I write this letter a day after the results of India's 2019 Lok Sabhapolls. Prime Minister Narendra Modi and the Bharatiya Janata Party (BJP)-led NationalDemocratic Alliance (NDA) have thoroughly trounced what pollsters' call the'antiincumbency' factor and are back with an even greater majority than in 2014.The BJPalone has won over 300 Lok Sabha seats; and the NDA will now account for well over 350seats in the lower house of Parliament.
I welcome the result and let me explain why it matters a great dealfor an engineering and construction company such as yours in the infrastructure sector.
Our growth indeed our very existence depends upon the successfulexecution of a slew of infrastructure projects be these national and statehighways thermal hydro or nuclear power projects ports and airports metro railwaysmajor irrigation schemes and large housing projects. In India most of these requiresubstantial and consistent public funding.
The NDA-I government that governed between 2014 and 2019 was entirelycommitted to growing the infrastructure sector. Within a couple of years of coming intopower NDA started to seriously focus on increasing public expenditure on infrastructure.And that momentum has continued with the States now following suit as well. Just to givean example in its last Union budget the Government of India allocated around '4.56 lakhcrore for infrastructure.
Thanks to this additional focus on infrastructure the last few yearshas seen a gradual improvement in construction activity in India.The sector was in thedoldrums between 2012-13 and 2015-16. Revival started in 2016-17 with 6.1% growth.Thenafter a small dip in 2017-18 growth picked up yet again with construction clockinga healthy 8.9% growth in 2018-19.
With Prime Minister Modi and the NDA back for its second term I expectinfrastructure to remain a mainstay for the economy.Therefore not only do I expect publicexpenditure on infrastructure to grow over the next few years but also that there will begreater administrative focus and oversight to ensure that projects begin on time areproperly funded and completed according to schedule.
With that happening as I am sure it will end-to-endengineering and construction majors such as your Company should see a significantly largernumber of projects being put up for bidding; and should win enough of these to have arobust execution pipeline.
Let me nowtouch upon some key developments of your Company which aregiven in greater detail in the chapter on Management Discussion and Analysis.
Given the difficult financial situation of your Company over the lastfew years it is not surprising that management has focused a great deal on reducing debtand improving cash Tows. In that context there were five major developments in FY2019.
First September 2018 saw HCC Concessions Ltd executing a definitiveagreement for 100% equity stake sale of Farakka-Raiganj Highways Ltd (FRHL) to CubeHighways and Infrastructure II Pte. Ltd based in Singapore.This transaction - worth र 372crore with some potential upsides - will help in injecting liquidity in your Company.
Second in December 2018 your Company conducted a Rights Issue worth'498 crore.The issue was oversubscribed. Thanks to this Rights Issue your Company'spaid-up share capital has increased from र 101.55 crore to र 151.30 crore.
Third in February 2019 100% stake in the non-core business of CharosaWineries was sold to Quintela Assets Ltd. and Grover Zampa Vineyards Ltd.Though this isnot a financially material transaction it underscores your Company's intent anddetermination to focus on its core business.
Fourth in March 2019 HCC entered into agreement with investors toraise '1750 crore by selling its Receivables. Your Company will transfer its beneficialinterest and rights in a portfolio of arbitration awards and claims to a special purposevehicle controlled bythe investors.The proceedswill be used to pre-pay debt of '1250crore. The balance ofर 500 crore will be to fund working capital and thus businessgrowth. As a result of this transaction your Company's balance sheet from 2019-20 onwardsshould stand substantially deleveraged.
The fifth development relates to your Company's strategic investment inthe township project Lavasa. With there being no concrete lender-approved resolution plandespite prolonged and concerted efforts Lavasa is now in the NCLT underthe CorporateInsolvency Resolution Process prescribed by the Insolvency and Bankruptcy Code. As amatter of prudence your Company has written off its entire investment of '1046 crore inLavasa Corporation.Taking into account contingent liabilities the total tax adjustedimpact of the write-off is र 1531 crore. While this has obviously adversely affectedprofits of your Company it has had no effect on cash Tows. Moreover having accounted forits entire exposure your Company does not expect any further impact on account of Lavasa.
I should also briefly touch upon a key project won by your Company. HCChas been awarded in joint venture (JV) with Hyundai Development Corporation a '2126crore contract by the Municipal Corporation of Greater Mumbai (MCGM) for designing andconstruction of the Mumbai Coastal Road Project Package II between Baroda Palacenear Haji Ali and the Worli-end of Bandra-Worli Sea Link. Your Company's share in the JVis 55% orर 1169 crore and the project is to be completed in 48 months.
I am also proud of the fact that three of your Company's marqueeprojects were of such national significance as to be inaugurated bythe PrimeMinisterthisfiscalyear.
The first was the 4.9 km Bogibeel Rail-cum-Road Bridge across theBrahmaputra in Assam India's only fully welded
steel bridge fully adhering to European codes and welding standards.Itwas inaugurated byShri Narendra Modi on 25 December 2018. The second inauguration byShri Modi was the 330 MW Kishanganga Hydroelectric Project in Jammu & Kashmir. The HCCteam created a world record of the first successfulTunnel Boring Machine operation in theHimalayan region. The third was the 110MW Pare Hydroelectric Project in Arunachal Pradesh.
Your Company is turning around. It is focusing on its core operationsand strengths. It has ruthlessly focused on costs and operational efficiencies. It hasstarted the process of focused deleveraging to create a much firmer and more sustainablefinancial foundation for tomorrow's growth.
Most importantly the morale is back and everyone in senior managementnow sees light at the end of the tunnel.
It has been a hard slog through several years of acute financial pain.Such adversity has taught us many lessons. It has matured us even further. And it has madeus even more committed to financially sustainable operations and growth.
Thankyou as always for your trust in HCC. We respect our heritage.And are committed to your Company's profitable growth.
|With best wishes |
|Yours sincerely |
|Ajit Gulabchand |
|Chairman & Managing Director |