Our decrease in consolidated net worth at the end of FY18 was Rs.91 million whichdecreased the per share book value by 5.7%. Over the last sixteen years (that is sincethe present owners took over) per share book value has grown from Rs.151 to Rs.491(Rs.569 after ignoring the effect of goodwill write-offs) which after factoring individend paid during this period works out to a rate of 8.5% (9.5%) compounded annually.
Last year I had shared my perspective on the macro environment in which Revathi'sDrilling Solutions business operates. This year I would like to delve into the key risksto this business and how we have been dealing with them. This would give you a goodappreciation of the overall environment of Revathi.
The first source of risk is market risk. I wrote quite extensively about this in lastyear's report. While it is a clear long-term risk I do not perceive this as a risk in theshort- to medium-term. A second aspect of market risk arises out of business cycles. Sincemuch of our exposure is to coal which has been the primary energy source for India overthe past several decades we do not see much gyration owing to business cycles. It is truethat our business is not even year-to-year but that is due to factors at Coal India whichare typically short-term in nature. Over the course of three to five years the businessis fairly stable and predictable.
The next source of risk is concentration risk. The bulk of our business comes from oneclient Coal India. This leads to two risks low rate of growth reflectingrate of growth at Coal India as well as client concentration risk. To address marketsoutside Coal India we have over the years developed new products for the mining waterwell and construction industries. The products developed for mining were higher capacitymachines which expanded our range to cover a broader spectrum of applications. Thesedrills are much larger in size and value and do not have an annual demand. We continue todevelop new models which would help us penetrate deeper into some of the other marketslike cement and steel. Towards this we have already developed some models which wereintroduced into the market recently. The product has been well received and we hope togain market share in this business in the future.
We also developed products for the water well industry which are supplied to customerslike Central Ground Water Board. Like the larger drills for mining these drills also donot have an annual demand. The products developed for the construction industry were muchsmaller in unit value and as such did not turn out to be very attractive from aprofitability perspective. As such this range was discontinued several years ago.
Another initiative we have taken has been to open up some new markets for our products.Much of the work here has been within Asia though we have also supplied some equipment toEurope South America and Africa.
The annual business from Coal India approximates Rs.50 crores. Anything above andbeyond that comes from other customers and/or geographies.
The next source of risk is competitive intensity. So far there have been two majorplayers in Atlas Copco and us. Sandvik has been supplying some machines to Coal India aswell but is not yet a major player. The other players are Komatsu which acquired JoyGlobal in 2017 and Caterpillar which acquired Bucyrus in 2011. However none of theseplayers have even tried to get into the I ndian market in the product range that competeswith ours. Perhaps the small and slow growing market size makes it unattractive for largerplayers to attempt to get in.
Then there is balance sheet risk to which we were exposed for a few years when ourleverage had gone up significantly. Over the last few years however we have successfullybrought it down to very manageable levels. As a result of the significant reduction indebt last year this year our interest cost shrunk by half over last year. Over the nextcouple of years we should-be able to make Revathi a zero-debt company though we willcontinue to have non-fund based limits. With this we would have completed eliminated riskarising out of the balance sheet.
This year was one of the rare years when Coal India placed almost no orders for anyequipment. The rollout of GST triggered a massive exercise of reorienting all internalsystems to become compliant with the new law. The delays that resulted meant that we gotalmost no equipment orders from Coal India.
The other highlight of the year was that we finally shut down the concreting equipmentbusiness. This resulted in an asset impairment of Rs.7 crores. With this the cost of themistake made in 2006 is fully recognized in our books. Though it is a non-cash chargetoday it is shareholders' money that was spent many years ago.
The net result of all the above factors was that while we made a cash profit of Rs.2.2crores we had an accounting loss of Rs.5.9 crores for the year under consideration.
Last year I had shared my detailed perspective on the macro environment facingRevathi's core business. This year I would like to share a more detailed perspective onour journey at Semac. Most people usually focus much more on the future and do not spendmuch time thinking about the past. We have all heard that change is always painful andstill we all hope that we don't have to deal with the pain that comes with change! It is astrange aspect of human nature. We want things to change for the better and yet we wish itis painless. This has been my personal journey as well.
Every people decision I made created unique positives for the medium- to long-termthough with a lot of short-term pain. Likewise letting some senior people go would haveentailed short-term pain to the business though would have been good for the long-term.These motivations (of avoiding short-term pain) led to delays in making some of thesedecisions. However when I look back and reflect I find that the changes that werebrought in by some of our senior hires were momentous in our journey. So while they fellshort of producing the desired financial results they were important in shaping Semac'sfuture in a meaningful way. I am reminded of the commencement address given by thelegendary Steve Jobs at Stanford in 2005 where he said "You can't connect the dotslooking forward; you can only connect them looking backwards. So you have to trust thatthe dots will somehow connect in your future. You have to trust in something yourgut destiny life karma whatever."
The hiring of our first CEO back in 2007 did not produce the desired financial results.However without his coming on board the founding Principals of Potential ServiceConsultants would never have left. Their leaving caused short-term pain as they took awayclients and staff. However their departure forced us to build a new line of leadershipwith the talent we had. This was an important building block in building today's Semacthough at the time it didn't feel that way.
The hiring of the second CEO in 2015 also did not produce the desired financialresults. However he introduced some seemingly minor changes like video conferencing inthe organization which were the starting point of building a culture of collaborationacross offices at Semac. He also got us a marquee global client like Alstom for their highprofile Madhepura project where they are going to manufacture all electric locomotives ina joint venture with the Indian Railways under the Make in India initiative. He was alsothe reason that the remaining Semac founders moved out. While these Principals werekeeping things stable and profitable given their ages and experience in the industrythey were big barriers to change.
Our last CEO who joined in April 2017 and stayed with us for a little over a yearalso brought in some important changes such as bringing in cloud computing into thecompany which again was an important building block in building One Semac. It was alsoduring his tenure that we had a major shift in our strategy to focus only on industrialclients. Prior to that we were doing all kinds of buildings including townships hotelshospitals retail malls residential towers etc. As a result of this tight focus we havebeen able to make a more solid case to potential clients to give us work. This has helpedus to win some large new customers against competition from global players. Finally wehad another significant shift in our staffing policy from having a large inhouse team tohaving only a core team and outsourcing the surplus work to other consultants.
Our experience in the consulting business in this industry has not been very differentfrom the multinationals like AECOM Jacobs Mott MacDonald etc. who got into thisindustry in India. Most of them who acquired local firms as their entry strategy havedone one of two things. Either they have focused their energies on large infrastructureprojects in areas like Oil & Gas Roads Airports etc. or they have converted theirIndia practice to an offshore delivery center serving their international operations muchlike the IT industry.
I Semac now is healthier than the Semac then our business strategy is morefocused and crisp new leadership has developed from within the organization clients havestopped believing the negativity spread about us by the people who left us to startcompeting firms the teams are more aligned etc. These changes make for a stronger corebusiness though it is not visible in the financial results yet.
In the FY14 letter I had written about a company that was wholly owned by Revathi Renaissance Construction Technologies. That company was into the business ofproviding project management services. Post our exit it also got into the business ofconstruction of projects. At the time the business was quite new and there were a lot ofrisks involved in the business including the liability of torts. Having been in thebusiness for about five years now I feel comfortable that the business has become stableand the initial risks have been addressed. It is therefore no longer a startup.
So far they have been a standalone business mostly offering project managementservices to clients like Ford Alstom Ashoka University etc. with very little overlapwith Semac's business of providing architecture and engineering design services. Howeveras we go forward there is a case to be made for greater collaboration between therechristened Semac Construction Technologies and Semac. Now that Semac's core business andcore team have become stable we are evaluating how the two business can derive synergiesfrom each other. We are also examining possibilities of reorganizing the businesses in theinterest of Revathi shareholders. It is too early to say what the outcome of this exercisewill be and I hope to share more details in next year's letter.
Revathi had invested Rs.20 crores into a joint development real estate project inMumbai between 2008 and 2011. Of this we have recovered Rs.17 crores over 2014 and 2015.Effectively we have Rs.3 crores invested in the project at historical cost. The projecthas been in stall mode for several years now. Reasons are several including the softnessin the Mumbai market a financially over extended partner introduction of RERA etc. Thishas prompted us to find a different way to exit from this investment. Some initial stepshave been taken towards this but the windscreen is a bit hazy at this point to say when wewill be able to exit and at what valuation. Here again I expect something positive todevelop during the next twelve months and I will keep you posted as I find out more.
I would like to thank the families of our staff who stood by their spouse or parent ata time when very few believed Semac's ability to survive the departure of the Founders andsome key clients. Without your support and faith our team would not have stayed strongsteadfast and focused on the job at hand to bring us to where we are today. The rear viewmirror is not a pretty picture but the windshield is beginning to seem quite nice now.Big thank you Team Semac for making this happen.