Praveen Sood, Group CFO, Hindustan Construction Company, talks to Amritha Pillay of Moneylife on his company’s growth prospects and the current economic scenario
Amritha Pillay (ML): During the second quarter, HCC’s operating margins (OPM) declined 2% to 11% from the previous quarter. What was the reason for this decline?
Praveen Sood (PS): On a quarter-on-quarter basis, it is difficult not only to track the operating margins of a construction company, but also to cite one single reason for the decline. This is an industry where you have to track OPMs on a yearly basis and for FY10, we expect it to be around 12%.
ML: Raw material prices are already on the rise. Will it affect your OPM in the next two quarters?
PS: Most of our projects have escalation cost coverage. Normally, when the prices of raw materials go up, our company is usually covered against such rise in prices.
Speaking about the possible effect of rising raw material cost on the OPM, it depends on the kind of clauses you have in your contract. If the raw material cost escalation is not covered in your contract—like in most projects based on build, operate and transfer (BOT) basis—then it may affect your OPM. Many companies that work on BOT projects get affected due to higher raw material costs.
ML: Since you also have some projects on BOT, how you tackle this situation?
PS: HCC does have some projects on BOT, but they are on a minor scale. They constitute not more than 10% of our total projects. In a BOT project, what happens is you first have to bear the cost and then reap the profits with increase in traffic on the roads. So in BOT projects, there is some coverage benefit logically.
ML: What does your current order book look like?
PS: Our current order book stands at Rs15,542 crore. Out of which 54% comes from hydel power, 2% from nuclear power, 31% from water supply and 13% from transportation.
ML: How much profit are you expecting for FY10? What would be the order book size?
PS: We are expecting a 20% increase in our turnover from the previous year and would maintain an EBITDA of 12%. This fiscal year, our interest cost would be around Rs200 crore. For FY10, we see our order book at around Rs20,000 crore.
ML: What kind of projects are you are looking for? On which sector would you focus more?
PS: To achieve an order book of about Rs20,000 crore, we need new projects worth Rs5,000 crore. We see majority of the new orders coming from road developments with more orders on BOT basis. In fact, I think we may get orders worth more than Rs3,000 crore on BOT basis.
ML: What about the financial closure of your current projects, like the Pune-Dhule road development project?
PS: For the Pune-Dhule road project on BOT basis, we should be able to achieve financial closure by November- December. The project, worth about Rs1,200 crore is expected to be commissioned within two years.
ML: Last year, HCC invested about Rs554 million in some BOT-based projects. What is the progress of these projects?
PS: One of our BOT-based projects is completed and the National Highway Authority of India (NHAI) has started tolling it. We are expecting to get our first annuity from April 2010 onwards. Our second project, which is 50% completed, will be ready by 2010.
ML: You used funds worth $100 million that were raised from a Qualified Institutional Placement (QIP) to retire your debts. Do you plan to raise funds again for your future projects?
PS: We had a certain kind of working capital debt called rolling limit. The funds we raised through the QIP were used to keep this rolling limit down. At present, we have enough funds that can be invested in upcoming projects. So we do not feel any need to raise more funds. With the QIP, I think we got into a leverage position.
ML: More and more foreign companies are participating as well as investing in infrastructure in India. Do you feel threatened by the competition?
PS: Foreign companies have been around in India for the past seven to eight years, but it has never impacted our business. Everyone in the infrastructure industry is doing well. HCC has enough projects from Indian as well as foreign companies, so in a way competition has been good for us.
ML: Infrastructure in India is growing rapidly. But do we have enough skilled manpower to match the industry’s needs?
PS: Maybe, yes. During the boom time of 2007, we lacked skilled manpower. Now there is demand for civil engineering, which had become a forgotten course in many institutions. Many educational institutions are revamping their civil engineering courses and we see more engineers joining the infrastructure industry.