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CHAIRMAN AND MANAGING DIRECTORS REVIEW
Q.HOW DID THE INDUSTRY PERFORM IN 2012–13 AND HOW DID THIS AFFECT THE COMPANYS PERFORMANCE?
A The power sector in India went through challenging realities in 2012–13. The private power projects were stalled due to many uncertainties prevailing in the sector viz., ambiguity over new Fuel Supply Agreements (FSAs) and issues of price pooling of coal resulting in erratic coal supply, abnormal increase in imported coal prices, delays in land acquisition, environmental and regulatory clearances and timely payments from the DISCOMs, among others. As a result, new orders were not issued and the country could not achieve its Eleventh Five Year Plan target. This had a trickle–down impact for EPC companies like Techno Electric, affected by competitive bidding and a lower order inflow.
In the renewable energy sector (especially wind), capacity additions declined below the FY13 target, largely due to the lapse of an incentive scheme as well as policy framework uncertainties. Against a targeted 2,500 MW, the country's wind energy segment added only 1,699 MW in FY13.
Q.GIVEN THIS BACKGROUND, WERE YOU PLEASED WITH THE COMPANY'S WORKING DURING THE FINANCIAL YEAR UNDER REVIEW?
A The industry challenges notwithstanding, we were satisfied with our 2012–13 performance. Given the fact that 2012–13 was the slowest growth year in a decade for India and correspondingly we reported a 14.6 per cent decline in topline, we reported only a 0.45 per cent decline in our profit after tax to Rs 120.35 crore. We have always positioned ourselves as a profitability–driven company and there was no better vindication of this than the year under review: although our consolidated turnover declined in 2012–13, our operating and net profit margins strengthened 672 bps and 235 bps respectively to 33.51% and 16.7%. So even as one would be inclined to dismiss our performance as lacklustre, the reality is that we strengthened our business model in 2012–13.
Q WHAT WERE THE COMPANY'S BIG ACHIEVEMENTS IN 2012–13?
A] Firstly, we demonstrated that when the large sectoral circumstance is beyond one's control, the most effective insurance comes from a stronger exercise of factors within one's control. We operated our 207.35 MW wind energy capacity at a PLF of over 26%, which is one of the highest within India's wind energy sector where the prevailing PLF average is only around 20%. The result is that we generated a record 470–plus mn units derived from a better leverage of our engineering insight (reflected in superior equipment availability, better O&M practices and balancing with grid appetite).
Secondly, in an increasingly competitive business, we realised that we needed to graduate to insulated niches. This is what we showcased: even as the 400 kv space became increasingly competitive with a host of players quoting lower with the objective to carve out a larger share of projects, we chose to do something lateral –we moved to the 765 kv segment, emerging among a handful of players in this space. During the year under review, we completed the challenging 765 kv sub–station in Raigarh for PGCIL, which was our first project in this segment. The result was that we not only completed the station within a record 15 months but were pleasantly surprised that PGCIL declared it as a role model for onward national replication. Thirdly, we cleared our slate of outstanding projects in 2012–13. We utilised the order book slowdown to our advantage by closing around 20 projects and generated last mile revenues (as against a maximum of six in any year earlier) and cleared the ground for fresh order intake.
Q.COMING BACK TO THE COMPANY GRADUATING TO THE 765 KV SUB–STATION SEGMENT. HOW CAN IT STRENGTHEN THE COMPANY'S BUSINESS?
A Firstly, this segment is relatively under–crowded, resulting in a relatively higher pricing power compared with the lower sub–station segments. Secondly, we had added scale to our presence in this segment that we entered only in 2011. We added 12 PGCIL project sites to our portfolio, accounting for around 40 per cent of the industry's market share of that segment with an aggregate project value of Rs. 600 crore. In just two years, we emerged as the largest in this space and also the fastest growing with a project delivery cycle that is 20% shorter than other industry players. This makes it possible for customers to get into revenue generation faster, strengthening their ROI. Besides, in a country with a growing power deficit, we feel that our quicker delivery helps raise the national benchmark. In view of a growing national power generation backlog, the country needs to start looking at rationalising vendor costs while awarding contracts as opposed to the conventional L1 approach, which could be eventually costlier.
Q.WHERE IS YOUR SENSE OF OPTIMISM COMING FROM?
A Companies like us always benefit from a slowdown, making it possible for us to procure cost–effectively and deliver projects on schedule. In our line of business, we have been witness to cycles of high and low profitability every few years. While we expect the slowdown to extend for the next few quarters, we feel that margins will improve thereafter along with the prospect of larger volumes. Over the last year, we became increasingly aggressive in bidding for projects, convinced that the aggregation of scale will translate into various economies that will inevitably trickle down to higher operating margins. In turn, this increased cash flow will provide us with the foundation to reinvest in capabilities and grow our order book.
Let me provide some sectoral optimism as well. In the Eleventh Five Year Plan, NTPC could not complete a number of its projects and finished the entire Plan with a mere 11,000 MW; however, the Company is better–placed to add 20,000 MW in the Twelfth Five Year Plan with positive trickle–down implications for service providers like us. This development is relevant; in March 2013, we got our first NTPC order in seven years, covering two projects (2 x 800 MW Kudgi power plant in Karnataka and 500 MW Vindhyanchal) and generating the optimism that NTPC's large project implementation programme will translate into an annual Rs. 250–300 crore of business for us.
Q HOW DOES THE COMPANY EXPECT TO TAKE ITS BUSINESS AHEAD?
A We had an order book of Rs. 950 crore as on 31st March, 2012 and an order book of Rs. 1,000 crore as on 31st March, 2013 and we expect it to reach around Rs. 1,500 crore by end 2013–14, providing us with revenue visibility for the next two years.
From a larger perspective, let me state that we will always like to do what we know best. We would like to grow our EPC and asset book (renewable energy as well as transmission assets similar to the Jhajjar project in Haryana). We have applied for around a dozen PPP projects, have already qualified for three while the balance are in the pipeline. As far as renewable energy assets are concerned, we possess 207.35 MW on hand and plan to add at least 100 MW over the next year with the objective to grow our portfolio to 700–800 MW by the end of the Twelfth Five Year Plan (2017–18). Our focus will not just be on capacity increment; it will be on outperforming the industry average, achieve a high PLF and deliver the highest return on equity among all wind energy players in the country. We achieved Rs. 200 crore revenues from our wind energy business in 2012–13, which we expect to raise to Rs. 500 crore a year by the end of Twelfth Five Year Plan.
Q.HOW DOES THE INDUSTRY EXPECT TO PLAY OUT?
A The country could not capitalise on the foundation of the Electricity Act of 2003 due to tardy implementation. The result is that the national challenge is now 10 times larger needing immediate correction. Since power is a critical infrastructural segment, one expects that the government will soon drive growth in the sector through enhanced investments. Our vision is to continue doing what we know best and extend into adjacent spaces. We will continue to be bottomline–driven with a growing proportion of revenues derived from annuity businesses.We will bid for EPC contracts that represent attractive IRR and which have achieved financial closure. We will reinvest free cash flows from our renewable energy business with the objective to create a large sustainable business. We are optimistic that the combination of both businesses will translate into enhanced shareholder value.