My Dear Fellow Stakeholders
FY18 was a landmark year for your Company. I am extremely happy to share that ourperformance in FY2017-18 has surpassed expectations and set new benchmarks for theindustry. This is the result of our focused efforts in the last few years to build a solidfoundation for a profitable and sustainable business. On the one hand we have built asolid balance sheet with significant cash balance and on the other hand we have built anexceptional team focussed on operational excellence. Our efforts have started deliveringsignificant value for all our stakeholders and I firmly believe that this is just thebeginning of a wonderful journey.
A Differentiated Business Model
Since the formation of Welspun Enterprises in its current form we have been trying toevolve a business model in the infra space which is profitable sustainable and minimisesrisk. As you would know this sector has been notorious for destroying stakeholder valuein the last few years. Many Infra companies have a lot of cash stuck in plant andmachinery as well as working capital and we did not want to fall into the same trap byfollowing a similar business model. Hence we have evolved an asset-light model which webelieve would deliver much better returns on capital employed with much lesser risk.
Firstly we are focused only on HAM projects as a developer and that too ondifferentiated projects where the competition is lower. At the pre-bidding stage each bidis evaluated by an independent bid committee and is approved for bidding only if it meetsthe Company's return criteria. Unlike most other companies in the infra space that areburdened with high amount of debt the Company has built a significant cash balance of Rs.7.1 billion. This cash gives WEL ample capital for growth and supports the equity requiredfor the HAM projects. The strong balance sheet (with net worth of about Rs. 15 billion)and robust credit rating (AA- for long-term facilities) helps the Company achieve quickfinancial closure and arrange debt for the projects at very competitive costs which wehave demonstrated in the awarded projects in our portfolio.
On the EPC part the entire construction is outsourced/sub-contracted to thebest-suited sub-contractor and WEL only focuses on the high value-add activity - ProjectManagement Consultancy (PMC) ensuring quality safety and timely completion of theprojects. There is no investment in construction plant and machinery as well as workingcapital. There is also no need to build a labour force. The outsourcing of constructionalso gives WEL flexibility to take up projects in any part of the country. The rigorousproject monitoring and supervision by WEL during the construction phase reducesexecution risk helps in achieving early completion and minimises operations andmaintenance expenses during the O&M period. It also helps improve returns by earningthe early completion bonus.
Once the construction is over we plan to unlock value from these projects by divestingthe projects to investors with lower cost of capital. This ensures that the capital ischurned and is not stuck in various completed projects.
Thus our strategy is based on three pillars:
Prudent Risk Management
The Year Gone by
We started the year with just one HAM project in our portfolio. By following a cautiousbid/buy strategy we added five more HAM projects to our portfolio taking the total HAMportfolio size to Rs. 70+ billion and 235+ kms. While one of the projects in our portfoliois already complete work is in full swing in two more of these. Financial closure hasbeen achieved for two others whereas we are awaiting the Letter of Award in the mostrecent project win.
The highlight of the year has been the completion of our first project and India'sfirst 14 lane expressway - Delhi-Meerut Expressway (Package-1). The project wasinaugurated and dedicated to the nation by the Hon'ble Prime Minister of India ShriNarendra Modi in May 2018. We are thankful and proud to be associated with NHAI on thismarquee project - India's first to be built under the HAM model. Completed in a recordtime of 18 months as against the scheduled 30 months the Delhi-Meerut Exprxessway sets anew benchmark for the industry. It also showcases the operational excellence achieved byWelspun Enterprises.
Delhi-Meerut Expressway is much more than an expressway with several industry firstfeatures. This green Expressway features vertical gardens cycling track solar lightingand beautification initiatives by wall arts and replicas of famous monuments. Thecompletion of this expressway with the support of NHAI exceeded our commitments thustruly resonating with our philosophy of Leading Tomorrow Together'. We have built anexpressway today for the dreams of tomorrow.
Our operational achievements are also reflected in our financial performance. We havealmost tripled our total income compared to the previous year. On the profitability frontwe have achieved 145% growth in EBITDA and 153% growth in Profit After Tax on account ofthe EPC margins from the accelerated execution of projects especially Delhi-MeerutExpressway. We were also successful in improving our long-term credit rating two notchesto AA- while maintaining our short-term rating at A1+ (highestpossible rating).
A Promising Future Awaits
While FY2017-18 has been very encouraging for us I am more excited about the future ofWelspun Enterprises. With government initiatives including Bharatmala being rolled out inthe road space we see a significant uptick in bidding activity. Under Bharatmala a totalof around 24800 kms are proposed to be constructed in Phase I. In addition Phase I alsoincludes 10000 km of balance road works under NHDP. Estimated outlay for Phase I is morethan Rs. 5 trillion. The Ministry of Road Transport and Highways (MoRTH) has fixed atarget of awarding works for around 20000 kilometres of national highways during thecurrent year 2018-19. This is about 25 per cent more than the FY18 figure.
Apart from the upcoming projects there are many projects awarded by NHAI in the pastyear which have not been able to achieve financial closure. Most of these distressedprojects owned by weaker developers are available for takeover by stronger players.
Welspun Enterprises has built a robust HAM portfolio of Rs. 70+ billion with unexecutedorder book at Rs. 60 billion at the end of FY18 which sets a strong foundation for futuregrowth of the Company. The order book provides revenue growth visibility of 100% p.a. forthe next 2 years i.e. FY19 and FY20. The significant increase in revenue is also expectedto translate to better operating margins as operating leverage comes into play.
Your Company intends to continue its approach of prudent bid/buy strategy to strengthenits HAM project portfolio. The Company will continue to work on an asset-light model withfocus on Return on Capital Employed (RoCE) free cash flow and risk management.
We are also analysing the water sector for future growth opportunities and fordiversification. With experience of water pipes and water supply project I believe thatWEL is at an advantageous position to tap these opportunities and fuel the future growth.
We will also look at unlocking value from our Oil & Gas investments at the righttime. There are some promising blocks in our portfolio which could yield significantreturns at the right stage of the development cycle.
Welspun believes in doing business which is not only consistent with the environmentbut also helps sustain it in the long run. Known for its various social initiativesWelspun has played a key role in rehabilitating the slums at the constructed Delhi-Meerutexpressway. It has also initiated various social awareness programs with local populationin the areas of hygiene women empowerment and education for children. It will continue toplay its part responsibly in and around the region it operates in.
My Sincere Thanks
We had an outstanding year and this would not have been possible without the support ofour key stakeholders. I take this opportunity to express my sincere gratitude to our Boardof Directors our Management our dedicated employees our esteemed customers vendorsbankers and investors for their unrelenting dedication support and commitment toWelspun. With your continued support I am confident that Welspun Enterprises will reachmuch greater heights.
- Chairman Welspun Group