Smart cities need more funds, longer timeline: Infra sector

Calling today’s announcements regarding the smart city initiative 'a step in the right direction' , YD Murthy, Executive Vice President-Finance, NCC Limited expects the company’s margins to profit by 10-11 percent from these orders.Speaking to CNBC-TV18, Murthy says that he is confident of getting substantial orders for the smart city project and is looking forward to the new capital city of Amravati.On the estimated tenure, he says unless a tender is floated and guidelines given by the client, it is premature to talk about the completion timeline, adding any building contract takes a minimum of 2-3 years for completion.However, it is still a long way for the model to turn real, thinks KK Mohanty, MD of Gammon Infrastructure who is of the view that the project requires a lot of micro level planning and understanding of its fund provisions.Calling the Rs 200 crore fund just an ‘out of pocket expense’, he says it is likely to be spent only in researching, planning and designing of the basic framework as the real investment is much bigger than it seems.Questioning the allotment process he says an equilibrium balance needs to be maintained as the whole country has the scope of development and opportunity. This comes after Uttar Pradesh, Tamil Nadu bagged the maximum, East got a little and Karnataka and Gujarat got moderate allotment for smart cities.On timeline, he says construction needs around 3-5 years in addition to a year for conceptualising and putting a structure in place. With lending industry loosing confidence in infra sector, revenue model becomes all the more critical and needs to be fixed well in the entire model, he tells CNBC-TV18.Anoop Kumar Mittal, Chairman and Managing Director, NBCC says that it is looking to tie up with Korean and Malaysian companies for the smart city development. NBCC is in talks with IBM for technological assistance. Mittal says that NBCC will focus on already developed cities like Chandigarh and Bhubaneswar in the first phase. NBCC has sufficient funds to infuse in projects right now and it might look to raise capital in future, he adds. Below is the transcript of YD Murthy and KK Mohanty’s interview with Sumaira Abidi and Nigel D’souza on CNBC-TV18.Sumaira: You heard a part of what the minister was talking about. What is your key take away on the announcements that have been made today? Amongst them the key are that there would be Rs 100 crore every year for the next five years for each of these smart cities.Murthy: That is a step in the right direction and the smart city development programme has already been initiated. Being a frontline construction company with a large focus on buildings, we are very confident we will get substantial order accretion in our company as we go forward.Nigel: But, just sticking with that point then, Rs 100 crore for five years, is that enough to see everything up and operational?Murthy: It is Rs 100 crore per city. You have 100 cities, which means there is about Rs 10,000 crore per year for the next four years. And current year, they are giving Rs 200 crore per city which means about Rs 2,000 crore. So, it is quite substantial. Definitely it will kick start the smart city development in India. Sumaira: When do you see the first of these orders flowing in given that in this financial year, we could just see the green signal for 20 of these smart cities?Murthy: It will take a while. We will also wait for the order.Q: But, how early could it be? FY16, perhaps, somewhere in the middle there or even later?Murthy: It will take at least six months, but you have to wait and see how things will pan out. And we are more excited about the new capital city of Amaravati that is coming up in Andhra Pradesh being a local contracting company, we are looking forward to various tenders being floated by the government of Andhra Pradesh for further developing the new state capital.Nigel: Then I believe that Andhra Pradesh and Bihar, they have got three cities each, so do you think you are going to be up and bidding for those?Murthy: Absolutely. We will participate. Q: But what is the size of the opportunity you see there?Murthy: As a ball-park, all the 100 cities put together as should be something in the region of Rs 10,000-12,000 crore spread over a period of five years.Q: Can you explain to us the dynamics in terms of revenue generation, when exactly it will come into your books, when exactly do you see this hit your profit and loss account once the entire tender process, etc. So, just explain the dynamics of revenue generation. Murthy: That will take a while because it is only the thought process and unless they call for tenders. Q: That is fair, but if you could just give us a basic sense of the timeline that it would take from the time that your get the first order, what is the timeline that follows?Murthy: Typically, the building contracts are given for periods of 30-36 months, that is 2.5-3 years time. So, naturally, the completion periods will be like that. and accordingly, the project execution will take place it is too premature to give a timeline at this point in time. Unless the tenders are floated, and what is the timelines expected by the clients for each package, we have to see all those things, then only I can give a specific timeline.Q: There has been a lot of focus about your company and NCC’s margins. you are at around nine percent approximately. Typically, from these kind of orders what kind of margins do you expect going ahead?Murthy: Our company has reported reasonable margin expansion last year and that is continuing in the current year.As you rightly said in the first quarter, we have reported earnings before interest, taxes, depreciation and amortization (EBITDA) of about 8.9 percent. The new orders also, because they are under the building segment, usually they should come with the margin of about 10-11 percent and that will help us to improve the margins further.Sumaira: What are your first key takeaways? Mohanty: The government is focused and taking it forward that is a good sign but still a long way to cover. We need to understand the micro level planning and specific provisions in it. The Rs 100 crore and Rs 200 crore provisions are peanuts for this type of activity. We have to see how the rest of the funds are tied-up. This Rs 200 crore might be for the initial planning, designing and development of the thing but if you had to look at the real investment the numbers are very much different and much bigger also.Sumaira: How much bigger could they be?Mohanty: Smart city at least will be few hundred crore types. So, 98 you are talking about is a very huge number. Rs 100-200 crore is only initial out-of-pocket expenses type. It is like a out-of-pocket expenses just to create initial office, for designing the asset and doing a little research this will meet only those expenses to just to create a basic framework. If you talk about real investment scopes and all that will be much bigger and a larger numbers and we need to see how it is coming. Secondly, thing is we have to see what are the revenue model and investment model for this. Thirdly, thing is how it is planned as far as facility wise and user friendly wise whether India is ready for those type of facilities or not. Fourthly, I hope that there is equal distribution, initially what reaction is coming is Uttar Pradesh and Tamil Nadu have got the maximum. East has got very little. Karnataka and Gujarat has got some moderate so as a country we should maintain the equilibrium balance and every area has a equal development opportunity.Nigel: Have you identified any part of the country, any states that you will be looking at going ahead and bidding – that is one and secondly is five years is enough to get the project up and going? Mohanty: This type of projects should have a construction period of between three and five years and they require another one year of conceptualising and putting the structure in place. So, six to seven years time span should be a reasonable one provided we put all the offices in places. Second thing is India is a big country, different states have different demographics, advantages, disadvantages so we will select few of the options if at all the opportunity is looking at us. Sumaira: You said that you will be awaiting the revenue model, by when might we expect the first of these to actually be available for assessment and when do you also expect orders to finally start flowing in given that in this financial year there might be only 20 that might get the go ahead? Mohanty: It is still too early. They have to still get the right pieces in the drawing board for the planning and conceptualising the whole project. So, we are still six months to one year away of that stage. After that it will take another six months for bidding and other things. Nigel: You said that this Rs 100 crore that will be a very small amount in comparison to the total size. So how exactly do you expect funds to be raised? Will it be coming from the municipal corporation, what kind of part will be coming in from there? Mohanty: If they go for a public private partnership (PPP) route then the revenue model is very critical. Investment might be still easier but for that also today the confidence of the lending industry on the infrastructure is too weak. So, they need to restore that confidence on the infrastructure because the banks are bleeding also. So, unless the solution is there the date will not flow smoothly even if the equities somewhere might be somebody might be interested. So, these are all other pieces which has to be fixed into this model. Then only it can work.