While we have still some way to go your Company has weathered the financial storm thatbeset it over the last three years and is now set on a path of profitable growth. Hereare the key financials on a standalone basis for 2017-18:
Though it has been very careful in choosing what it bids for HCC has increasedthe order book of its construction business to Rs.19188 crore as on 31 March 2018. Thisincludes Rs.2277 crore of new orders received in the course of 2017-18.
Total income increased by 8% to Rs.4826 crore.
However given a change in your Company's project-mix operating margins (EBITDAmargins excluding other income) reduced from 179% in 2016-17 to 14.1% in 2017-18. EBITDAin 2017-18 was Rs.644 crore.
With reduction in overall debt levels your Company's finance costs reduced by14.5% to Rs.660 crore in 2017-18.
Profit after tax (PAT) increased by 30.5% to Rs.78 crore in 2017-18. Howeverafter accounting for loss on fair valuation of equity instruments represented in othercomprehensive income total post-tax comprehensive income reduced to Rs.66 crore.
As I have been sharing with you in my earlier letters the last three years of theUPA-2 government saw policy paralysis leading to a terrible legacy of stalledinfrastructure projects. We are now seeing some progress on this front. Projects that areunviable and beyond redemption are now being scrapped; while many of those that arepotentially viable are being nudged along to their completion. Even so the size of theproblem remains vast. As on January 2018 some 925 projects with a reported investment ofover Rs.13 lakh crore still carry the tag of 'implementation stalled'.
If you will recall I had written last year that these stalled projects played asignificant role in severely damaging the financial viability of infrastructure developersand engineering and construction (E&C) companies. Enterprises that had spent sizeableworking capital to mobilise labour and deploy expensive plant and machinery at variousproject sites were faced with stalling and inordinate delays which led to huge costover-runs and consequential financial strains.
But that was not all. More often than not government agencies and by this I meanGovernment departments authorities and public sector undertakings held back paymentsagainst contractor claims. Even when independent arbitrators in dispute resolution foundin favour of the E&C companies the clients delayed payments by appealing to a highercourt of law.
The outcome has been devastating. All major E&C companies in the infrastructuresector have suffered from massive receivables on their balance sheets inadequate cashinflows to support their operations while making good the burgeoning interest payments onlarge working capital exposures.
Though government sector clients still hold back on payments and on making good costoverruns that have occurred for no fault of the contractors there has been someimprovement thanks to a few key initiatives taken by the current NDA government. Let mebriefly outline two of these.
The new Arbitration and Conciliation (Amendment) Act 2015 which facilitatesfaster and time bound decision making in arbitration.
Where public sector undertakings (PSUs) or government departments havechallenged any arbitration award that has gone in favour of a contractor 75% of the awardamount to be paid to the contractor or concessionaire against a margin- free bankguarantee.
As on 31 March 2018 your Company has won arbitration claims amounting to Rs.4823crore. Of these for Rs.2744 crore worth of claims HCC has received letters for 75%payment. That amounted to Rs.2046 crore of which HCC has collected Rs.1416 crore.
This money went directly to reducing your Company's corporate debt. That is why therehas been a 19.4% reduction in HCC's total non-current borrowings as on 31 March 2018.Thus finance costs have fallen by 14.5% to Rs.660 crore.
Moreover a better balance sheet position on account of payment of these arbitrationdues has led to increased allocation of limits from your Company's banks. Here thoughlies a caveat. Given the tightening of credit by banks on account of their NPA overhang adelay occurred in the sanction of increased limits by the consortium of bankers.
Furthermore the decision making process of some banks has slowed down for fear ofconsequences and despite their best intentions to expedite them. A successful navigationof these challenges will unshackle HCC's ability to finance its existing projects andfuture growth.
Another positive development for your Company as well as the E&C industry as awhole is the present government's clear commitment to infrastructure. In the Union Budgetfor 2018-19 the Government of India increased budgetary and extra budgetary expenditureon infrastructure by around 20% to Rs.5.97 lakh crore with a focus on roads and highwaysrailways urban development and airports.
In roads capital expenditure of Rs.1.22 lakh crore has been earmarked for expansion ofNational Highways. Connectivity with the interior backward and border areas is beingsought to be achieved under the Bharatmala Pariyojana programme.
For railways capital expenditure of Rs.1.49 lakh crore has been earmarked for doublingof tracks gauge conversions track renewals and additional rolling stock. In additionRs.16800 crore has been allotted for metro rail projects.
If implemented these will create large opportunities for the E&C players in India.To profitably leverage these prospects each company must strike a right balance betweentwo goals. The first is to steadily deleverage balance sheets prune fixed costs andmonetise non-core activities in a manner that gives comfort to the banks. The second is togrow their businesses and focus on execution notwithstanding the current liquidity crunch.These are not easy tasks and not all E&C companies will necessarily be successful.However given the determined manner in which it has gone about its business in 2017-18 Ibelieve that HCC will succeed.
HCC is a company of firsts and over our nearly 100 year history we have establishedmany landmark projects across India. Our subsidiary Lavasa is also a first of its kindproject - unfortunately stress there continues. Lack of cooperation among lendersfinancial stress in the banking system and constantly changing banking regulations hasmade financial resolution difficult and tardy. Our focus remains on a resolution in theinterest of all stakeholders and particularly our customers.
The investment climate remains lukewarm with private investment yet to take off. Thestressed situation of the banks stems their ability to lend to new investmentopportunities.
Rising oil prices portend that there will be serious challenges to containing thefiscal deficit. The constantly changing and sometimes unstable regulatory environment isunsettling and leads to unintended consequences. These along with the disruption causedby slew of new and yet untested laws add to economic uncertainties.
Many rules regulations and laws intended for creating a predictable environment forbusiness and meant to be prospective in nature when brought in at a time of stress inpractice become retrospective in effect and intensify the stress and unpredictability ofdoing business.
The government must take note that the economy needs serious attention and act to speedup the reforming of administrative processes of decision making. Only this will help thecountry return to virtuous cycle of investment and growth.
Your Company has effectively dealt with the financial problems of the recent past.Today with the spirit of determination which is at the heart of all things HCC I amconfident of an early return to robust growth.
Thank you for your support.
Chairman & Managing Director.