyimplemented.
Regarding the infrastructure sector with special focus on the countrysconstruction industry the situation is quite grim. The Government of India has clearlyrecognised this and launched several reform measures to boost sectors like roadsrailways power distribution rural and urban development. The Union Budget 2016-17 hasallocated Rs. 2.21 lakh crore for the sector. The one good news is the pace with whichprojects are being sanctioned for the construction of highways. The biggest issue in thesector is the legacy of stalled projects thanks to the freeze in decision making thatoccurred over the last four years of the previous government. This has far reachingadverse consequences on the future execution of work.
These stalled projects have disturbed the momentum in creating physical infrastructureand have seriously hurt the financial strength of private developers and constructioncompanies. Such enterprises mobilised labour and deployed expensive plant and machinery atsites; these were not sufficiently utilised due to project stoppages and led to massivecost over-runs. Instead of expediting projects government and quasi-government executionagencies have held back payments. Consequently the claims of construction companies onthe executing agencies have mounted substantially. Regrettably when the decision ofindependent arbitrators in such dispute resolution has favoured a construction companythe executing agencies have invariably stalled the payment process by routinely appealingto higher judicial jurisdictions.
The example of your Company is no different from what is faced by other constructioncompanies. Consider the case of ARSS. Your Company has filed for claims over Rs. 4000crores due to various project related disputes. Of these some claims has been awarded toARSS through arbitration. But unfortunately some of these arbitration awards have beenfurther disputed by clients. Thus several awards that were positive to your Company havebeen taken to the judiciary. To put it in perspective had your Company received the fullamount that it was awarded it could have wiped out its debts and started afresh.
In such an environment the entire infrastructure and construction sector is highlystrapped for cash. As long as legacy claims settlement issues are not expeditiously dealtwith there is very little scope of a serious revival of the sector because most companiesdo not have the financial strength to absorb the losses of the past and yet continuefinancing new projects. Given this context two positive legal developments need to bementioned.
The Arbitration and Conciliation (Amendment) Act legislated in 2015 facilitatesfaster and time bound decision making in the arbitration process. Moreover it requiresthe aggrieved party to deposit award money in an escrow account before taking the judicialroute to challenge an arbitration award. Hopefully this will reduce the current practiceof needless appeals.
The Commercial Courts Commercial Division And Commercial Appellate Division of HighCourts Act also passed in 2015 has introduced the setting up of commercial courts at thedistrict level as well as commercial division in the High Court to deal with commercialdisputes over Rs. 1 crore. Thus all appeals of arbitration orders will be dealt withCommercial Appellate Divisions of the High Courts which ought to speed up theresolution of commercial disputes. Time will tell whether these two laws actually deliverwhat are intended in the statutes.
Let me move now to the performance of your Company. The standalone results for 2015-16which reflect construction business have been encouraging and reflect efforts atstreamlining operations optimizing efficiencies of on-going projects and pursuing pendingdues at every level.
- Turnover of Rs. 623.30 crores.
- EBITDA is Rs. 207 crores in FY 2015-16 an increase of 6.3 % over the previous year.
- PAT was Rs. 5.02 crores.
- EPS (basic) in the FY 2015-16 is Rs. 3.38 as against Rs. 4.19 in the previous year.
I am therefore saying two things: that your Company is wholly committed to reduce thedebt burden but in order to generate fair value the due process will be followed which istaking time. Infrastructure developers and construction companies go through sharperbusiness cycles than many other sectors. The better ones come out of slumps stronger thanbefore. Your Company ranks among the best in the construction business in terms ofexpertise execution capabilities and the determination to surmount all odds to succeed.
With these thoughts and feelings I would like to take this opportunity towholeheartedly thank the Central and State Governments Shareholders Investors BankersFinancial Institutions Regulators Suppliers Media and Customers for their consistentand constant support. I wish to express appreciation to my colleagues on the Board and ouremployees for their thought Leadership dedication and commitment. I am indeed grateful toyou all for your cooperation and the trust you have reposed in us.
With warm and very best regards
Yours Subash Agarwal