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G. Madhan

`Pre-qualification criterion in India, unlike in the other countries, require us to have undertaken a job of similar size and nature.'

Mr E. Sudhir Reddy, VC and MD, IVRCL Infrastructures and Projects

IVRCL Infrastructures & Projects, a Hyderabad-based engineering construction company, has a strong presence in water and irrigation projects. The company has taken initiatives to establish its presence in the railways sector, and the Sagar Mala project, which involves port development. Mr E. Sudhir Reddy, the company's Vice-Chairman and Managing Director, and Mr S. Ramachandran, Senior Vice-President (Corporate Strategy) shared their views with Business Line.

Excerpts from the interview

What challenges are you facing in bagging contracts?

Mr E. Sudhir Reddy (ESR): Pre-qualification criterion is one of the major challenges we are facing at present. Pre-qualification criterion in India, unlike in the other countries, require us to have undertaken a job of similar size and nature. The only thing that they do not state is that it should have been executed at the same place!

Mr S. Ramachandran (SR): For example, the Godavari electrification project, which involves the laying of 2500-mm diameter pipeline, the pre-qualification is that the company should have executed a 2000-mm diameter pipeline. Secondly, the company should have executed at least one project, a 50-km long pipeline. No such comparable project has ever been executed in India. On the other hand, we have done 1800-mm diameter and 75- km long pipeline. We are the only company in India to do that. But we will not be able to qualify for this (Godavari) project unless we have a tie-up with a foreign company that has executed a similar project.

What steps have you taken to address the pre-qualification criteria issues? You were also planning to raise funds through a GDR issue. What is the current status?

ESR: We have achieved physical quantities (bid capacity, technical expertise, similar type of work executed and so on) in most cases. As tenders become larger, the Government is attempting to play it safe by looking for a construction company with sound financials. As financial mass is given an equal weight to that of the technical expertise, we are planning to raise funds. GDR is one of the instruments we were talking about. It may also be through a strategic partner. We are keen on getting a good price.

What extent of equity would you be willing to offload?

ESR: More than the extent of equity, we are looking at bringing in about Rs 100 crore into the company. I may probably be able to give you a concrete answer by the end of this calendar year.

Does that mean your cost of funds is going to come down?

ESR: Yes, drastically. Today our average interest cost with banks is 12.5-13 per cent. With the net worth going up, our bankers will also be more comfortable and our ratings, probably, will also go up.

Besides, our interest costs might go down to 11 per cent. This money will help us to purchase materials through cash more instead on credit. If construction materials are purchased in cash, you get about 20 per cent savings annually. Our bottomline on the whole will improve at least by a minimum of 2 - 2.5 percentage points.

How has the sharp rise in the steel prices in the last one year impacted your margins?

ESR: The rise in prices has definitely impacted us. But, we are also protected by the steel price index formula, or rather the WPI formula (steel is also a component of the wholesale price index). We have the price escalation clause built into a majority of contracts. In some cases, the Government also goes a step forward and has an estimate; if the cost goes beyond that, they pay.

What is your current order book position?

ESR: In the last couple of years we are maintaining Rs 1,400 - Rs 1,500 crore worth of works, 98 per cent of which is with the Government. This will sustain us for another two years. The completion period of these projects ranges from nine months to seven years. The average is 30-36 months. We have also pre-qualified for projects worth more than Rs 4,000 crore.

Do you expect the pressure on operating margins to continue?

ESR: In the last two years, our operating margins have stabilised. Big-ticket jobs have started coming. It is far easier to control a large job if it is at one place — control over suppliers, economies of scale, among others. As time goes by, I expect the margins to improve by 2-3 percentage points, not only for us but also for the entire industry, as this phenomenon is common for all. Your operational efficiency will only differentiate you by about 0.5 per cent.

The construction sector has been granted the industry status last year. Does it help you get finances from banks, FIs?

ESR: Not really. At the end of the day each company is on its own. Like the film industry, we do not get any funds.

Does that mean that your cost of funds continues to remain high?

ESR: Yes. When you sign a contract, there is no gestation time. Within 14 days we have to start the work. Within 14 days, no financial institution will be able to process your papers. Practically, it is not possible. However, there is a lot of specific project funding that is happening now. Yes, banks have also realised that infrastructure is a good and a safe industry to be in. The tendering process has become lot more transparent and, hence, the element of doubt and uncertainty has been removed. Today we talk about Nabard funding, HUDCO funding, ADB and things of that sort. There is a definite proof of money being available.

What segments appear promising at present?

SR: In the emerging segments, railways (another golden quadrilateral is happening here) is one segment where opportunities are expected to come and also in port connectivity. They all seemed to be well planned, in terms of their funding. We are entering that sector. Another sector that is expected (we would like to be in on that too) is the development around the ports - the Sagar Mala project. Anticipating that, we have also entered into a joint venture with an international company — Dragomar. Now, we are exploring the possibilities of getting into dredging activity. Dredging is a specialised activity, more equipment-dependent and specialist-driven.

Your company has been restructured into six divisions. What is the objective behind this?

ESR: In this industry, getting in to a contract is the easiest. Getting out is the toughest. We need to have a focussed approach. Keeping that as the sole objective, we decided to have six divisions, of which four are now fully functional, headed by senior persons.

Last year, we took a breather and did this restructuring exercise. This year, it has shown in results. In the quarter one and two, which is historically not so good for business for our kind of industry due to monsoons and various other factors, we have shown a 100 per cent growth.

SR: Apart from bringing down the financial costs, it will also improve our technical efficiency (such as procurement of materials, project management and so on). It will bring about quality improvement in the way we work. It will also improve the confidence and help us to bid for larger projects.

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