Change in accounting practice has a one-time cost: Gammon

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Change in accounting practice has a one-time cost: Gammon

While high interest cost has hit bottomline for Gammon Infrastructure, there is a Rs 9.5 crore sitting under 'exceptional item' on the company’s Profit and Loss (P&L) statement. Parag Parikh, executive director and chief financial officer of the company tells CNBC-TV18 that the sum is with respect to accounting changes undertaken by the company.

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While high interest cost has hit bottomline for Gammon Infrastructure , there is a Rs 9.5 crore sitting under 'exceptional item' on the company's Profit and Loss (P&L) statement. Parag Parikh, executive director and chief financial officer of the company tells CNBC-TV18 that the sum is with respect to accounting changes undertaken by the company.

"Gammon has filed the rights issue Letter of Offer with SEBI with an aim to raise funds for bringing down debt," he informs. The company also recently received the letter of award from NHAI for four-laning of the Patna-Buxar stretch of NH 30 in Bihar on BOT (Toll) basis.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Your bottom-line has been hit first because of higher interest cost and then because of extraordinary. Can you explain both?

A: We have actually disclosed our accounting treatment changes in respect of the exceptional item of Rs 9.5 crore. This is more in terms of the emergence of newer accounting guidances that are coming with the institute. One of the things that we have done is with regard to the developer fees which are being charged from the holding company to the special purpose vehicle. Traditionally as all intra-group transactions, these get eliminated, but in respect of the service concessions, there is a growing guidance that since these developer fees or any other such capital expenditure is finally exchanged with the grantor, that is the government out here, for the tolling rights, the same need not be eliminated.

In fact we started off from the first quarter of this year on this accounting change and now we have gone and treated all our developer fees as income with non-elimination of the same. This has resulted into a recognition of an income of Rs 65 crore. So that's been one impact.

The other impact has been also in terms of the growing emergence of the treatment for periodic maintenance that happens on a five-yearly basis on road concessions. Previously, we were capitalizing the periodic maintenance and amortizing over the next five years by which the immediate periodic maintenance would be due.

Going by the newer emergence of such treatments again at SPVs, we have actually now started providing on a systematic basis, over the first five years before the periodic maintenance is due.

For the last periodic maintenance which was already capitalized, there was an amortized block of Rs 74.54 crore and the same has therefore being charged off, as well as we have now started providing for the next periodic maintenance which will be due.

This has resulted both, as an expenditure of Rs 74.54 and a Rs 65 crore of income on a net exceptional item for Rs 9.5 crore.

Q: This looks like a recurring thing. So when do you see the bottom-line actually getting into the green?

A: Well this impact that you see is more of a one-time impact because what we have done is for the existing unamortized block as well as the developer fees for the earlier years, hitherto we will be doing both. On a quarter-to-quarter basis, we will not eliminate the developer fee as well as start charging periodic maintenance on a systematic basis. So whilst the accounting treatments will start from hereon for every quarter, we will not see it as an exceptional item which has been a one-time large expense for writing off the unamortized block as well as for the developer fee income recognition. So moving forward from that perspective, this exceptional item one should be considered to be removed. The normal quarterly developer fee as well as the provision for periodic maintenance any which case gets included in our normal income and expense recognition.

Q: Is it safe to say that this big dip that you have seen in margins from 62% last quarter to about 45% this quarter is just an aberration and you will get back to that 55-60% mark in terms of margins?

A: To the extent of these exceptional items, yes these are items which you should not see coming as an exceptional item at all. This will come in the ordinary course which will move on a systematic basis, quarter-to-quarter, and therefore you should not see such large dips which has come for this quarter. Secondly, if you really look at it from a perspective of numbers, these are all non-cash items now since you are charging off specifically for the past years.

Q: How much does the total gross debt go down by before the year is out taking into account the rights issue as well as money that you will make in terms of accruals and secondly what will the trajectory of interest costs be therefore by the year end? It doesn't look like going down.

A: Well, for the purpose of our rights issue, we have a loan of close to Rs 180 crore on the books of the holding company and one of the objectives of the rights issue is to retire this debt. So to that extent, the interest that you see on the stand-alone books which would be close to about Rs 6 crore plus, all will get reduced once the debt is being repaid from the holding company. On the other interest costs which are there at the operating SPVs, as I just stated, Mumbai-Nasik has an interest expense coming in more so because it has got commissioned. However, we also see an increase in line along with that on the income statement as we have started now commissioning toll.

Q: What is the current order book and what kind of outlook do you have on orders for the next couple of quarters?

A: Well, we do have an overall work order amounting to a little over Rs 10,000 crore in terms of asset size. Just to share with you, we have received the letter of award from the National Highways Authority (NHAI) for an additional toll road project. This is located between Patna and Buxar amounting to Rs 1,129 crore odd. This is a 20-year concession including a construction phase of 2.5 years. Now that the letter of award is received, it goes through its next round of formalities of signing off the concession agreement, then the financial closure, and then the beginning of construction. So this is one more project that gets added to our asset book.