Nearly 25000 MW Capacity Pending Over Coal Shortage

R D Chandak
Managing Director & CEO
KEC International

What needs to be done to help the power sector at this point of time?

The power sector is largely suffering on account of environmental clearances and coal availability. In both cases, the government has a role to play. So, the government really has to decide what role it wants to play.

Also, some people had put up projects in anticipation that imported coal will be available at cheaper rates, which was probably their mistake. Today, coal prices have gone up sharply and the projects are not viable. Hence, they are not producing power because it is cheaper to pay interest on the project cost that they have incurred than to make losses on the supply of power. These are very important decisions that the government has to make. The power problem may be resolved to some extent when the government takes some decisions.

There is unutilised capacity of almost 25000 MW lying ready, pending only on account of coal unavailability. The moment coal or gas becomes available, all this production capacity will come in at one stroke. In a period of six months people would start using this capacity, and India would be a little better off.

Given these ups and downs in the sector, how is your company placed overall?

We realised that each country has its ups and downs – when one country is down then another country is picking up. Hence, we have spread our business globally. When you look at our order book, 55 per cent is out of India and 45 per cent in India. Hence, we have a very good mix of almost 50:50. Even the outside business of 55 per cent is spread over 35-40 countries. In case of a situation in any particular country, we have always another county to help us to tide over the difficulties.

What is the order book outstanding at present?

This is about Rs 9700 crore, executable over 18 months.

Which are the most profitable geographies among those you have operated in? Which are the places where you find executing a project or coming onstream much easier?

See, what is easier is not necessarily profitable, and vice versa. If you want to go Nigeria and Afghanistan, the projects are profitable. If you go to an area like the Middle East, Abu Dhabi, the projects are less profitable. So, it is directly proportional to the difficulties.

One area where you have taken exposure is water management. What is the potential that you see for this segment?

We believe that the potential for water management is as big as transmission, if not more. So, the potential is there. Of course, the number of players is also more. So, we felt that we really had to go into this and secure market share, as there are big players like L&T, Tata Projects and other large companies. We are just starting now, and are looking at Rs 300 crore this year. Over time, I think it should be par with our transmission business.

Is this related only to India or abroad too?

Well, the world is our market but we will first be establishing ourselves in India in the next one year or so and will then be expanding.

Your profitability has been in a tight position for the past couple of years. How do you plan to improve that?

This year itself will be substantial improvement over last year. Of course, full profitability will only come when the overall industry improves. Today, the number of orders is less and more people are going behind these. Naturally, your margins will be less. I am expecting that next year will be better than this year, and that we will have normal profitability by 2015-16.

Any capex plans that you would specifically like to draw attention to?

We have spent large amounts of money on our cable manufacturing plant and on increasing the pole manufacturing capacity in our Mexico plant. So this year there will not be any further major capex apart from that for maintenance, which would be less than Rs 100 crore.

High interest cost is something that is plaguing all corporates. How do you view this factor?

Our interest cost is not more than 3.5 per cent of the gross sales, which is not more unlike other companies. Hence, we are able to manage our borrowings at certain limits. I would say that 3.5 per cent is on the somewhat higher side, and are planning to reduce it because there will be no capex this year. So, all our profits will be float back minus the dividend. Hopefully over next two years, the interest costs will come down to some extent. 
[PAGE BREAK]

Do you think that the government is doing enough to put the sector back on track?

I think all of us know the answer now, and my answer will be no different.

To put this differently, are you looking for a change in the regime at the centre?

I will not give lot of important to which regime comes now. All the regimes which are likely have come to know that the future vote bank depends upon their performance. So, whichever regime comes, things would probably start improving. My guess is that this may start even before a change in the regime. You can see action in the Parliament, a number of bills getting processed and a number of bills getting on the table. For example, we recently saw gas pricings changing.

All the industries will be in focus now, and I don’t think it matters which government comes to power. As for us, we are government-neutral. As long as it is stable, strong and capable of taking decisions, we are okay with it.

There is a lot of talk about removing bottlenecks for the development of various sectors. There is a minister who has had to put in his papers as many projects are stalled. Most of these are in the power and steel sectors. What are your expectations on this front?

I don’t expect that all the projects will get cleared, and it is not that every project is held up only by the government. The government is not there just to approve projects, but they have to see what is required for the country. Definitely, projects which are held up on at flimsy ground need to get cleared, and I think they will not wait for the elections.

Certain projects are held up for valid reasons, and I don’t think that the government should or will clear those. For example, if there is a real environment issue, they will not clear the project. But according to me, if projects are held up on flimsy or technical grounds or due to the lack of some co-ordination between the ministries, those will get addressed.

Where do you see the power industry heading in the next three to five years?

There is no doubt about the fact that there is a perennial shortage of power. Whatever numbers the government is talking about has no relationship with the real shortfall. Today, we are looking at power shortage based on what people are demanding and what is available. But the lack of demand is because the people feel that there is no power supply. Take the example of a village. It you have load shedding for about six hours, what will you do with an air conditioner and refrigerator? You will not buy them. 

So, whenever you give power for 24 hours, your consumption will change dramatically. The fact that our power consumption is only 800 units and that in China is 3000 units means that there is that much scope. Till the capacity does not increase by three times, we are still short.

So, is it a chicken and egg situation?

No, it’s not. Actually, we have developed expertise in under-providing everything. No matter which road you make, in one year’s time it is blocked and packed. Start the bridge and it is blocked. Start manufacturing any public service, and there will be a shortfall. In the past, the government was talking about shortage in the telecom industry. Today, the industry is ten times larger, but telephones are still selling! Look at the Gurgaon highway – the problem is that you have to wait for 15 minute just to pay toll. I think our planning is always for yesterday, and we are not planning for tomorrow.

How do we rectify that?

I think the mindset of the government needs to be changed. Our people have to demand that.

This brings us back to the same point about a change in regime.

No, every government will agree to that. I am not saying that a change in regime is required for that. The regime may or may not change. But every government has now realised that no matter who comes into power, they have to do that.

Anything in particular that you wish to share about the company or group?

As far as KEC is concerned, for last 10 years our turnover has moved from USD 100-105 million to USD 1.3 billion, which is a CAGR of 20 per cent plus. We have done that by two means – one, by geographic expansion, going from 10 countries to 35-40 countries, and second, by way of product expansion. We have expanded our product folio from power to include water and railways as well, and believe that this strategy has worked. In addition to that, we have also followed the route of mergers and acquisitions. We have acquired SAE Towers in USA, and factories in Mexico and Brazil, and merged a cable company with us.

We are undertaking expansion on three fronts – geographical, product and via the mergers-acquisitions route. These are three typical ways for a company to grow. So, we believe that we are on the right path. We expanded into water because it is cross-country in nature and is similar to our transmission projects. They will also give us some sort of hedge when the power sector does not work for us. So, we have a good combination over a period of time.

Are you comfortable with your capital position now? Do you have any plans to raise capital from the equity markets?

Yes, we are. We do not have any intention of raising capital as of now, as we don't have capex plans for the next two-three years. Whatever ploughback we do, that will take care of all our demands.

Are you funded by internal accruals, or is there any debt on your books?

We have a loan but are not very heavily leveraged and do not have issues with banks. Our payments are made on the due dates. When we ploughback in the next two years, things will look even better.