Cement, road sectors finally witnessing turnaround: Industry

In the same interview, Sudhir Hoshing, Joint MD of IRB Infra said that land acquisition is no longer a hurdle and National Highway Authority of India (NHAI) awards have rapidly increased in the last 2-3 months.

Traffic has grown 7-8 percent on the back of which a tariff growth of 3 percent was clocked in FY16, he said.

There has been a significant improvement in the road sector under the Prime Minister Modi’s government and the company plans to commission  two projects by the end of fiscal year 2017, he added.Below is the transcript of Sudhir Hoshing and Atul Daga’s interview with Sonia Shenoy, Latha Venkatesh and Guest Editor, Adrian Mowat on CNBC-TV18. Sonia: On the cement prices and the demand situation, have you seen any significant pick up or a trend that has improved in the last couple of months or so? Daga: Yes, it has been happening. If you look at January onwards, we have seen uptick in volumes, prices have moved in line with demand pickup. Various parts of the country have worked in a different manner. Adrian: Where are you seeing the geographical dispersion? Daga: Northern markets have picked up very well. East was already doing pretty good since last 4-5 quarters. And this southern parts of the country we are still not seeing traction, but the big bang will happen in the south as well. And the western part which is Gujarat and Maharashtra are still lukewarm. So, the growth is right now being driven by I would say north followed by east and then a bit of traction happening in Gujarat in the non-Mumbai Maharashtra, if I would talk about it that way, it is Pune and those areas of Maharashtra also showing a lot of traction. Adrian: And why the dispersion? Are there anything you can point to that would explain why northern India is picking up? Daga: There has been a lot of government spending, let us say Uttar Pradesh state which comes up for elections towards the end of this fiscal year. A lot of development work happening. You have Lucknow, the state capital where the elevated roads that are being done, the Agra-Lucknow expressway that is being done. So, these areas a showing a lot of traction. Besides, you see work happening in Haryana, in Punjab. So, there is general improvement in volumes and there are a lot of contracts which the government had initiated, the projects which were stuck in the past. The old projects which have got cleared and they have started picking up pace. Sonia: Are you noticing, too, a pickup in government spending, a higher amount of stuck projects getting resolved, etc? Hoshing: Stuck projects, we are ‘F’, at least in terms of roads, we are talking less on stuck projects, most of the projects have come out which were earlier stuck and a lot of spending as far as engineering, procurement and construction (EPC) projects are there. A lot of them are coming and in hybrid annuity mode also, we see a lot of projects coming. There is a bit less on build, operate, transfer (BOT) toll, but there are a lot of projects on hybrid annuity and EPC which are coming out right now. Latha: I just wanted some numbers from you. Instead of just this piecemeal, if you can tell us what was the demand in FY16, how much higher was it compared to FY15 and does FY17 look like going back to at least the FY14-FY15 levels? Daga: The official data is not yet out for full-fiscal year, but if I can split it in quarters or the time that has gone by, first half of last fiscal saw demand growth of sub-2 percent for the industry. Q3, which is October-December saw the industry growing 4.5 percent. So, that was a dramatic improvement. That was the green shoots, I would imagine, that were visible. And January onwards we have been seeing double digit volume growths without inventory piled up. That is one big sanity check for me in the industry that there is no inventory pile-up in the system happening because of which the momentum is on. Adrian: Are you seeing a pick-up in sales mainly to large projects so perhaps the margins will be less attractive then selling bags of cement? Daga: Yes, it is largely on big projects. However, the continuous volumes, the grade of cement which is the higher premium cement, then since these are direct plays, obviously, you avoid the dealer margins, so there is a bit of discounting over the trade markets, but it is still much better than having no volumes. Sonia: I have not heard about anyone talk about double digit volume growth in the cement space in a long time. So, I guess that is a very positive lead indicator. So, what about capacity? What capacity are you targeting now? You are currently at about 90 million tonnes. Daga: We will be at 90 million tonnes. We have just announced the acquisition. That will take time to consummate, maybe a year or so. Today, we are at about 66-67 million tonnes and operating at about 80 percent capacity utilisation already. With the demand pick-up happening, we could image, we could jolly well see this 80 percent capacity utilisation going towards the 90’s. There are pockets in the country where we are already operating at 90 percent capacity utilisation. Adrian: What are the hurdles in terms of the consolidation, your JP acquisition? Daga: I do not imagine that there will be any hurdles. It is a process that one has to follow. You apply to Competition Commission of India (CCI) for the clearances. It will be a court craven scheme. Two high courts involved. JP Associates is headquartered out of Uttar Pradesh. Our registered office is in Mumbai, so Maharashtra and UP High Courts involved. So, it is a High Court process, shareholders’ meeting, creditors’ meeting and so on and so forth. That is a routine process. It has its own time slot – application to Securities and Exchange Board of India (SEBI), application stock exchange at the end, etc. So, that is a routine process. Latha: How are the toll collections and road traffic earnings? If you can give us this trajectory quarterly, or in comparison, FY16 versus FY15. Hoshing: The growth, I would say in traffic as such would be around 7-8 percent. And in terms of tariff the growth is around 3 percent. So, overall growth you will get around 10-11 percent from the last year, what we thing. And, it is almost on the western parts and the central parts, so you will have bit difference of 1-2 percent here and there, but mostly it will be in the range of, your revenue will increase at a rate of 9-11 percent, that rate it will be. Adrian: Are you seeing higher growth in commercial vehicles relative to passenger vehicles? Hoshing: I would say around 6-7 percent in the increase in the commercial vehicles and around 10 percent in cars. Sonia: Has the government moved in the right direction as far as settling some of the disputes in awarding of projects or the land acquisition which was another big pain point for the industry. Have all those things settled down and as far as improvement in the pace of execution is concerned, what more would you expect to see from the government? Hoshing: First of all, let us come to land. Land things are now getting sorted out. We are not talking about land things anymore. So, lands, they give us around 80-85 percent land at the start of the work. And over a period of another six months, you get balance land. So you are coming out of the land slowly. As far as awarding is going on, there are a lot of awards which has last few months, awards have increased. And if you see the last year, maybe National Highways Authority of India (NHAI) would have awarded around 6,000 km of work and even if I am, what I am seeing, the pace which has happened in the last two months is much faster than maybe what happened in the entire year. So, it was quite fast. We see a lot of projects coming in EPC mode, lot of projects coming in hybrid annuity now, a few in BOT, but a lot of them in annuity and BOT mode. Latha: So, for yourself, for IRB Infrastructure, will you be commissioning more in FY17 in the current year? Hoshing: FY17, towards the end, we may be commissioning a project or two, but because since most of the projects are at 40 percent progress to 60 percent and one or two projects are just to start. So, maybe end of FY17, you would see some projects coming up executed. So, since we are at that level today, we just started a year back. Adrian: I am always getting asked this. I was asked this just now about the Modi administration. Has life got easier in terms of doing business. Is there a meaningful change, just in the last two years. Do you think there is a meaningful change in your sector? Hoshing: I would expect it, I would say yes because it is not that, do not expect things to happen in a day or two or a month or a year. But of course, things have moved in a positive direction. One of the things is that exit policies have come, then you have so many hybrid annuity which has seen people coming back to the road sector and EPCs. So, what happened earlier, all the EPC contractors were forced to become developers. Now, they have their own sector. They can work there. There are people who have moderate risk taking ability. They can go to hybrid annuity. And the people who want to bid for, they can take risk, they want valuation, they can go for BOT toll. Adrian: Tell me about your thoughts on infrastructure investment trusts. Hoshing: Infrastructure trust in our case, we as such, IRB would be the first company who is registered in SEB as a trust. And, till now, we are actually expecting the final listing norms from SEBI which should be out in two months time. And then, another 2-3 months for us, draft red herring prospectus (DRHP) and then we will go for listing. Latha: So that eases your financing. There is this investment trust as well now there is supposed to be more liquidity in the money market. So, hopefully commercial paper (CP) and other money market instruments will have lower yields. So, is financing any cheaper? Hoshing: Of course, at least you have your money coming or whatever you have done so far through your trust there is money coming, we have more liquidity, we can actually bid for more projects. And there are a lot of projects, the number of projects which are available are too many. So, if this money is there, your growth can be much more than what you had today. Adrian: When we look at your balance sheet, a 2.9 is your debt to equity at the moment. If we were to disaggregate this into projects, for a typical road BOT project, what do you think the right mix is between debt and equity? Hoshing: Generally it goes 70-30, so that would be the range it would be the range it will be always. Adrian: So, this 2.9 is about right. Tell us about the airport you are developing. Is that not meant to come on stream very soon? Hoshing: Airport what we are delivering in Sindhudurg, that is now, we have reached around 60 percent of the progress there. And it should be ready by May, 2017. So, that is the target for that. And then after let us see how it works out.