Let me start by sharing my views on the challenges the infrastructure industry is facing today before penning various developments. The Indian macroeconomic environment has looked turbulent during the past years, consequent to a deceleration in global economic growth. India’’s GDP growth rate has slowed down to a decadal low, partly due to global factors, but more on account of slow reforms and delays in implementation of projects in the country.
Over the last quarter, the Government has taken various initiatives to boost development of infrastructure in the country. These include setting up of infrastructure targets for various sectors, putting in place an institutional mechanism to monitor and hasten the progress of PPP projects at the Central and state levels.
Let me begin this letter with a view of the Indian economy, then move on to what is happening in infrastructure and the construction industry and end with a brief discussion on your Company. According to the latest estimates of GDP and Gross Value Added (GVA) released by the Government of India’s Central Statistical Organization, the Indian economy is certainly getting back to a higher growth path. For 2015-16, real (or inflation adjusted) GDP has grown by 7.6% — up from 72% in 2014-15. That makes India the fastest growing large country in the world, with a growth that not only exceeds any developed nation but also major emerging economies such as China. Besides, I believe that the economy has not yet realized its potential as several reform measures are yet to take off and make a material impact. For instance, several key initiatives such as the ones for start-ups or the ‘Make in India’ campaign are yet to be meaningfully implemented.
Regarding the infrastructure sector with special focus on the country’s construction industry, the situation is quite grim. The Government of India has clearly recognized this and launched several reform measures to boost sectors like roads, railways, power distribution, rural and urban development. The Union Budget 2016-17 has allocated Rs. 2.21 lakh crore for the sector. The one good news is the pace with which projects are being sanctioned for the construction of highways. The biggest issue in the sector is the legacy of stalled projects, thanks to the freeze in decision making that occurred over the last four years of the previous government. This has far reaching adverse consequences on the future execution of work.
These stalled projects have disturbed the momentum in creating physical infrastructure, and have seriously hurt the financial strength of private developers and construction companies. Such enterprises mobilized labour and deployed expensive plant and machinery at sites; these were not sufficiently utilized due to project stoppages, and led to massive cost over-runs. Instead of expediting projects, government and quasi-government execution agencies have held back payments. Consequently, the claims of construction companies on the executing agencies have mounted substantially. Regrettably, when the decision of independent arbitrators in such dispute resolution has favoured a construction company, the executing agencies have invariably stalled the payment process by routinely appealing to higher judicial jurisdictions.
The example of your Company is no different from what is faced by other construction companies. Consider the case of ARSS. Your Company has filed for claims over Rs. 4,000 crores due to various project related disputes. Of these, some claims has been awarded to ARSS through arbitration. But unfortunately, some of these arbitration awards have been further disputed by clients. Thus several awards that were positive to your Company have been taken to the judiciary. To put it in perspective, had your Company received the full amount that it was awarded, it could have wiped out its debts and started afresh.
In such an environment, the entire infrastructure and construction sector is highly strapped for cash. As long as legacy claims settlement issues are not expeditiously dealt with, there is very little scope of a serious revival of the sector because most companies do not have the financial strength to absorb the losses of the past and yet continue financing new projects. Given this context, two positive legal developments need to be mentioned.
The Arbitration and Conciliation (Amendment) Act, legislated in 2015, facilitates faster and time bound decision making in the arbitration process. Moreover, it requires the aggrieved party to deposit award money in an escrow account before taking the judicial route to challenge an arbitration award. Hopefully, this will reduce the current practice of needless appeals.
The Commercial Courts, Commercial Division And Commercial Appellate Division of High Courts Act, also passed in 2015, has introduced the setting up of commercial courts at the district level as well as commercial division in the High Court to deal with commercial disputes over Rs.1 crore. Thus, all appeals of arbitration orders will be dealt with Commercial Appellate Divisions of the High Courts — which ought to speed up the resolution of commercial disputes. Time will tell whether these two laws actually deliver what are intended in the statutes.
Let me move now to the performance of your Company. The standalone results for 2015-16, which reflect construction business have been encouraging, and reflect efforts at streamlining operations, optimizing efficiencies of on-going projects and pursuing pending dues at every level.
- Turnover of Rs.623.30 crores.
- EBITDA is Rs.207 crores in FY 2015-16 an increase of 6.3 % over the previous year.
- PAT was Rs.5.02 crores.
- EPS (basic) in the FY 2015-16 is Rs.3.38 as against Rs.4.19 in the previous year.
I am therefore saying two things: that your Company is wholly committed to reduce the debt burden but in order to generate fair value, the due process will be followed which is taking time. Infrastructure developers and construction companies go through sharper business cycles than many other sectors. The better ones come out of slumps stronger than before. Your Company ranks among the best in the construction business — in terms of expertise, execution capabilities and the determination to surmount all odds to succeed.
With these thoughts and feelings, I would like to take this opportunity to wholeheartedly thank the Central and State Governments, Shareholders, Investors, Bankers, Financial Institutions, Regulators, Suppliers, Media and Customers for their consistent and constant support. I wish to express appreciation to my colleagues on the Board and our employees for their thought Leadership, dedication and commitment. I am indeed grateful to you all for your cooperation and the trust you have reposed in us.
With warm and very best regards,