Road projects to generate new orders: UR Associates

UR Associates has come out with its report on infra sector. As per the research firm, HCC has received approval from 27 banks for the re-alignment of its debt and is likely to sign the deal soon.

Rate cut will boost sentiment; however, investment revival is the key
The Reserve Bank of India (RBI) will be announcing its mid-term credit policy review today i.e. 18 June, 2012. The infrastructure sector expects the Central Bank to cut the policy rates; and after the poor growth number, the expectations are on a high.

However, after the May inflation number which came in at 7.5%, and a 50 bps rate cut in its last review in April 2012, RBI may not look to go for the cut.

April industrial output, as measured by index of industrial production was flat at 0.1% YoY. Capital goods continued to be the biggest laggard, underlining the slowdown in the investment cycle.

Capital goods production declined by 16.3%; against a growth of 6.6% in the same month last year, indicating weakening investment scenario. The worsening industrial output strengthens the case for a reduction in key rates by the RBI as the weak IIP numbers could further dent growth prospects in the current fiscal.

The rate cut will definitely bring cheers to the market and especially to the infrastructure sector; however, a rate cut alone will not be enough to revive the economic growth.

The supply side bottlenecks should also be targeted which has led to more problems for the sector rather than the increasing interest rates. Order inflow had slowed down for the last two years and a sudden revival in the order inflow is not expected.

The policy paralysis of the Central Government has added to the wound. The Government should display speedy decision making and create an environment that support private investments.

Road projects to generate new orders
The recent revision of infrastructure projects target by the Prime Minister is likely to augment order inflows for small and medium-sized companies in the roads segment. The government is planning to award 9,500 km of road projects this year, 30% higher than the target for the last financial year. Of the total project length, over 40% is earmarked for engineering procurement and construction (EPC) contracts, while the rest will be on a build operate and transfer (BOT) basis. In recent quarters, select construction companies have been able to maintain their working days at reasonably good levels despite the tough business conditions. Companies such as MBL Infrastructure, Simplex Infrastructure, Unity Infraprojects and Supreme Infrastructure have been able to work for around 120 days. Besides this, these companies have a strong balance sheet, which would help secure funds for new orders. At present, these companies have a debt-equity ratio of less than 1.5x. On the other hand, many companies in the build operate and transfer (BOT) segment are unlikely to bid for new orders, considering their over-leveraged balance sheet and the drop in the internal rate of returns on operating projects. Over the past one year, for equity infusion in under-construction projects, many companies have been weighing the option of a stake sale on a set of projects.

Mitsubishi may buy stake in L&T Shipbuilding
Japanese engineering major, Mitsubishi Heavy industries may consider buying a stake in Larsen and Toubro's subsidiary, L&T Shipbuilding, as it looks to set up its first shipbuilding base outside Japan. Hisashi Hara, head of shipbuilding and ocean development of Mitsubishi said this to the Japanese media while presenting the company's business plan. L&T Shipbuilding signed an agreement in December last year with Mitsubishi for technological assistance, ranging from design drawings to quality control. Though, MV Kotwal, President, Heavy Engineering at L&T denied of any discussions with Mitsubishi on the issue, but added that the company will take an appropriate call on the matter if it comes up for discussion. L&T said that the company is open to partnerships that add long term value to any of their businesses. L&T shipbuilding has established shipbuilding facilities at Hazira in Gujarat and is also developing a shipyard at Kattupalli, near Chennai in Tamil Nadu. L&T and Mitsubishi also operate two joint ventures, which they signed in 2007, to manufacture power-related equipments, including super-critical boilers, and steam turbines and generators.

HCC to complete CDR process soon: Ajit Gulabchand
Mr. Ajit Gulabchand, Chairman & Managing Director of HCC, said at the company’s 86th Annual General Meeting that the company expects corporate debt restructuring (CDR) process to be completed soon. He mentioned that HCC has received approval from 27 banks for the re-alignment of its debt and is likely to sign the deal soon. He said that this process is underway and is expected to be concluded soon which will give the company sufficient  time to repay the debt. Due to mounting debt pressure, the company had to apply for restructuring of debt to the tune of Rs 33 bn. The leading banks involved in the process are IDBI, State Bank of India, ICICI Bank and Punjab National Bank, among others. As per Mr. Gulabchand, the company was also looking at monetising some of its assets.

Infrastructure companies still find the going tough
Having faced margin pressure and subdued performance for a few quarters now, infrastructure firms feel they need a couple of more quarters to gather momentum. Mr. R. Balarami Reddy, Executive Director of Finance, IVRCL, feels that unless there is steady order flow and the necessary clearances are in place, infrastructure companies will be hard placed to generate adequate business. He maintained that even the Government and the RBI have announced some measures; interest rates still rule high and fixed expenses continue to drain funds. Mr. Y. D. Murthy, Executive Vice-President-Finance, NCC, feels that most infrastructure companies are passing through difficult times due to high inflation, high interest rates, delayed payments and hurdles in implementation leading to a direct impact on the top lines. He believes that the recent initiatives to bring down cost and accelerating the pace of clearances are positive developments but is concerned that the interest rates are still high at 11% against 7-8% few years ago. He, similar to Mr. Balarami Reddy feels that any announcements will take about two-four quarters to bring about changes and impact the sector.

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