Dear Shareholders Ladies and Gentlemen
In more ways than one 2016-17 has been a worst year for your Company. Let me shareseveral reasons why this is so.
The UPA-2 government the major problem that faced all construction companies was thelegacy of stalled infrastructure projects. The size was immense. As an example on January31 2016 there were 304 stalled projects involving investments of Rs. 1275877 crore.
Such stalled projects completely destroyed the financial viability of privateinfrastructure and construction companies. These enterprises had used sizeable workingcapital to mobilise labour and deploy expensive plant and machinery at various projectsites. With the stalling and inordinate delays of these projects the obvious consequenceswere massive cost over-runs and huge financial strains. Matters significantly worsenedwith government and quasigovernment execution agencies holding back payments againstcontractors claims. Even when independent arbitrators in dispute resolution favouredconstruction companies the executing agencies invariably delayed the payment process byappealing 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. As such thebusiness was not financially sustainable.
Thanks to 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.
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.
Third the Reserve Bank of India (RBI) has stepped in to regulate Corporate DebtRestructuring ( CDR) and unsustainable levels of corporate debt. The new Strategic DebtRestructuring (SDR) and the Scheme for Sustainable Restructuring of Stressed Assets (orS4A) introduced in 2016 should give relief to the construction majors and create theliquidity needed to bid for new projects.
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.
Fifth let me now share with you what your Company has done regarding the CDR scheme.The Company had availed credit facilities ("Facilities") for working capitalrequirement as well as for hiring construction equipment for its various projects. Thedebt obligations of the Company were restructured under Corporate Debt Restructuring("CDR") mechanism on the terms and conditions set out in the MasterRestructuring Agreement dated 26th December 2014 executed amongst SBI (as theMonitoring Institution) the Lenders and the Company ("CDR MRA"). The PrincipalMoratorium was for 27th months from the cut-off date i.e. 1stJanuary 2014.
Despite availing the restructuring of the Facilities under the CDR mechanism theCompany was facing liquidity issues and challenges in debt servicing due to inter aliaslower than envisaged recovery in the economy and infrastructure sector and increasedinterest cost for the Company due to increase in working capital requirement andnon-realization of claims/receivables. This resulted in a gap of cash-flow timing mismatchbetween claims realization (including interest) and debts serving. If such gap leftunaddressed the Company will face challenges in the execution of its order book and alsoin serving of its debt. Additional working capital support sanctioned by Lenders were notdisbursed.
Accordingly in order to bring the aforementioned cash flow timing mismatch thelenders deliberated various solutions to address the aforementioned liquidity issue andrecommended the Scheme for Strategic Debt Restructuring introduced by the Reserve Bank ofIndia ("RBI") pursuant to circulars dated February 252016.
The Lenders in their Joint Lender's Forum meeting ("JLF") held on 28thMarch 2016 deliberated on the various options but could not agree with therecommendation of Monitoring Committee for implementation of Strategic Debt Restructuring.
Sixth during the period under review the Turnover of the Company on a standalonebasis stood at Rs. 247.08 Crore as compared to Rs. 381.40 Crore during the previous year.The Company posted a Net Loss after Tax of Rs.1113.20 Crore during the year ended 31stMarch 2017 as against a Net Loss after Tax of Rs. 540.37 Crore during the previous yearended 31st March 2016.
Seventh the option left with the Company to explore the opportunities for strategicinvestor as well as to complete the projects which were near to completion to avoidfurther encashment of bank guarantees or termination of contract. The Company and themanagement is hopeful that it will come over the said situation.
Eighth bureaucrats are still not taking timely decisions for fear of being chargedwith corruption. For the same reason some do not act expeditiously on even orders comingfrom the Union Cabinet. The administration of contracts by government agencies isstilltardy suffering from excessive dissecting to find reasons why not to act. And whenaction is forthcoming 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 acrisis of its own. The new Banking Ordinance and the latest RBI regulatory order in thewake of the ordinance are encouraging. But the confidence of bankers to make them work isstill to be tested. They too are fearful of being charged with corruption even though theOrdinance and the RBI orders gives them adequate teeth to take tough decisions. They needto be left alone and operate without the fear to make commercial 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.
Thank you for your support.
Kishore K Avarsekar
Chairman & Managing Director