Friday, June 07, 2013

IVRCL Ltd: Huge Returns Expected
CMP: Rs.18.45
S Ramachandran,
Director of IVRCL Ltd
Infra player IVRCL currently has an order book of Rs.26,000 crore. However, of the total, orders worth Rs.18,000-20,000 crore are executable, Business Development & Corp Strategy S Ramachandran, Director told CNBC-TV18.

The company has been performing well in segments like buildings, irrigation but orders from the transmission line segment are at nascent stage, he informed. Ramachandran is hopeful that the company will perform well in FY14.

Further, the company is looking at reducing Rs.1,000 crore debt via stake sale in special purpose vehicles (SPVs) this year, he added.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Could you just walk us through how FY14 is looking in terms of order book visibility and which big projects do you think will come on board and show through for the course of FY14?

A: We have an order book of about Rs 26,000 crore but out of them few of them are non starters for various reasons. So, effectively we can say anywhere between Rs 18,000 crore to Rs 20,000 crore is the order book which can be implemented now.

As far as FY14 goes, it should be a much better year because we have done a little bit of reworking in terms of our overheads and people cost, lot of unwanted stuff has also been removed. I would say that, we definitely would have an upside from here.

In terms of the sectors, buildings’ are doing quite well. We have a fairly good order load of about Rs 4,500 crore on buildings. Irrigation and water is also pretty strong. We have moved to different states such as Madhya Pradesh, Chhattisgarh and now something is coming up in Orrisa, and Gujarat was always there. In terms of transmission lines still remains at a nascent stage and last is our highway sector.

Our turnover would come from basically these four sectors and in addition we do have some orders from railways. So, things are looking up for FY14. The only constrain here that is actually for all of us infrastructure companies is financing. We did have problems, I presume it is with everybody and this is the time we expect the bankers to come forward and hold us or at least support us, which even what the finance minister has been telling the bankers that you must treat them differently and should not be fair-weather friends. All these years we have been giving them fairly good amount of business but when we are in a little bit of trouble they should support us. Some of them are supporting, I guess the others also will come forward.
Q: The analyst community has gotten quite positive on your company ever since you made clear your intent to exit some of your assets and reduce your debt can you give us a definitive guideline of how much you plan to reduce your debt by from this current Rs 3,000 crore figure that you are sitting at. What are the tools that you guys will use in this calendar year itself either in the form of unlocking value in your special purpose vehicles (SPVs) or any other asset sales?
A: It has to be the SPVs only. After having signed this definitive agreement with Tata Realty for the three roads, some others are also seriously looking at some of our roads, which are under construction like in Indore-Jabhuva, Phaltan-Baramati, Chandrapur, these are all under construction. Some of them can go on stream anywhere between six to nine months from now.

In addition, we also have the Chennai desalination plant which is doing very well this whole year. It has been hitting over 95 percent capacity. Things have really fallen for good for us and it is all going to be trying to divest. Now, that the government has also formed three member committee consisting of finance minister, planning commissioner, and the minister of highways, there is some news about them recommending divestment of our equity immediately after financial closure. We need it to be able to sustain ourselves. In that process all the SPV debts will come out.

I would be happy if we can get another Rs 1,000 crore out of the SPV off, and maybe pare about Rs 300 crore of IVRCL debt during the year. We are working in that direction, it is not very easy but we are hopeful now this year we should be better off.

Q: What is the experience been with regards to road projects, it is less competitive or is it still quite cut throat in terms of bidding and are margins still quite low for some of these projects?

A: On the concession front there are hardly any bidders. Very few roads have actually been bid out or people have come forward with any offer. The concession needs to be revised in the sense that there is no control over escalation which is a big disaster. If this is how the rupee is going to go up, this is how the crude oil prices are going to go up, automatically it will reflect on diesel and petrol etc and that in turn will reflect on transportation cost, cement, steel etc.

It is very difficult for anybody to factor in such an unpredictable and very-very high rate of escalation. There is a talk also going on to see how some elements of this escalation can be factored in new concession. Unless the concession is modified and made more fair to both the concessionaire as well as the government, things are going to be non starters for some time to come.

Q: Just to throw some more light on the cost overruns that IVRCL is seeing this quarter you did see some improvement in your margins to about 9 percent or so, but the fear is that your cost overruns will prevent margins from improving further going ahead. What would your sustainable trajectory be in terms of margins in FY14?

A: In additions to cost overruns, we also have a threshold overhead. Essentially, in any infrastructure project unless the top-line improves drastically it is not able to sustain the threshold overheads which are there. It has to do with cost of finance because the interest rates are very high, it has to do with people cost, and all costs of administration. So, the magic only lies in increasing the turnover so that the overheads can be absorbed.

To that extent we have taken some definitive action to see how we can reduce our overhead costs in all ways but what is most crucial is to be able to work on our receivables. Typically, when we closed the project the final bill hangs on - that money is due, retention money hangs on - that money is due. Then there are bank guarantees and bank guarantees is as good as money. So, unless we have improvements in these directions, they are definitely going to bite into our margins. At the gross level we would still be anywhere between 9 to 11 percent.