BSE:500185 | NSE:HCCEQ | 58888:hiuc | IND:Construction & Contracting | ISIN code:INE549A01026 | SECT:Construction
While we have still some way to go, your Company has weathered the financial storm that beset it over the last three years, and is now set on a path of profitable growth. Here are the key financials on a standalone basis for 2017-18:
- Though it has been very careful in choosing what it bids for, HCC has increased the order book of its construction business to Rs, 19,188 crore as on 31 March 2018. This includes Rs, 2,277 crore of new orders received in the course of 2017-18.
- Total income increased by 8% to Rs, 4,826 crore.
- However, given a change in your Company''s project-mix, operating margins (EBITDA margins, excluding other income) reduced from 17.9% in 2016-17 to 14.1% in 2017-18. EBITDA in 2017-18 was Rs, 644 crore.
- With reduction in overall debt levels, your Company''s finance costs reduced by 14.5% to Rs, 660 crore in 2017-18.
- Profit after tax (PAT) increased by 30.5% to Rs, 78 crore in 2017-18. However, after accounting for loss on fair valuation of equity instruments represented in other comprehensive 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 the UPA-2 government saw policy paralysis leading to a terrible legacy of stalled infrastructure projects. We are now seeing some progress on this front. Projects that are unviable
and beyond redemption are now being scrapped; while many of those that are potentially viable are being nudged along to their completion.
Even so, the size of the problem remains vast. As on January 2018, some 925 projects with a reported investment of over 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 a significant role in severely damaging the financial viability of infrastructure developers and engineering and construction (E&C) companies. Enterprises that had spent sizeable working capital to mobilise labour and deploy expensive plant and machinery at various project sites were faced with stalling and inordinate delays — which led to huge cost over-runs and consequential financial strains.
But that was not all. More often than not, government agencies, and by this I mean Government departments, authorities and public sector undertakings, held back payments against contractor claims. Even when independent arbitrators in dispute resolution found in favour of the E&C companies, the clients delayed payments by appealing to a higher court of law.
The outcome has been devastating. All major E&C companies in the infrastructure sector have suffered from massive receivables on their balance sheets, inadequate cash inflows to support their operations while making good the burgeoning interest payments on large working capital exposures.
Though government sector clients still hold back on payments and on making good cost overruns that have occurred for no fault of the contractors, there has been some improvement thanks to a few key initiatives taken by the current NDA government. Let me briefly outline two of these.
- The new Arbitration and Conciliation (Amendment) Act, 2015, which facilitates faster and time bound decision making in arbitration.
- Where public sector undertakings (PSUs) or government departments have challenged any arbitration award that has gone in favour of a contractor, 75% of the award amount to be paid to the contractor or concessionaire against a margin-free bank guarantee.
As on 31 March 2018, your Company has won arbitration claims amounting to Rs, 4,823 crore. Of these, for Rs, 2,744 crore worth of claims, HCC has received letters for 75% payment. That amounted to Rs, 2,046 crore, of which HCC has collected Rs, 1,416 crore.
This money went directly to reducing your Company''s corporate debt. That is why there has 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 arbitration dues has led to increased allocation of limits from your Company''s banks. Here, though, lies a caveat. Given the tightening of credit by banks on account of their NPA overhang, a delay 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 of consequences and despite their best intentions to expedite them. A successful navigation of these challenges will unshackle HCC''s ability to finance its existing projects and future growth.
Another positive development for your Company as well as the E&C industry as a whole is the present government''s clear commitment to infrastructure. In the Union Budget for 2018-19, the Government of India increased budgetary and extra budgetary expenditure on infrastructure by around 20% to Rs, 5.97 lakh crore, with a focus on roads and highways, railways, urban development and airports.
In roads, capital expenditure of Rs, 1.22 lakh crore has been earmarked for expansion of National Highways. Connectivity with the interior, backward and border areas is being sought to be achieved under the Bharatmala Pariyojana programme.
For railways, capital expenditure of Rs, 1.49 lakh crore has been earmarked for doubling of tracks, gauge conversions, track renewals and additional rolling stock. In addition, Rs, 16,800 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 between two goals. The first is to steadily deleverage balance sheets, prune fixed costs and monetise non-core activities in a manner that gives comfort to the banks. The second is to grow 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, I believe that HCC will succeed.
HCC is a company of firsts and over our nearly 100 year history, we have established many landmark projects across India. Our subsidiary Lavasa is also a first of its kind project - unfortunately, stress there continues. Lack of cooperation among lenders, financial stress in the banking system and constantly changing banking regulations has made financial resolution difficult and tardy. Our focus remains on a resolution in the interest of all stakeholders, and particularly our customers.
The investment climate remains lukewarm with private investment yet to take off. The stressed situation of the banks stems their ability to lend to new investment opportunities.
Rising oil prices portend that there will be serious challenges to containing the fiscal deficit. The constantly changing and sometimes unstable regulatory environment is unsettling and leads to unintended consequences. These, along with the disruption caused by slew of new and yet untested laws, add to economic uncertainties.
Many rules, regulations and laws intended for creating a predictable environment for business and meant to be prospective in nature when brought in at a time of stress, in practice become retrospective in effect and intensify the stress and unpredictability of doing business.
The government must take note that the economy needs serious attention and act to speed up the reforming of administrative processes of decision making. Only this will help the country 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 am confident of an early return to robust growth.
Thank you for your support.
Chairman & Managing Director
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