Analysis of Construction Company, India

Analysis of Construction Company, India Annual Report Analysis of  Hindustan Construction Company Limited Tejas Vaidya Construction Sector Analysis: Construction in India has become a key contributor to the economy of India in the recent years. It ranks 2nd in employment and contribution to the economy only after the agriculture sector. This sector also ranks 2nd when it comes to FDI inflows. However the last three years have been a challenging period for this sector. This sector has now come into the forefront with the ‘Make in India’ campaign being driven actively by the Prime Minister of India. Key aspects of the sector are as follows: The Indian Construction is valued at about USD 126million and projected to grow to USD 140million by 2017. The Construction industry contributes about roughly 10% to the GDP, a contribution of Rs. 6708 billion in the year ending March 2013. 50% of the construction industry demand comes from infrastructure and the rest comes from industrial activity, railways, residential and commercial development combined. Being a labour intensive sector, it employs 3.5crore people including direct and indirect jobs. The government has highlighted infrastructure as a key sector to turn around and sustain the momentum of GDP growth that had slowed down in the last 3 years. This industry is skewed in terms of major players; there are a handful of companies from both public and private sector. The public sector players are: IRCON, NBCC, RITES and EIL. The major private sector players are: LT, HCC, MN Dastur Co and Ansals. There is immense scope for development in this sector and it is seen as a booming sector, primarily due to the following reasons: The estimated shortage for housing in urban India is 18.8million units whilst that in rural India is 47.4million units. The current standards of infrastructure are unable to sustain the growing population and there is hence a dire need for re-generation and renovation to meet demands in urban areas. The Government of India has released a new urban development campaign that will help develop 100 ‘smart cities’ across India. Cities will be supported to gain investments from private capital and make effective use of PPP model to strengthen their infrastructure and services. 100% foreign direct investment (FDI) is permitted in construction and infrastructure development projects. Apart from this, a high degree of recent regulatory advancements have been seen in this sector which include the following: Jawaharlal Nehru National Urban Renewal Mission The National Urban Housing and Habitat Policy, 2007 Real Estate Investment Trusts (REITS) Infrastructure Investment Real Estate Regulation Development Bill, 2013 Model State Affordable Housing Policy for Urban Areas, 2013: About HCC: Hidustan Construction Company was established in 1926 by Seth Walchand Hirachand Doshi. It is an integrated group that operates in the areas of construction, infrastructure development and real estate. Being one of the largest private sector construction companies in India, it has been involved in projects ranging from highways and bridges to hydel-power projects to nuclear facilities.HCC’s standalone turnover stands at Rs. 4,113.5 crore and net profit stands at Rs. 80.6 crore, after reporting losses for the last two years. Financial Report Analysis HCC has a multitude of ongoing, new and completed projects in this year across various states in India and also in Bhutan. A total of 202 projects are listed. The state wise spread of the projects is as follows: Chairman’s Address to Shareholders The chairman starts by highlighting the terrible state of the economy, of governance and of the infrastructure sector over the last two years. However he shares a spirit of optimism over the formations of the stable NDA government. He states that the GDP growth has been languishing at the sub 5% levels this year 2013-14. As a result the construction sector is also badly hit. Overall, HCC works in a discreditable framework in India since the sector that is most affected by economic slowdown is infrastructure. The chairman, Ajit Gulabchand lists the problems endemic to the construction industry and they are: Environmental clearances to new infrastructure projects Lack of effective decision making Non-payment of claims by government public sector clients The chairman also highlights the performance of HCC as a standalone company which has been impressive amidst turbulent economic conditions. Turnover has increased 7.2% to Rs. 4113cr and has seen an increase for 67% to 640.7cr. The company has been successful in driving down costs. A key project Lavasa is back on track and taken up by Steiner AG, a wholly owned subsidiary which has remained profitable since the last 3 years. The chairman ends with sharing his optimism with respect to a stable BJP-led NDA government under Prime Minister Narendra Modi. Management Discussion Analysis In this section various aspects of the business and business environment of HCC, both internal and external is discussed. The macro economic review The performance of the economy coming into the year 2013-14 is analysed. Chart A highlights the GDP growth rate in the 5 preceding years. Chart B highlights the growth of the construction sector. It is observed that current account deficit as a ratio to GDP has narrowed significantly and there as also been an increase in foreign inflows. India’s Infrastructure Sector   The current situation of the infrastructure sector is analysed. It is observed that the sector faces several challenges in spite of long term demand being consistent. The lethargic decision making of the old government has negatively affected the sector. Infrastructure financing need to improve significantly by dealing effectively with internal and external factors. Delays are also observed on 15-20% projects along with rise in number of projects without commissioning date. HCC- Key developments Traditional focus on transportation, power and water supplies has continued. Areas like industrial construction projects, complete engineering, procurement and construction (EPC) have been explored. The improvements implemented in efficiency of project operations, inventory management, structure of the organisation and liquidation of receivables have been noteworthy. The company has also undertaken re-evaluation projects to expedite slow-moving financially challenging projects. Performance Highlights   The company has been successful in maintaining its top line at par with 2012-13 amidst adverse economic, financial regulatory environment primarily due to its thrust on cost control. Revenue from operations stands at Rs. 4113cr up 7.2% while EBIDTA stands at Rs. 641cr up by 64.1%. The company has also successfully paid of its dues from the Corporate Debt Restructuring package availed last year. Investee Companies Includes HCC’s portfolio of business through subsidiaries: Infrastructure: focuses on investment and asset creation through PPPs. During 2013-14, the business focused on executing existing projects and raising capital. Real Estate: The focus area of this business has been the development of complete integrated townships. Total Service Contractor: An extension of engineering construction division driven primarily by Swiss acquisition Steiner AG. IT: Expansion into IT done with Highbar Technologies. Engineering Construction Division   This division is distributed across power, transport, water and industrial sectors. Transport: Two major contracts were won viz. tunnel T49 in Udhampur – Srinagar – Baramulla railway line and RCC Bridge over river Sone in Bihar. In addition progress is satisfactory on Delhi metro projects won earlier. Power: This sector has been affected in terms of new undertakings however projects under execution performed well. This includes Hydro and Nuclear Power projects. Water Supply Irrigation: The company has completed water supply projects in Gujarat. New contracts secured at Yettinahole, Karnataka as well as in Pune. Industrial: Includes civil and fabrication contracts in Hindalco-Orrissa, Reliance-Jamnagar, ISPRL-Visakhapatanam and Padur, Karnataka. Marine Works: A contract for reconstruction of a dry dock and wharves is progressing satisfactorily in Mumbai. Infrastructure Division   HCC’s infrastructure business was handled by its wholly owned subsidiary HCC Infra. Projects were majorly developed either on PPP or on DFBOT mode. The company’s entire portfolio comprises NHAI highways with concession periods ranging from 18 years to 30 years. The asset portfolio of HCC is mature which it plans to monetise to raise capital. The asset portfolio is also briefly touched upon. Real Estate Division The real estate division is further divided into two businesses, Lavasa and commercial real estate. Having received environmental clearances, 2013-14 saw the development at Lavasa go into the next phase. A restructuring meant all employees involved in construction were shifted to Steiner India and Lavasa remained a pure developer. Focus has been on collection and salesat Dasve and Mugaon. Dasve in ready withal operational basic infrastructure. Work on infrastructure and utilities development of the second town Mugaon has gathered pace. Gadle Dam, built to supply water for the construction of Lavasa neared 90% completion. Commercial real estate has also seen satisfactory progress with the work on 247 Business Square and 247 Business Avenue, Vikhroli Corporate Park Phase II and Mean Township Developers projects progressing. The company also won bids for Parleshwar CHS, Mumbai and Charosa Wineries. Steiner AG   HCC acquired the remaining 34% stake in the Swiss company which makes Steiner AG a 100% owned subsidiary. Profit level has been maintained as last year at CHF 8.2million. Key undertakings of the company post acquisitions are described. Steiner launched its new corporate identity and design in September 2013. The brand essence ‘Taking the lead together’ which is being implemented on all channels. Highbar Technologies Focus has been on IT implementation from point of view of business transformation, rather than just technology implementation. 14 new customer added to make the count of customers 78. Multiple awards have been won. Expertise developed in areas of ERP, business intelligence and CRM. Operations Support   The operations of the different divisions are supported by Management Systems, Intellectual Property Rights, Branding and Human Resources. Integrated Management System (IMS) adopted based on standards based on standards stipulated by ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 to streamline processes. Re-certification audit for ISO 9001: 2008, ISO 14001:2004 and BS OHSAS 18001:2007 conducted to confirm compliance. HCC continued to create and protect intellectual property through multiple mediums. On the branding front, HCC continued with it brand enhancement initiatives in both external and internal mediums. Brand value was enhanced by standardised brand practices and delivery of big and complex infrastructure. Awards won by HCC During the year the company won CIDC Vishwakarma Award 2014 for Best Project for Pir Panjal Tunnel, Dun Bradstreet Award for ‘Social Impact’ project of the year 2013 for Nimoo Bazgo Hydel Power Project and Construction Week Award. Human Resources Substantial improvement initiatives like annual turnover per employee, upper ceiling on indirect/ preliminary expenses at the sites and Head Office cost being limited to a percentage of turnover were undertaken. The organisation structure, work and people allocation was re-calibrated to further improve efficiency and focus on various business areas. The company is also working towards implementing performance-oriented culture. Financial Review   In this section the abridged profit and loss accounts have been illustrated. Key financial aspects have been highlighted along with key financial ratio. A detailed analysis of the financials has been included in the later part of this report. References: Annual Report AY 2013-14 –  http://www.hccindia.com/pdf/HCC_Annual_Report_FY2013_14.pdf http://makeinindia.com/sector/construction/ http://en.wikipedia.org/wiki/Construction_industry_of_India https://www.equitymaster.com/research-it/sector-info/construction/Construction-Sector-Analysis-Report.asp http://www.indiainfrastructure.com/reportpdf/research_catalogue.pdf K.J. Somaiya Institute of Management Studies Research Page | 1