Govt trying to solve legacy woes; fin cost high: Punj Lloyd

The industry is facing problems relating to legacy issues and what is going to happen to infra orders in the future, says JP Chalasani, MD and group CEO of Punj Lloyd. The government on its part has recognised the legacy issues and made attempts to resolve them, he says.

He says the industry is also facing issues relating to financing cost, price of money, among others.

Chalasani says road sector is seeing traction. Also, he adds that there is a slowdown in demand from the oil and gas sector.

Below is the transcript of P Chalasani’s interview with Latha Venkatesh, Sonia Shenoy & Guest Editor Adrian Mowat on CNBC-TV18.Adrian: When we look at the capex story there are two parts to it. There are legacy orders, which may be caught up in issues such as environmental clearance and then there is this new order flow. Can you give us an indication of how the industry in aggregate is dealing with some of the legacy issues?A: As you rightly said there are legacy issues and there are issues with respect to what is going happen currently in the future orders in terms of infrastructures sector on this.Legacy issues -- yes there has been an attempt to address the issues by the government in number of areas whether it is called power or roads and various things. I don’t say we have reached an end of solving these issues but at least there is a recognition that there are a set of issues to be resolved and then there is an attempt towards trying to resolve the issues.In my opinion it will still take some time to resolve the issue because if you look at the legacy issues there are four players, the government and other government agencies that is one side; you have the banks and you have the developers and you the construction contractors. All four especially the first three other than the construction contractors did have their own dos and don’ts because of which we got into this mess of legacy issue.Some of them have realised but my only worry is that having realised set of issues we are tending to become overcautious in some of the areas. That is hurting moving ahead in future.On the fresh ones, leaving aside the legacy issues, if you look at the power sector there are still quite a few issues to be resolved unless we do that it is not going to pick up. However, I am seeing traction in road sector and urban transport sector and few other areas, definitely there is traction. It might take a few more months or few more quarters before we see the good traction but at least we are moving in a right direction.Adrian: We are been talking quite a lot about where interest rates are in India particularly real rates when you have negative wholesale price index (WPI). Do you think the price of money is one reason why your are saying a very muted capital expenditure (CAPEX) cycle for the private sector?A: Definitely, not just the price of money; one major issue is the price of money for moving ahead. If you look at the financing cost, for most of the infrastructure companies, has become much more than EBITDA margin so then everybody is in sort of negative profits in terms of that. However, how do you evaluate the project and start funding -- I think we went from one end of the spectrum where we started funding projects, which didn’t have any fundamentals to other end of the spectrum where banks and everybody else have become overcautious and it is taking much longer time to finance the projects.Adrian: So if look for the broader the engineering construction industry globally we are seeing very dramatic declines in energy and commodity prices. Then that is having a knock-on effect for the engineering construction industry particularly in places like the Middle East where the fiscal challenges for those governments are building. Are you concerned about this as a trend and do you think it will have a knock-on effect in terms of making the engineering construction sector focus more domestically?A: Some of the areas we are slowing seeing the impact on slowing down mainly in the oil and gas sector because of the crude prices and things like that we are seeing the cut down on the capex globally. However, the other side of it, if you look at the process industry or the other areas are still picking. One of the advantages we are having, we are seeing clearly is that because the commodity prices are being at what they are today the contracts which we are executing we are seeing significant improvement in our margins because the procurement prices have come down significantly on this. Overall topline might come down but margins are improving because commodity prices are low.As Punj Lloyd we are only seeing a slowdown in the oil and gas industry. However, other infrastructure areas globally are still picking up especially the infrastructure segment including in the Middle East there is a huge pick up.Adrian: If we look at the fiscal priorities for the government which is road, rail and defence how do you think your company is positioned to take advantage of those?A: As I said that the road segment is what in India especially if you see there is huge traction on this. There are number of which have come up and which are likely to come up in the next 45 days. We are talking about Rs 4.5 lakh crore orders out in the market in the next couple of years. The urban infrastructure, the metros, is other areas where we are seeing big traction on this.One of the issues most of the engineering and construction companies are facing today is in terms of banks supporting these companies to move ahead in terms of picking up the large projects.Therefore even if you have a large opportunities out there unless the banking sector starts looking at the construction industry different from development and infrastructure business, you will see a limitation -- at least in Indian construction companies -- towards how many projects can pickup and how many projects can complete on time. I am seeing that as one of the issues today.