I owe it to you to explain with complete clarity the difficult state that your Companyhas been going through over the last few years including FY2017. In doing so it is bestthat I start with the audited financial results prepared according to the revised Indianaccounting standards or Ind-AS.
In FY2017 for Punj Lloyd as a standalone entity:
Revenue grew by 12% over the previous year to clock Rs. 3761 crore. And totalincome increased by 15% to Rs. 4060 crore. Though small compared to the earlier standardsof your Company this is relatively good news and indicates that we are slowly gettingback onto a growth path
The other good news is how tightly your Company is controlling costs. In FY2017cost of sales increased by only 1.4% to Rs. 3952 crore versus growth of total income of15%
Thus your Company earned a positive EBITDA of Rs. 108 crore in FY2017 comparedto an EBITDA loss of l Rs. 370 crore last year
Unfortunately this was hardly enough to take care of your Company's financecosts on account of its large debt exposure - a common feature of almost allinfrastructure and construction companies across India. The finance cost for FY2017 wasRs. 882 crore or 8.2 times Bk the EBITDA
After deducting finance cost and depreciation your Company's pre-tax loss wasRs. 899 crore in FY2017. The silver lining is that it was significantly less than theprevious year
Post-tax loss for FY2017 was I Rs. 850 crores - also notably less I that whatyour Company had to incur in the previous year
Why is the financial situation like thisRs. Let me explain the reasons.
Infrastructure construction business all over the world depends upon leveraging. Whenany construction company wins a sizeable project it has to draw upon working capital frombanks to start the necessary activities such as purchasing raw materials as well asmobilising manpower and machinery. Under normal circumstances the additional workingcapital taken to finance such project work is balanced out by milestone revenue paymentsfrom the client the first on starting the project subsequent instalments aftercompletion of different stages and the final payment after the satisfactory handing overto the client.
If client payments arrive on time as per the contract the cash flows allow the workingcapital loan to be turned over thus keeping the construction company's debt-equityratio and finance costs in a safe zone. Thus right upto FY2008 the debt-equity ratio ofall listed construction majors in India ranged between 3.5 and 5 and finance cost as ashare of revenue was in the region of 5% both considered to be in fairly safe territoryfor the construction business.
The key phrase is 'if these client payments arrive on time and as per contract'.
Unfortunately that has not been so for the past five years not just for your Companybut across the infrastructure construction industry as a whole.
Throughout most of the second term of the previous United Progressive Alliancegovernment policy paralysis and risk aversion of the bureaucracy put all majorinfrastructure projects on hold. This unfortunate legacy continued for the first year ofthe present National Democratic Alliance regime. Stalled projects meant that milestonescould not be achieved for no fault of the contractors. This in turn led to paymentsbeing withheld. And every construction company that had borrowed from banks to mobiliseresources had to sit idle with no revenues in sight.
But that was not all. All major construction projects have scope changes in the courseof execution some suggested by the client and others carried out by the contractor.Throughout the developed world when the contractor presents a scope change bill it iseither accepted or negotiated and settled or sent for time-bound arbitration; and thearbitrator's decision is final and binding. Not so in India. When an arbitration award isin favour of the contractor most clients especially government departments publicsector undertakings and cash strapped private companies appeal against the award incourts. This leads to further delays in justifiable payment to the contractor.
Not surprisingly therefore these factors have severely damaged the financialstructure of almost every construction major in India. The debt-equity ratio of all listedconstruction companies for FY2016 has swollen to 8.5; and the burden of finance cost hasincreased to almost 14% of the top-line. Simply stated these companies which help buildthe sinews of India have become severely financially endangered. Your Company is noexception.
In addition your Company has been hit by another factor. As you are aware one of ourcore strengths built over two decades was doing large infrastructure work for the oil andgas industry in the Middle East North Africa South East Asia and India. With crude oilprices falling from three-digit to around US$50 per barrel today after having dipped tothe mid-20s in the middle all construction activities in this sector have either beenhalted or severely curtailed. That has not only affected building the order book andcollecting revenues but also created an environment for the clients to actively contestscope changes and thus significantly delay payments.
In addition the huge political crisis that has engulfed Libya over the last fiveyears has not only put a halt on our key projects in that country but also on paymentsfrom the clients.
Simply put the construction industry has been battered by a 'perfect storm'. YourCompany is no exception to this.
So what are we doing about itRs.
First we have focused unerringly on operation efficiencies and taking costs outwherever we can. As the results show while your Company's total income increased by 15%in FY2017 it restricted the cost rise to 1.4%. This will continue throughout FY2018 andthereafter. The benefit will be a leaner organisation with much tighter cost control -things that will help us when the businesses pick up as these must.
Second we are carefully calibrating our strategy between bidding for new business andefficiently executing projects at hand so as to conserve working capital and cash.This has become a mantra for your Company and will remain so going forward.
Third we have re-positioned our portfolio away from oil and gas in favour of thosesectors where there are sufficient projects and which demand lesser working capital. Inparticular 54% of our consolidated order backlog as on 31 March 2017 is on buildings andinfrastructure which includes highways mass rapid transport systems and railways.Moreover while we continue to have a presence abroad especially in the Middle East andSouth East Asia we are now concentrating heavily on India where public-fundedinfrastructure investments have picked up significantly in the last two years thanks to the Government of India's determination to get infrastructure back on track.
Fourth we are monetising some non-core assets. In the past your Company's subsidiaryPunj Lloyd Infrastructure Limited (PLIL) developed and owned solar projects in PunjabRajasthan and Uttarakhand. These are in the process of being sold to different privatesector players. We are also attempting to sell our interest in the Khagaria-Purnea highwayproject in Bihar which was successfully implemented and has been earning its six monthlyannuities. The market for selling highway assets is tight but we are actively looking forbuyers.
Fifth your Company has become much more proactive in going after its claims. Whilethere has been some progress on this account the claims recovery process continues to bemired by long drawn litigations. We are still awaiting monies from large claims in Indiaand abroad.
Sixth we have started serious talks with our banks about a viable debt restructuringprogramme. All parties have recognised that the earlier corrective action plan (CAP)entered into between your Company and its lenders was not delivering the results. Thelenders have been supportive of another round of financial restructuring to provide yourCompany with the breathing space to scale up operations and generate necessary cash torevive business profits. Detailed consultations with the lenders are underway and aworkable solution is expected fairly soon.
Seventh although these are still early days your Company has made serious progress inits defence manufacturing business. Punj Lloyd was among the early companies to be granteddefence manufacturing licences after the sector was liberalised by the Government of Indiato allow private participation. Our defence play includes land systems small armsaerospace and homeland security. The most significant development in FY2017 was that yourCompany's joint venture with Israel Weapon Industries (IWI) a global giant in small armsdesign and production inaugurated the country's first private sector small armsmanufacturing plant at Malanpur in Madhya Pradesh on 4 May 2017.
The union government led by Prime Minister Narendra Modi clearly recognises the urgentneed for seriously stepping up infrastructure investments to facilitate employment andcreate a sustainable framework for future growth. Two successive union budgets have seensignificant increases in the government's allocations for infrastructure. The newarbitration process under the Arbitration and Conciliation (Amendment) Act 2015 hascreated a better playing field for outstanding claims settlement in India. While thebenefits of the new law have not yet fully come into play we expect these to flow in fromFY2018 and thereafter.
So what is my outlook for FY2018Rs. Your Company has gone through very hard times inthe last three years. In the process we have learned a great deal become unfailinglycost conscious in everything that we do and have taken a careful path that focuses onpreserving cash flows while building our order book by bidding for profitable projects.Adversity forces each of us to do better. Your Company is no different. Therefore I amcautiously hopeful of better results in FY2018 and of using the year to set thefoundations for a new growth path.
Thank you for your support.
With best wishes