In more ways than one 2016-17 has been a significant year for your Company. Let meshare several reasons why this is so.
As I have been writing in my last few letters to you for the last four years of theUPA-2 government the major problem that faced all construction companies was the legacy ofstalled infrastructure projects. The size was immense. As an example on February 012016 there were 304 stalled projects involving investments of Rs. 1275877 crore.
Such stalled projects completely destroyed the financial viability of privateinfrastructure developers and construction companies. These enterprises had used sizeableworking capital to mobilise labour and deploy expensive plant and machinery at variousproject sites. With the stalling and inordinate delays of these projects the obviousconsequences were massive cost over-runs and huge financial strains. Matters significantlyworsened with government and quasi-government execution agencies holding back paymentsagainst contractor claims. Even when independent arbitrators in dispute resolutionfavoured construction companies the executing agencies invariably delayed the paymentprocess by appealing to a higher judiciary.
Thus all construction majors in the infrastructure sector faced a terrible situationof burgeoning receivables on their balance sheets inadequate cash inflows and hugeinterest payment on large working capital exposures. For a sample of listed constructioncompanies interest cost as a percentage of total income soared from 6% in 2008-09 toabove 13% in 2015-16 when the debt-equity ratio had bloated to over 8. Simply putfor even the better construction majors such as your Company the business was notfinancially sustainable.
Thankfully the NDA government under Prime Minister Narendra Modi has intervened tocorrect this glaring problem.
First the Government of India (GoI) has managed to break the choke-hold of stalledprojects by giving faster clearances and closely monitoring these at the highest levels.Only 24 projects that were under implementation remained stalled during the quarter endedMarch 2017 the lowest in any quarter since December 2008. Moreover the number ofabandoned projects is the lowest in any quarter over the past eight years; and the valueof such projects is just a tenth of the average value that we have witnessed over the pasteight years.
Second to revive the construction sector the Cabinet Committee on Economic Affairshas approved a series of initiatives which ought to help in improving liquidity andintroduce much needed reforms in the business of contracting. Some of these include:
The Arbitration and Conciliation (Amendment) Act 2015 which facilitates fasterand time bound decision making in the arbitration process.
Where public sector undertakings (PSUs) or government departments havechallenged the arbitration award 75% of the award amount is to be paid to the contractoror concessionaire against a margin-free bank guarantee.
All PSUs or departments issuing public contracts are being encouraged to set upConciliation Committees or Councils comprising independent subject experts to ensureexpeditious disposal of pending or new cases.
Item-rate contracts can now be substituted by EPC or turnkey contracts. If thisis done the PSUs or departments are expected to adopt the model EPC contract forconstruction works.
These initiatives ought to create a sound process of dispute resolution and by doingso infuse badly needed liquidity in the construction sector.
Your Company has secured favourable arbitration awards which will yield a cash inflowof Rs. 2599 crore as 75% of the awarded amount. As on date Rs. 380 crores were receivedof the above amount.
Third the Reserve Bank of India (RBI) has stepped in to regulate unsustainable levelsof corporate debt. The new Strategic Debt Restructuring (SDR) and the Scheme forSustainable Restructuring of Stressed Assets (or S4A) introduced in 2016 should giverelief to the construction majors and create the liquidity needed to bid for new projects.More on this a bit later.
Fourth the GoI has clearly focused on pushing for significant infrastructuredevelopment. In the Union Budget of 2016-17 the outlay on infrastructure was substantiallystepped up. The Union Budget 2017-18 boosted it further by 10% to Rs. 396135 crore withroads bridges and railways seeing higher allocations. Thus we are at last beginning tosee a concerted attention to and greater funding of infrastructure.
Fifth let me now share with you what your Company has done regarding the S4A scheme.We became the first company in India to adopt S4A. The scheme involves: (i) carving out acertain part of your Company's debt which is converted into a combination of equity andOptionally Convertible Debentures (OCDs) in the hands of the lending banks with (ii)balance debt to be serviced as per the existing terms. For HCC:
The entire funded exposure of Rs. 5107 crore was divided into two debtclassifications: sustainable debt of Rs. 2681 crore and unsustainable debt of Rs. 2426crore.
A portion of the unsustainable debt was converted into equity share capital soas to allow lenders to jointly own around 23.6% of the expanded share capital of yourCompany.
OCDs have a repayment period over 10 years and will carry a coupon of 0.01% p.awith yield to maturity of 11.5%.
HCC secured approval of the scheme from shareholders at an Extraordinary GeneralMeeting held on January 05 2017. Thereafter the S4A scheme has been implemented whichhas substantially reduced interest outgo and repayment obligations. The scheme providesyour Company much needed breathing space for its cash management.
Sixth we are starting to get good orders. During 2016-17 your Company secured Rs.5375 crore worth of new orders. The order backlog grew by over 12.5% from Rs. 18123crore at the end of 2015-16 to Rs. 20390 crore on March 31 2017. I need to emphasisethat we will only pursue financially sound orders so that we grow with the right type ofconstruction projects while simultaneously keeping a tight control on preserving cashflows.
Seventh given the stress that your Company has gone through the standalone financialresults for 2016-17 are quite creditable. Under the new IND-AS accounting standard out oftotal operational income of Rs. 4196 crore PBT was Rs. 97 crore and PAT was Rs. 59crore. No doubt the results can be better as I hope it shall be in 2017-18 andthereafter.
Eighth Arjun Dhawan who has been associated with your Company for nearly a decadehas taken over as the Group CEO from April 01 2017. I wish him well in his new job.
India is back to growth. The dark clouds seem to have dissipated. But not entirely.Bureaucrats are still not taking timely decisions for fear of being charged withcorruption. For the same reason some do not act expeditiously on even orders coming fromthe Union Cabinet. The administration of contracts by government agencies is still tardysuffering from excessive dissecting to find reasons why not to act. And when action isforthcoming it is often in violation of the contractual conditions. Contractadministration needs reform. This needs support from the central and state governments ifthese are to be executed on time and with least cost overruns.
The banking sector is in a crisis of its own. The new Banking Ordinance and the latestRBI regulatory order in the wake of the ordinance are encouraging. But the confidence ofbankers to make them work is still to be tested. They too are fearful of being chargedwith corruption even though the Ordinance and the RBI orders gives them adequate teeth totake tough decisions. They need to be left alone and operate without the fear to makecommercial decisions.
It is under these circumstances that we have to move forward to deliver performance.The year 2017-18 therefore will be a year of consolidation and laying the foundation fora growth path. The GoI's determination to remove the obstacles to economic growth isencouraging. Let us pray for a burst of consistent growth that our country needs growthdriven by the government's purposeful drive to build infrastructure and with itbetter times for HCC.
Thank you for your support.
Chairman & Managing Director