THE stock of IVRCL Infrastructures & Projects has been one of the star performers in the bull market of the past two years as construction sector stocks started to attract investor fancy on a scale never seen in the past. The Hyderabad-based IVRCL offers engineering, procurement and construction services as well as lump-sum turnkey construction projects. Its focus area has been water solution. It has diversified its operations and won major contracts for road projects from the National Highways Authority of India over the past year. IVRCL has been one of the prime beneficiaries from the Government's commitment to boost infrastructure spending. Mr. R. Balarami Reddy, Director of Finance, shared his views on the prospects for the industry and IVRCL in a wide- ranging interview with Business Line.
Excerpts from the interview.
What are the factors that have led to the sharp re-rating of the construction sector stocks, which have risen manifold over the past couple of years?
The construction business has been traditionally looked upon as a cash business. The outlook has now changed. We have become more transparent in its transactions and the government has recognised it as an industry; banks are viewing the sector as a good business to support.
I believe IVRCL has also contributed to this re-rating. The process started after IVRCL announced that two FIIs — ChrysCapital and Citicorp — were investing in the company. The recognition of this sector by foreign investors bolstered positive sentiment. The realisation by the government and others that the country's development rests on the growth of this sector has also contributed to re-rating of stocks from this sector.
How does the acquisition of Hindustan Dorr Oliver fit into IVRCL's growth strategy?
Sixty-five per cent of our turnover is from water-related projects. Hind Dorr Oliver possesses high technical capability in designing water projects and also manufacturing capability for equipment required for these projects.
These were not our strengths. Hind Dorr Oliver was, however not in a position to grow due to lack of execution capability in engineering, procurement and construction and lump sum turnkey projects. We have expertise in these areas. he acquisition would help bring the skill-sets together.
Is the company looking for acquisitions in overseas markets or comfortable with strategic alliances?
We are not desperate to tap overseas immediately. We are comfortable here at present with each construction company having about Rs 3,000 crore worth of orders in hand.
We are familiar with the rules and regulations here. Hind Dorr Oliver and its associate firms, however, have a presence in about 15 countries. This will help us in our foray into other markets.
What is the size of your order book now?
It is Rs 3,400 crore as on date.
Would call the current phase a boom for the infrastructure sector in India? What additional incentives would further boost the infrastructure sector?
The industry has been in a boom phase for the last five years and the same trend can be expected for at least another five years. After that it will be maintenance and revisiting. The industry will not be cyclical and will continue to grow in a steady manner. Several incentives have been put in place. The Government has recognised construction as an industry. But the definition for this industry is still not clear in the Income Tax Act.
Similarly, some government organisations do not accept guarantees from scheduled banks and insist on securing them from PSU banks. These aspects need a re-look.
Do you think the government's budget allocation for infrastructure will help ease the funding situation in the sector?
Definitely, for example, the requirement in Andhra Pradesh for the next 5 years is Rs 46,000 crore and orders have already been issued for Rs 27,000 crore to be completed in the next 2.5-3 years.
For the balance Rs 19,000 crore, some commitments are on from London EXIM Bank and World Bank.
What has been IVRCL's experience in the public-private sector partnership with models such as Build Operate Transfer (BOT), Build Own Operate Transfer (BOOT).
Are these models potential revenue boosters?
These new models have been successful in roads and power sector. However it has not taken off in sewerage/effluent treatment projects. Several aspects still lack clarity.
Toll roads are normally used by high net worth individuals (the rest pay indirectly through buses that they use) who analyse the net benefit derived in terms of time and fuel saved and lesser wear and tear and are prepared to pay the toll. In areas where toll collections are low, Government now supports infrastructure companies with grants (a subsidy-based model), which was not earlier built into these models.
These models are definitely revenue boosters as a regular cash contract has an effective return of 15 per cent; a premium of about 5 per cent is built into such projects to compensate for the higher risk.
What is your geographical spread?
We have covered the southern and western regions and a few areas in the north and east such as Uttar Pradesh, Bihar and Assam. We have no hesitation in taking up projects in any region.
Some projects require you to bid jointly with another entity to qualify. Is the company comfortable with sharing profits in an industry that operates on small margins?
We view joint bids as the cost of qualification. Depending on the requirements of the client we go for joint bids in areas that are not our forte.
What is your view on the trends in steel prices? How are you trying to protect your profitability levels even as material costs continue to be at high levels?
I believe a plus or minus 10 per cent variation in steel prices will continue. Most of our orders, barring a few dated ones for about Rs 250-300 crore, are covered by price escalation contracts. Going forward, there will be no contracts without this clause.
Do price escalation clauses augur well in a competitive bidding environment?
As all companies in case of long-term contracts adopt this rule, no individual company is affected in the bidding process.
Does the company have plans to further increase its equity base?
Not unless we have big BOT projects. Our present debt-equity ratio is a comfortable 0.45 and we have several options to raise funds.