The Hindu Business Line : Single-point responsibility will be key qualification for construction companies

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Single-point responsibility will be key qualification for construction companies

Surprisingly our order flow continues to be on the higher side from the IT industry, although there have been some concerns over slowdown in that industry.

MR SARABESHWAR, CHAIRMAN & CEO, CONSOLIDATED CONSTRUCTION CONSORTIUM.

Vidya Bala

Consolidated Construction Consortium is one of the few organised pure-construction and engineering players in the listed space. After a successful initial public offer in September 2007, the company now plans to focus more on core infrastru cture segments. In an interview with Business Line, Mr Sarabeshwar , Chairman & CEO of CCCL, shares his views on the domestic construction industry and the company’s plans in the infrastructure space.

Excerpts from the interview:

Why did you choose to list CCCL now, although you have been around for over 10 years?

We were focussing on the buildings and factories segments for the initial six-seven years. As we grew, we found a number of good infrastructure projects coming up. These projects require a bigger balance sheet — with high net worth. On those grounds we went to the public. If we had wanted to remain in the buildings and factories sector then we may not have needed more funds.

What are the opportunities you see in the infrastructure space?

As you will appreciate, the construction market in India is growing at nearly 10 percentage points more than the GDP. With major thrust given to building infrastructure we see lots of opportunities here.

We are going to have operations under five heads — rail, airport, seaport, power plants and water and effluent treatment. In the power plant segment, we are currently focussing on civil and electrical jobs alone and not BoP. We are in the process of tying up with companies who are already into executing EPC projects and offer a total package.

Do you see a difference in the nature of construction services required earlier and now?

Indian companies were initially looking at separate contracts for electrical, mechanical and civil works. Later, MNCs who came in wanted timely delivery and single-point responsibility. The contractor had to design, build….take up the total assignment and hand it over at the end of an agreed period. This was not easy for the contractor, as failure to meet deadlines would result in huge penalties.

However, this change has provided us with tremendous opportunities since we focus on buildings and factories and anything related to this segment, whether it is electrical, interiors, glazing work, fire fighting and other added services, so that offers integrated solutions. Since everything is in-house, it is possible for us to commit a date and deliver the project. It is cost-effective for us as well as the project owner, as we have no mark-up over somebody else’s work. In the buildings and factory segment, we have a design team of around 60 people, so combining engineering and construction is possible.

The construction industry still remains largely unorganised. Do you expect some consolidation?

We should be happy that contractors are now viewed as an industry and a number of them are trying to move to the next level by offering single-point responsibility.

The unorganised sector will continue to be active in smaller jobs of, say, about Rs 15-20 crore. But as the value of jobs goes up, the organised sector will play a primary role as clients prefer to deal with fewer service providers for a project. So consolidation at the higher level is possible.

Construction contracts are generally seen as low on margins. Do you have any plans to improve the same?

Instead of merely looking at margins, we focus on return on capital employed, which is around 30-35 per cent. We will definitely improve on profit margins because of the projects that we have taken up in the total turnkey solutions segment. The EBITDA margins will touch double digits as a result of this. While Net profit margins may not move to this level, they will hover around 6-7 per cent.

Further, we insulate ourselves from price escalation through appropriate clauses in the contracts, especially for major raw materials. For instance, at least 60-70 per cent of our steel and cement prices have been covered through escalation clauses.

What is your view on the price scenario for key raw materials?

Both steel and cement have seen a steep increase. We were buying cement at Rs 128 per bag a year ago as against Rs 250 now.

Thankfully, the Government has allowed cement imports, resulting in some stability in prices over the last couple of months. Steel price will only see further hike now that petroleum product prices are shooting up.

Our foreign clients lament that land and raw material prices are going up in India and the labour available is largely inefficient. Even while they had plans, they are not even sure whether to start operations in India, given this scenario.

This may dent the confidence of FDI inflows into the country. The only silver lining at present is that the market is large for new players to set up shop and sell products.

What has been your experience in the airports segment?

We are at present doing three airport terminal buildings, one more recently added in Dehradun. We are also doing a few cargo and passenger handling facilities. In terminal buildings, we are focussed on providing complete solutions. After the public issue we are in a position to bid for larger airport projects.

Do you bid directly or have you tied up with airport developers who sub-contract a part of the work?

I believe you are talking about the Greenfield airport projects such as the one in Delhi and Mumbai. We are working on a small portion in Delhi as an engineering contractor to the owner developer.

We have a company called CCCL Infrastructure Ltd which does build-operate-own-transfer (BOOT)-based projects. This company will develop our SEZ project in Tuticorin. It can also align with other companies and start bidding (as an airport developer) for new Greenfield projects that are coming up. We will focus on non-metro cities. Some of them are coming up in Andhra Pradesh and Karnataka. We are looking at tie-ups wherever required.

Do you predominantly use owned assets or use the leasing option?

We own much of the critical equipment. We also strategically decide about hiring. We have the IPO proceeds for augmenting our construction-related equipment. However, earthmoving equipment is easily available on a piece-rate basis, in other words on lease.

There are enough agencies to provide them and this also appears cost-effective at present. We, instead, focus on procuring tower cranes and batching plants.

You have been contractors for a number of IT/ITES projects. Have you seen any slowdown in their capex plans in recent times?

Surprisingly our order flow continues to be on the higher side from the IT industry although there have been some concerns over the slowdown in that industry.

Order flows even over the last six months have been robust. However, in our own order mix, we now have clients from diversified industries compared to the concentration from IT a few years ago. IT/ITES is about 20-22 per cent as a percentage of order book, with industrial segment at around 12 per cent.

Do you foresee a case of over-supply of commercial space?

Most State Governments give extra Floor Space Index (FSI) for IT buildings compared to other office buildings. As a result there is some excess supply of IT space whereas other commercial office space is still largely required.

For example, in Chennai, a number of companies are unable to get the right office space because every developer has got into the IT space. In fact, developers entering the office space can expect good returns now.

What would be your current order book and execution cycle in the past?

The order book is about Rs 2,400 crore-plus and the average execution period has been 12-15 months.

Can you state three key areas that would drive revenue and earnings in the next two-three years?

Factories and buildings, airports and metro rail projects, in particular, and other jobs from Railways that are awarded as a package would be key drivers. Others such as power plant, heavy civil works and water treatment will result in some turnover this year but will see enhanced focus in the coming years.

There are lots of opportunities, especially in environmental solutions; we will focus on that too.

What has your progress been in the residential space?

At present, we find the residential segment to be low on technical requirements, so any contractor can do such jobs. We avoid such jobs now; that does not mean we shun them. What we are doing now is advising developers to move to total concrete structure when time cycle and skilled labour requirements can be brought down. We have already received one such job for a 20-storeyed building with six towers from True Value Homes. So we will focus on residential projects that require high-end technology.

What were the funding options you explored before the IPO? Going forward, what are your funding plans?

We had a private placement with the UTI and Evolvence fund; we tapped the market a year after that. We will be able to leverage at least 2-2.5 times whereas we are operating at less than 1. We should, therefore, be able to manage funding at lesser cost. We may look at other options such as foreign currency convertible bonds (FCCBs) at a later date when we start on large infrastructure projects.

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