The Indian construction sector has had its share of woes, which relate to the slowdown in India’s economic growth and infrastructure spending, and the high interest rates and tight liquidity conditions which are acting as impediments for new and ongoing projects.
HCC, among the large players in the sector, has however seen its order book rise from Rs 9,000-10,000 crore levels to Rs 12,000 crore currently, which it hopes will rise further to Rs 15,000 crore by March 2009. Jitendra Kumar Gupta spoke with Ajit Gulabchand, chairman and managing director, Hindustan Construction Company (HCC) on the key issues looming the sector, the company’s current position and its future strategy.
With commodity prices softening, liquidity easing and interest rates expected to decline, do you see the situation improving for the construction sector?
I think the world financial crisis and India’s broad financial crisis continues. We are underestimating the impact of this crisis. It is both a liquidity crisis and crisis of confidence. The confidence and sentiments have a huge role to play out in this.
So, even if slight liquidity comes in, the high interest rates and the lack of confidence makes peoples risk averse. And because of that, it is difficult to attract investments and without investments one cannot see GDP growing. So, the current state of affairs is very serious.
Although commodity prices are falling, there may be some opportunities here, but the point is that the overall scenario is bleak. We need a lot more action, shore up confidence, improve liquidity and create low interest rates so that people will invest. We have not done many economic reforms, which would have helped us in times like this.
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For instance, we do not have a debt or bond market. The large infrastructure projects, long term projects need long term funding. So, in my view, the access to the debt is going to be a bigger problem than equity. Once the things settle down lot of private equity players will be there to invest. T
he valuations are ridiculous and looking very good to anybody who is a long term investor. But, if we do not lower the interest rates, IRRs (internal rate of return) required in order to deliver a good project of PPP (public private partnership) would be very high.
Given this scenario what is your strategy with regards to funding?
We at HCC have decided; on construction side we will take more government projects so that we can get the advances against the orders. Now since the interest rates have gone up, those advances have become attractive and we have the access to liquidity. Secondly, we are also asking the government to waive the interest on advances. If that happens, it will help banks to fund the construction service projects.
What about the new projects?
We are peculiarly positioned in the construction industry. We are targeting the government projects and limiting the PPP projects. These are difficult times. I think we will continue to notch a good order book. Even if the growth rate drops or even if certain government expenditures drop on infra projects, we are well positioned to get the orders.
As far as PPP projects are concerned, we find that the interest costs are going up, so unless the project is solid, high IRR and are at least for 20 years concession period one can not make money. We will take a more cautious and solid approach and will be selective of the projects.
What is your view on a possible slowdown in orders during elections?
I think the problem the country today faces is far bigger than just the stock market correction. The world financial equilibrium is disturbed. We will go through various problems; we are not insulated from the world. We have a growth story, we will probably not go into recession, but our growth will slow down, which will affect all of us.
We will hopefully cross the turnover of Rs 4,000 crore this year, but there is election in between. India is the only country where the election commission stops all the new jobs during the election period. Considering the upcoming elections in Rajasthan and other states and thereafter national election, it seems the new development work might stop for the next year, which is at a time of serious financial crises.
Analysts are concerned about your real estate projects including Lavasa considering the uncertainty over property prices and funding issues. What is your view?
As far as real estate is concerned, we have a very clear strategy. We have two big projects one is Lavasa. We have already sold 1,400 villas and apartments and have got advances against them of about Rs 150 crore. We have tied up with Axis Bank and Bank of India on convertible equity basis, which has got us Rs 500 crore.
So, just now we have completed everything including the funding of the first phase (spread over two years). We are not able to sell more because we will first deliver these 1,400 villas and apartments; this year we will be booking revenue and profits in the Lavasa project.
So, that is how we have shored up the Lavasa project. Our other project that is an IT Park is also on course to be completed on March 2009. As far as creating new land bank is concerned we have curtailed our plans. We are not making any cash purchases as of now. Whatever land acquisition would be there, we will be the joint developer. So, this is our strategy.
For now, the whole thing is in turmoil; a lot of good and bad news is still to come. And, once it starts coming, we will have issues. We are going to take a very cautious approach.
What is your view on the conversion of FCCBs and resultant impact on financials?
There are three more years to go and we will be much bigger than what we are today. And, if needed, we will raise more money at that time.
What is the status of the Bandra-Worli sea link? Are there more losses to be booked?
Whatever is done is done, we will just complete it by the end of June 2009. And, whatever amount is there to be claimed we will go into arbitration try and claim that amount. We just wanted to finish this project.
Where do you think the focus would be going forward in terms of segments like water/irrigation, transport and power?
In India you cannot say that, it all depends on how our development expenditures happen. However, we are currently focused on the power transport and irrigation segments.