Financial Daily from THE HINDU group of publications
Tuesday, Sep 07, 2004
Financial Daily from THE HINDU group of publications Tuesday, Sep 07, 2004 |
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Corporate
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Outlook HCC pins hopes on volumes to offset shrinking margins Amit Mitra
Mumbai , Sept. 6 WITH the number of players in the construction sector racing ahead of the country's infrastructure expenditure, leading to a squeeze on profit margins, domestic construction companies now face a problem. Limiting themselves to a few highly specialised projects may mean higher margins, but it would be at the cost of low, even negligible, top-line growth. And, conversely, opting for more projects to maximise cash flows could mean lower average margins. But it is the second option that construction major, Hindustan Construction Co Ltd (HCC), has plumped for. The reason? "It is our belief that infrastructure growth is on the upswing and that, going forward, lower margins will be partly compensated by higher volumes," said a senior official of the company. HCC's decision to switch tracks from focusing on 15 to 20 medium or large infrastructure projects to taking up new projects involving lower margins is in tune with the present scenario in the construction sector. The entry of new players in virtually all fields of construction, including HCC's specialised area of hydel projects, has led to shrinking margins. Construction companies experienced this in the last fiscal too. Industry analysts say the significant rise in steel prices has affected construction companies. The construction industry has also faced serious problems sourcing this major raw material. Other factors such as the precarious fiscal position of several State Governments and shortage of skilled workforce (such as carpenters and crane operators) have dented the bottomlines of many construction companies. HCC's decision to opt for enlarging its order book was also prompted by the need to "sweat" its large equipment base. In the beginning of the current fiscal, HCC had on hand a string of unexecuted works valued at Rs 3,975 crore, including its share in integrated joint venture projects. "This is almost 18 per cent higher than the value of work on hand at the end of 2002-03," according to the official. The company is expected to submit bids for 16 projects worth Rs 5,600 crore, including projects worth Rs 1,025 crore for which it has been pre-qualified. Further, the company is in the process of submitting pre-qualification bids for 14 projects worth Rs 17,905 crore. It is confident of securing a "sizable share" of these new projects. Going in for more orders of diverse nature calls for reinforcing its equipment pool. "With our diversification into different sectors, the need for different types of equipment also increases. Our investment for equipment procurement increased from Rs 261 crore in 1999-2000 to Rs 436 crore in 2002-03 and Rs 475 crore in 2003-04. We are increasingly looking at procuring used equipment and re-conditioning it for further use, rather than buying new equipment and paying higher depreciation and interest costs on it," the official said.
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