Construction company, Gayatri Projects recently won two large irrigation projects worth Rs 2,132 crore taking its total order book to about Rs 5,000 crore. These numbers stand out as the company has an annual turnover of Rs 750 crore in 2007-08 and a market capitalisation of just Rs 65 crore. The other side of the coin could be the challenges including the company’s ability to execute large scale projects, high debt levels and the current economic environment. Additionally, the company has also partnered with Maytas Infra in BOT road projects. Jitendra Kumar Gupta spoke to Sandeep Reddy, managing director, Gayatri Projects to understand his view as to how the company is going to balance its growth while dealing with the challenges. Excerpts:
What will be the impact of falling interest rates and commodity prices?
Interest rates only affect the BOT (build-operate-transfer) projects. It does not affect the regular construction or EPC companies. While we have about one third of our exposure to BOT projects, we have already completed the financial closure and hence, it does not affect us.
As far as commodity prices are concerned, all our contracts are covered under the cost escalation clause. Except BOT projects, which are fixed price projects, there was a slight stress because of the increase in commodity prices. It has now again come to normal levels. For the coming quarter, we should be able to maintain our margins.
The company has recently won Rs 2,131 core worth of orders. Can you tell us about the current order book?
Till September 2008, we had an order book of Rs 3,000 crore. With the recent order of Rs 2,100 crore and another Rs 500 crore that we expect by March 2009, we should be having an outstanding order book of about Rs 5,000 crore ending March 2009.
How do you expect to manage projects of such large scale?
It is an EPC contract, where we will get five per cent advance, which is enough to fund the project. Besides, we might require some amount of working capital. Also, this is a long-term project having completion period of 53 months (4.5 years). We will have to first complete the survey and design of the project and then start the construction, which itself will take another six months. So, per annum what we need to achieve is within our reach.
The company is perceived as a regional player with large exposure to roads segment. Your comments.
We are well diversified in other states as well and have been bidding for projects where we see an opportunity. And, we are also strong in irrigation and have been working on such projects for some time now. However, compared to the size of the road projects, irrigation projects were small due to the larger capex happening in the road and infrastructure. But now, irrigation is picking up; Andhra Pradesh alone is spending Rs 40,000-50,000 crore. This is also a reason our order book mix after the recent win is equally divided between roads and irrigation.
The promoters have pledged shares. Can you throw light on this?
We have not taken any loan against shares. We pledged them as a collateral securities wherein this is just additional security given; for investment in group ventures.
More From This Section
What will be the fate of projects where Maytas Infra is a partner?
Three of the five BOT projects (undertaken by Gayatri Infra) are with Maytas Infra. But, we have already given an undertaking for the balance equity; whatever Maytas cannot put in, we are ready to take over.
Also, Maytas is involved in EPC work in only two projects, where again, we are ready to take over the EPC work. However, we are awaiting developments on a decision from the Company Law Board or till the new board of Maytas is formed.
What are your plans with the Gayatri Infra Ventures?
This is a separate subsidiary for the BOT projects, where we are aiming to win Rs 2,000-5,000 crore worth of orders over the next five years. In terms of funding, a part of the equity is already infused and AMP Capital of Australia has invested Rs 100 crore for a 30 per cent stake. We will further dilute our stake up to 51 per cent and get fresh capital. We will probably go for an IPO after three years. The company owns and is commissioning five BOT projects, which will start generating cash flow by March 2010.
Do you foresee any slowdown in new projects due to impending elections?
Yes. There are some projects announced, but since this is the election period there could be some slowdown in the next 3-4 months.
During Q3FY09, despite the rise in sales by 25.3 per cent, why did profits fall by 17.6 per cent?
Q3 saw the major impact of commodity prices. The BOT project operating margins were hit by 1-2 percentage points because of high commodity prices. In Q4, we margins should improve.
What steps are you taking to reduce debt burden and increase interest coverage?
We have a working capital requirement of about Rs 200 crore and a term loan of Rs 70-80 crore. We will probably be taking more working capital in future in proportion to the increase in turnover, which banks are ready to fund.
Our total debt is about Rs 300 crore and net worth would be Rs 300 crore by March 2009, so the debt-equity will be comfortable at 1:1. Now, probably next year, we will take Rs 30-40 crore of debt, but relative to this our turnover will increase from Rs 1,000 crore to Rs 1,500 crore. So, automatically our net profit will be higher to take care of the interest cover.
Has there been a delay in customer dues?
The payments are on schedule, except for private clients pertaining to a few steel plants getting little delayed, resulting in some issues in the last quarter. But, our exposure to private clients is just Rs 200-300 crore.
Have revenue and profit guidance changed? Also, if you can comment on operating margins in future?
Earlier, our net profit guidance for FY10 was Rs 70 crore, which has been brought down to Rs 60 crore (net margin of 4 per cent) on targeted revenues of Rs 1,500 crore. In FY09, our revenues could be Rs 1,000 crore and net profit about Rs 45 crore (4.5 per cent margin). Even if it does not improve, we should be able to protect our operating margins at current levels of 12 per cent due to the rising revenue share of high-margin irrigation business (15 per cent margins).
Gayatri Projects has not made provision for losses incurred by its 50:50 joint venture, with ECI Engineering. What could be the liability for the company?
The judicial process is going on. We have already filed a claim for Rs 300-450 crore. So, in the worst case, if we lose, the liability could be about Rs 50 crore.
