30 minutes with the Vice Chairman and Managing Director
"There is an over-riding message for shareholders: MEP is at the cusp of a raresectoral opportunity"
Q: Was the management of the Company pleased with the performance of the Company inFY16-17?
A: The MEP team was pleased with the way it grew the business in a holistic mannerin FY16-17. During the year the Company completed a few projects viz. RIDCOR and KiniTasawade and also handed over the Chennai and Madurai Kanyakumari projects to theAuthority. MEP's consolidated revenues stood at C1729 cr in FY17. The Company's EBITstood at C507 cr with a strong EBIT margin of 30%. PAT increased to C109 cr in FY17 ascompared to C(37 cr) in the previous year. PAT margins improved to 6.3% from a negative1.9% in FY16 owing to a reduction in finance costs to C493 cr in FY17 as against in C642cr in the previous year. The Company forayed into the Hybrid Annuity space of roadconstruction in 2016 and has already booked EPC revenue of C63 cr in FY17.
The Board of Directors have recommended a final dividend of C0.15 per equity share ofthe face value of C10/- per share.
Q: The Company forayed into the Hybrid Annuity space of road construction in 2016. Takeus through your order book in this space. A: MEP ended the year with a robust orderbook of six HAM projects valued at C3836.99 cr. It has successfully achieved fullfinancial closure for all 6 HAM projects with project finance of C1726.65 cr whichaccounts for 45 % of the project cost. The Company also received the Appointed Date forthe commencement of work for four of six projects (Nagpur Ring Road 1 Nagpur Ring Road 2in Maharashtra and Talaja-Mahuva Mahuva-Kagavadar projects in Gujarat).
Given the significant market share of the Company in the HAM space and the fact thatNHAI is expected to award 80% road projects through the EPC or HAM routes we seeattractive opportunities for the Company in this space going forward.
Q: How else did the Company strengthen its business during the year under review? A: TheCompany strengthened its credentials as a full-fledged infrastructure company by enteringinto an alliance with CIDB Holdings a fully-owned subsidiary of Malaysia's ConstructionIndustry and Development Board to address an entirely new business opportunity. Underthis MOU agreement both parties will endeavor to strengthen promote and develop theircooperation by knowledge sharing and introducing their best practices towards jointdevelopment of sustainable highways and expressway projects in India and relatedinvestments.
The Company is in active discussion with EPC construction companies from China andKorea for prospective bidding which allows the Company to expand into new geographieswithin the country.
Q: The big question is where the Company goes from here.
A: One of the biggest opportunities for the Company lies in re-sizing its BalanceSheet and creating a foundation for sustainable growth. The Company will actively pursueefforts to bring down the cost of borrowing. It also intends to list the InvIT(Infrastructure Investment Trust) on the capital market which allows a significantdeleveraging of the Balance Sheet. We have already received an in-principle approval fromSEBI and are in advanced stages of filing of DRHP. We believe that the InvIT offering willmoderate our debt reduce our borrowing cost and generate steady cash flows.
Q: With the recent suspension of toll for almost a month how much toll loss have youwitnessed? What is the update on compensation from the Authorities? A: We at MEPwelcome the Government's vision to fight corruption and go on the progressive path ofdemonetisation.
Currently the Company is operating its toll business predominately with NHAI and stateauthorities such as MSRDC RIDCOR etc.
The NHAI tolling contracts both the one-year short-term tolling and the long-term OMTcontracts and contracts with State authorities have specific clauses / provisions toaddress any change in law or force majeure events. Such clauses specify the manner ofcompensation to be awarded to the concessionaire in the event of any loss of revenue oradditional costs. We submitted our claims to the respective authorities and the same isunder consideration.
The demonetisation initiative also served as an impetus to create more awareness amongthe commuters about the electronic mode of toll payments bringing a larger customer baseto the e-platform.
Q: How does the management percieve the future? What is the way forward? A: UnderHAM we already have an order book of close to C4000 cr. Going forward the Company willbe evaluating HAM in which it already holds a significant market share and EPC where itis likely to bid for some large state & national highway road projects. Apart fromthis MEP will also participate in TOT projects for which a couple of packages wereannounced recently and likely to be bid for in the next 2 -3 months wherein the bundlingof toll plazas will be done and upfront money will be paid under the TOT concept which webelieve is our Company's forte.
At MEP we believe that a change in our business mix introduction of new technologieseffective government policies increase in pan-India presence and the launch of InvITs cantranslate into healthy revenues and PAT growth accross the coming years.
Q: What is the principal optimism related to the country's road building sector? A: Weare placed in a period of time when the subject of roads is not just national; it hasacquired an international geo-political dimension. The One Belt One Road' that isbeing proposed by China is not just about connecting China with the nearest port; it isabout connecting China with much of Asia Africa and the European continent. For sheerdaring this could be the largest infrastructure opportunity in the world that couldcompletely redefine global trade and business dynamics bringing the role of roads indriving the global economy to the absolute centre-stage. I would also add that roads aredefining Asian power shifts: the road connectivity between China through Pakistan to theemerging Gwadar port could transform economic and political realities faster than possiblyany other single South Asian development.
Q: How would you compare this reality with the sectoral background in India?
A: Before I come to the Indian scenario I would like to explain the completedisconnect between a growing global urgency around roads and the scenario that existedbefore this Indian government assumed office in 2014.
India's extensive road network of around 48.7 lakh kms about three years ago was thesecond largest in the world after USA. While this would indicate a road building prioritythe reality was that India's road building penetration was considerably low compared withits population: USA built 21 kms of road per 1000 persons while India had only 3.8 kmsper 1000 persons. Besides the length of national highways/expressways was a meagre100087.08 kms - about 2% of the total road length network but carrying 40% of thecountry's road traffic. Worse India ranked 74th (out of 140) and 61st (out of 140) interms of quality of overall infrastructure and quality of roads respectively as per theWorld Economic Forum Report for FY15-16. The result was that India incurred US$ 6.6 bn inannual costs arising out of transportation delays; India's annual additional fuelconsumption arising out of the delays was estimated at US$ 14.7 bn.
The result was a national consensus: to build new roads faster widen the existingones improve road conditions through round-the-year maintenance increase the length ofnational highways and access-controlled expressways as a percentage of the total roadlength network replace manual toll collection with electronic toll collection minimizedelays related to documentation checks fees tax payments at check posts and stateborders as well as overall documentation to enhance logistics efficiency. One would havebelieved that when faced with this evidence the country would have responded positivelyand commensurately: the reality is that road construction came virtually to a standstillin the years before 2014; only about 1000 kms of road construction contracts were awardedin 2013.
Jayant D. Mhaiskar
Vice Chairman and Managing Director