‘We will match industry growth’
Moneylife: KEC International is one of the largest engineering, procurement and construction (EPC) companies. What are its key strengths?
Ramesh Chandak: One thing that we are proud of is our culture that focuses on a few things which we think are unique to us and which others may not be able to copy quickly. Also in KEC we are focussed on time-bound delivery. We usually work on orders received through tenders where cost factor is not re-negotiated, so ultimately we have to deliver within the stipulated time. Power transmission, our core activity, is an important link between generation and distribution and so we always have to be ahead of these two linkages. I think this definitely is the uniqueness of our business as any delay from our part can affect the project and we cannot afford this. KEC’s strength is also to work across geographies in diverse conditions. We are present in 40 countries. Our ability, developed over years, to deal with local conditions, language, customs, rules and regulations is what separates us from others. On any particular day, we have teams working in different conditions from -40 degrees centigrade to +40 degrees.
 
The construction part in our business is simple; anybody with adequate knowledge can do it. What separates KEC from others is our capability in design located in Delhi and Mumbai. But even in construction, we can claim that we have done contracting of each and every kind. We do the tower erections manually, by crane, by helicopter or by gin poles. We have the abilities to do it by various techniques, whereas many others may not have that experience.
 
ML: The government has permitted private players to invest in power transmission either through a JV with Power Grid Corporation or via an independent private transmission company (IPTC) based on competitive bidding. What are your plans?
Chandak: We have gone for the bidding whenever there was opportunity for private bids. So far we have not been successful. Till date there were only two orders under the new initiative from the government and both had gone to Reliance, so except Reliance no other company was successful in the bidding, you can say. But there are new three-four bids coming up and we are in the race. Even if some other company wins the bid, we can still ask for the construction part. After all we are an EPC contractor primarily. We are not an asset ownership company. That’s a different mindset. I would still say that our mindset is more of EPC contractor than of an asset owner.  
 
ML: What is the current capacity of KEC in tower manufacturing?
Chandak: At present, our tower manufacturing capacity is about 200,000 plus metric tonnes (MT) per year, including our own and jobs contracted outside. Our own capacity is 150,000 MT and about 60,000 MT is outsourced. It is sufficient for our own needs but if tomorrow some other company wants to contract with us, then we can always increase our capacity. The critical part in manufacturing is the project design and procurement of materials. We have a very good relationship with vendors and we can always depend on them.
 
ML: What about your tower testing business, what is the capacity of it and is it limited to the domestic market?
Chandak: We have three tower testing stations which are the largest in the world. We are building one at Nagpur in Maharashtra which will be ready by October end. This also will be the largest tower testing station known to us and we will be able to test a 1200Kv tower easily. The scope for tower testing in not limited to the domestic market. But since our own volume is so huge, we have to use this facility for ourselves. We have been testing towers for other customers, mostly from overseas like Turkey, Egypt and other countries, as well.
 
ML: In the domestic markets, generally the contracts are in linked to costs but but the international orders are often fixed-price based. Considering international business contributes about 65% to your revenues, what are the challenges in managing costs?
Chandak: As far as aluminium and zinc are concerned we can cover it in the London Metal Exchange (LME) in one day. Being an EPC contractor, we can also cover other cost items like insulators, conductors, and aircraft warning lights. What is not coverable is steel which consists less than 10% of our whole business. In the steel market there is no liquidity. So, half of the steel requirement gets covered through advanced contracting. The remaining 5% to 6% of the sales is open for risk. Every open risk is a challenge. But it is not that big a challenge which really matters. For this we have to estimate the price rise that can take place and we have to provide that at the time of bidding. So far we have been successful in anticipating the price rise. Over the last 8-9 years you would not have seen any negative impact of this risk on our business and our results have reflected the same.
 
ML: Since you mentioned geographies, how much do your domestic and international businesses contribute to KEC’s total revenues and profits?
Chandak: The revenue contribution from the international business is 60%. For profits, there is not much difference between these markets. Profitability is the same.
 
ML: KEC has been winning orders across geographies. What is the formula?
Chandak: We have been working in all these countries and have developed good contacts there. We have a mechanism by which we keep a tab on a regular basis and more where we are not present. Also we have the knack of spotting the business at least a year ahead, and we are prepared to take the business as and when it comes. Without this “basic instinct”, you can’t enter into so many new countries.
 
ML: What about opportunities in the US?
Chandak: In the US, there is not much business. US is mainly supply business and not EPC contracting business. Supply business is an opportunistic business that you get an order and you have the capacity available and you can source it and supply it. But KEC would like to take pride in EPC contracting and not supply business.
 
ML: Competition in both domestic and international markets has increased as there are fewer jobs and many players to bid. How you plan to tackle the competition? 
Chandak: Competition is a part of life. It sharpens you. Once competition comes, consolidation happens, leading to lower competition. We have been in this for more than 50 years now, so we have seen enough competition.
 
ML: With the entry of new players like Sujana Towers, ATSL and Emco, do you think the operating margins for the industry would remain flat and there would not be any material expansion from the current levels?
Chandak: Firstly the business is expanding. There is scope for everybody. You mentioned two companies, another four can come. In the end, each company has its own strategies to counter the competition.
 
ML: But would it affect the operating margins?
Chandak: Operating margins have to be reasonable, in any case. If for any reason margins are very high and there is no competition, it would be a bad scenario for the country and for the industry as well resulting in a lot of lethargy and incompetence. We feel that there should be competition. We are more experienced in the industry; probably our cost can be lower than anybody in the industry. Probably our project management is better than others. So, despite the competition we will get our share.
 
ML: Typically, transmission EPC companies have high working capital requirements, about 125 to 135 days. How does KEC manage receivables?
Chandak: Being in the EPC business, only 10% is advanced on the entire contract value, whereas the contract has to be completed over 18-24 months. So the cycle can be even longer. We are plouging all our profits back into the business. Over the years our borrowing as a percentage of sales and our interest costs as a percentage of sales for the last 10 years, have been coming down. Our internal accruals are more than enough and the borrowing has not gone up in the past so many years. So when we think for a 20%-25% growth year-on-year, we do not need any outside financing. In the last six-seven years we have not even gone to the capital markets. This itself is an indication that I am not tight on finance. I do not believe in the idea that money is available so just take it.
 
ML: There are rumours about KEC winning some contracts from BSNL. What kind of growth, revenues you expect from telecom infrastructure segment, say over a period of next 12 months?
Chandak: BSNL contract is still not finalised. It will take its own time. As of today, telecom is just about 5% of our total business. We hope to grow this business. There is a scope for it. We will see how it goes. Over the next 12 months I don't see major changes in our telecom segment. Even if this order from BSNL comes today, by the time you execute it would take a few more months. So I don't think there will be a major change over next 12 months. The changes will occur in 2010-11.
 
ML: What are your plans for the railway infrastructure segment?
Chandak: We have just started. We believe that there is a scope. The business has not yet come; the government is talking about that. Government is talking about the increase the investment in railways. We are trying to be prepared for that, so that we do not miss the boat.
 
ML: Any specific growth target for this segment?
Chandak: We are all waiting. We know it is the need of the country, the need of the hour. We know it's critical for the whole industrial growth. But we have to wait till the business comes.
 
ML: In terms of revenues and profits as well as scope of the opportunities, where you see KEC, over the next three to five years?
Chandak: KEC has always refrained from giving any guidance. One thing is very sure, we will match the industry’s growth. As for the industry growth, you will have to make your own estimates. - By Yogesh Sapkale [email protected]

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NELP VIII suffers a major setback

Thanks to the fight between the Ambani brothers, NELP VIII has suffered a major setback with only 76 bids received for 36 blocks. There were no bids for 34 gas blocks offered under NELP VIII. This is a major setback after the huge success of Reliance and Cairn India which discovered major oil and gas fields in the Krishna Godavari Basin and Jaisalmer, respectively. The government has been expecting huge response as 100% foreign direct investment (FDI) is allowed in oil exploration.

The government has blamed the lack of interest on the row between the Ambani brothers from the Reliance group. Anil Ambani has claimed that Mukesh Ambani should give him 28 million cubic metres of gas per day at a price of $2.4 per MMBTU. This price is 44% lower than the government price settlement of $ 4.2 per MMBTU.
 
Another setback was when Reliance Industries returned 14 blocks to the government as it could not discover any gas in these fields. RIL has also mentioned that the company has spent Rs1,400 crore in exploration for 14 blocks. Reliance Industries says that this money cannot be recovered from the government as it is the exploration risk cost. There was a weak response from foreign companies as well. The Government of India may soon go for fresh round of road shows for the remaining blocks.
 
NELP VIII has covered 24 deepwater blocks, 28 shallow water blocks, eight online blocks and 10 type S blocks spread over 1,63,535  sq km in Assam, Jharkhand, Orissa, Madhya Pradesh, Chhattisgarh, Maharashtra and Tamil Nadu. Earlier the government had planned 100 blocks but it reduced it to 70 blocks.
 
It was estimated that around $10 billion investment would pour into NELP VIII. In earlier NELP rounds, 68 oil and gas discoveries were made in 19 blocks which will bring in 600 million tonnes of oil and oil-equivalent gas. The Government has planned that around 80% area under exploration will be covered by the XIth Five Year Plan.
- Dhruv Rathi [email protected]

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“The new generation of wealthy are the ones open to using wealth-management services”
Yogesh Sapkale (MLD): Tell us about the wealth management services of BNP Paribas.
Sharad Sharma (SS): Wealth management services in India started in 2001 and BNP Paribas was amongst the first to start. Since then we have been very consistently trying to emphasise more on the quality build-up rather than volumes. Our attrition rates for clients are very low. Acquiring client details is a long process and we would like our clients to stick to us for a much longer period. As of today, we have relations with around 1,000 family groups. Actual account numbers can be much more because one family can have 4 or 5 accounts. What is unique about our client relations is we give them a solution which is holistic rather than sticking to what the license permits.
 
MLD: What are your core target segments?
SS: Our target market comprises business families, entrepreneurs, professionals and senior management professionals. The segment of smaller entrepreneurs is where we see the maximum possibility for our value-added services. That’s the most preferred client segment. And we know that tremendous growth is expected in the years to come. This also means more and more individuals are seeking specialised advice in managing their growing wealth.
 
MLD: In India, the number of wealthy fell by nearly a third to 84,000 in 2008, the fastest drop in the world after Hong Kong. During the recent turmoil, many of the players in the wealth management business have lost clients. What is the situation right now?
SS: Last year, a lot of clients were moving out from risk assets to risk-free kind of assets. There is certainly a marked change in the situation today than it was a year ago. The rise in the markets has been swift so far. The sentiment has changed and investment appetite is gradually reviving, driven by the performance of asset classes. We feel that there is never is a perfect time to enter the market. Investment in equity has to be over a three-five year horizon. I must add, we were barely impacted by any loss in clients. There was a large segment among the wealthy which was not using wealth management services. They are using advisory services now rather than doing it on a standalone basis or picking and choosing each service provider for only the transactions they wanted to do.
 
MLD: How much current client assets under management BNP Paribas has at present and where you see BNP Paribas in the next 12 months?
SS: Client assets in all organisations are a mix of things and so an apple to apple comparison is not possible. But I can say our growth has been fast. I see growth in terms of adding more and more families. On the asset side, the growth based on the acquisition will keep on increasing as well as on the wallet size of existing clients.
 
MLD: Many of the millionaires in India are first-generation, mostly created by the stock market boom between 2003 and 2007. How does BNP Paribas deal with their expectations?
SS: In fact, the new generation of wealthy are the ones open to using professional services. The reason is they have grown using the most modern facilities and practices available in their own industry and the same attitude applies for handling their wealth. They are very receptive to new ideas.
 
MLD: Financial institutions have divided wealth management services market into four segments based on income levels. Is that logical?
SS: The requirements, perceptions, risk appetite will be different for different segments. Segmentation helps in aligning the advice, products, services and delivery channels to their specific needs.
 
MLD: Do you have specific criteria for selecting new clients?
SS: The starting point is $1 million plus investment. That is a good starting point and we build on that.
 
MLD: Most local wealth management service providers accuse global players with some concerns in the longevity and stability and their commitment to India. Your comments…
SS: Well, all I can say is that BNP Paribas will shortly be completing 150 years in India, in some form or the other, so we have been around for a while now.
 
MLD: Going forward, the competition in the wealth management segment is bound to increase. How you plan to tackle it?
SS: We welcome competition because as more and more organised players come, the market practices will improve and ultimately it will be the resident Indians, who will have better services. We were early entrants, so we already have gone through the learning curve much earlier. We also bring in the best practices and more experience.
 
MLD: If I have to differentiate between BNP Paribas Wealth Management and others, what would be your USP?
SS: The biggest factor is we are not transaction oriented. We are more focussed on long term relationship oriented approach.
 
MLD: What about marketing practices?
SS: Our marketing is based on a simple principle: understand the client’s total requirement. We are not going to go with a single product but rather with a holistic approach. We find solutions for clients and not really sell products. That’s how we probably build.
 
MLD: What about growth through consolidation, mergers and acquisitions?
SS: I think it is too premature for consolidation in wealth management segment because as of now the penetration levels are quite low. I think consolidation is a few years away. - [email protected]

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