A GIANT SECTOR, RIDDEN WITH PYGMIES

India’s infrastructure sector, is an irony of sorts. With a huge backlog in housing, roads, highways, ports and social infrastructure like hospitals, schools etc., India is rated among the top five global markets, for the construction/infrastructure industry, till 2030. The PM has himself committed a government investment of Rs. 111 lakh crores, or about $ 1500 bn in this sector in the coming decade. Just housing has a backlog of a trillion dollars of investment, with India needing to construct about 32000 new houses per day in the next ten years. That’s a huge demand and a giant sized business opportunity for the construction companies alone. With such enormous business available in India, the balance sheets of Indian construction companies should be robust and strong, but the irony is that they are not. As compared to this huge demand, need, opportunity and business that this sector offers, the infrastructure construction companies of India are not just puny, but they have also been unprofitable/unviable, despite the massive industry potential and opportunities. Some of the biggest bad loans and bank defaults in India are rooted in this sector. India offers a domestic multi trillion dollar business opportunity in infrastructure construction, but its own domestic/home grown entities are simply unfit to bite the pie. Looking to the mega opportunities, they are pygmies, only fit to be fringe players in this industry.

WHY DO WE SAY THAT THEY SMALL

As against a business opportunity of $1500bn in the public sector alone, as was announced by the PM himself, if you look at the financials of the top ten Indian companies, involved in the EPC business of civil engineering and construction, you would realise, that they neither have the capability, nor the ability/viability to seize the mega opportunities that the infra sector is offering to eligible players. Let us understand the ground reality here, with a bit of a global perspective. As against a proposed government investment of $ 1500bn in infrastructure in India, the fact is that none of our top companies, have the track record and the financial muscle to bag the big opportunities/contracts on the cards. Among the top ten construction companies in India, excluding L&T, which is an engineering company in many other verticals, there is almost not a single domestic construction company, with a turnover exceeding just a billion dollars, as proof of their ability to take up big ticket construction projects. As per the latest available figures, Dilip Buildcon, a large player in the top ten.

Indian construction companies had a turnover of just about $400mn, Sadbhav Engineering’s turnover was $660mn, Punj Lloyd’s revenue was about $750mn and only HCC’s sales exceeded a billion dollars at $1.08bn. The biggest construction companies of India, just do not have the financial muscle and cashflow management experience, to take up the big size infrastructure projects, that the sector offers in the coming decade.

A REALITY CHECK WITH JAPAN ETC.

Since the Indian economy is expected to exceed that of Japan by 2030, let us compare the top Indian construction companies, with their Japanese counterparts. As a compared to these Indian entities in the EPC infra sector involving real estate/civil construction, the Japanese companies are giants that straddle global markets. While almost no Indian construction entity has a turnover exceeding a billion dollars, the latest reported turnover of the top Japanese construction entities are all in billions of dollars, with the turnover of its top entity Kajima Corporation being at $ 18.1bn and that of the smallest in the top five, Takenaka Corporation being at $10.76bn. And the top Japanese construction companies do not even make it to the top global list, which is monopolised by the Chinese and European entities, led by the Chinese construction major, the China Communications Construction Group Ltd., which was formed in 2005 and had reported turnover of $78bn last year. The smallest in the global top ten is perhaps Strabag, the Austrian construction giant with a recent turnover of $18bn. And it is such construction giants that are needed and will be capable of seizing the emerging domestic and global business opportunities in the infrastructure sector in the coming decade, led by the USA, which offers a $30trn opportunity, India $13trn and the UK $6trn of infra construction business.

WHY ARE INDIAN INFRA ENTITIES SMALL

Most of these giant construction entities began their growth from domestic business in their own countries. India itself has not been short of infra business, as it seeks to overcome the huge infrastructure backlog that it faces. So why is it that despite spending lakhs of crores of rupees on infrastructure projects, by the public and the private sectors in India, that our infrastructure companies look like dwarfs/start ups, as compared to their peers even in comparable economies. The answer to this is evident in some recent reports about 3 leading construction companies of India.

1. IVRCL – a Hyderabad based infrastructure construction company, whose promoter MD was booked by the CBI, for a banking fraud of Rs. 4837 cr. a year ago, by misappropriating funds through bogus expenses is under liquidation. It owes about Rs. 15000 cr. to banks and other lenders and is being sold for a mere Rs. 1200 cr., due to which banks will write off about 92% of the loans given to IVRCL. Despite a takeover, the company will be unfit to take any big sized construction project, and perhaps no lender will give it financial support to take up business.

2. Gayatri Projects, yet another Hyderabad based construction company, promoted by its high profile promoter Shri T. Subbarami Reddy is also a bank defaulter. It is under a forensic investigation, as it seeks to restructure its massive bank loans of over Rs. 22000 cr. The company has 32 ongoing projects and all of them are running behind schedule and face cost overruns. The bankers have concerns about siphoning/diversion of funds and are said to be contemplating legal action against its promoter, who happens to be a former Rajya Sabha member.

3. The third report says that HCC Ltd., India’s leading construction company, has defaulted on loan repayments of Rs. 2171 cr., out of its total loans of Rs. 9727 cr. The company’s debt servicing capability is said to have taken a hit, due to delays in order execution, resulting in lower revenues. Apart from suffering due to delays in getting payments from the government entities/agencies, it also faces the problem of high cost debt.

So why is it that a sector with giant projects/prospects is ridden with relatively pygmy small entities in India, with inadequate financial capability to bag these projects. What has made them relatively so small, when the sector is so big.

1. Dealing with the government entails endemic corruption, resulting in bribes, delayed payments, cost overruns, default in completion of contracts, liquidated damages etc. These contractor companies face all the ills of red tapism and corruption that dealing with any government department entails and does not let them grow beyond a point.

2. The payment of bribes means that companies need to book bogus expenses, to siphon money and pay the babus/netas. Booking of bogus expenses results in siphoning of funds, tax evasion and financial statements of a compromised integrity, all of which are a drag on its potential growth.

3. Many an infra construction company has perished due to delayed payments from the government, due to which while on the one hand the bank loan/interest mounts, on the other, the company struggles to collect its own dues from the government, to meet its payment commitments.

4. In such a scenario, contract default by the contractor is inevitable, leading to protracted arbitration/litigation and numerous missed opportunities.

5. The government contracts are generally awarded to the lowest bidder, on what is popularly known as the L1 basis. In order to get contracts, companies trend to bid at the thinnest possible profit margins, often not enough to even cover the costs and the contingent risks that they undertake, thus weakening their finances and killing their growth.

6. Many a time companies have lost their mobilisation expenses and preliminary expenditure, due to delay in receiving the complete project site from the government, as in the case of roads/highway projects.

7. All these factors encourage promoters to siphon money and indulge in poor governance of their companies, thus perpetrating frauds and malpractices. Banks are reluctant to lend in such a situation and foreign players are unwilling to take up projects in India, which explains the plight of the Indian entities.

This explains the irony that we spoke about. A giant sector, with huge business opportunities, but relatively small companies, unfit to encash these massive opportunities. The collapse of ILFS, which was the top infra entity of India, with seemingly unlimited funds, tells us what ails this sector, despite the humongous business that it offers.