December 2019

ACIL Interview

By Karan Singh

Last five years have been of remarkable transformation for Ahluwalia Contracts. The company has seen a significant turnaround in its business. How do you view these five years? What things did you do right in these years, and what were the learnings, if any?

The last five years were a consolidation period for us. We focussed on profitable growth, got out of loss making projects, induced discipline in bidding and execution. From being concentrated on the private segment (over 80% of the orderbook) we now have a 20:80 mix of private: public clients. This has helped us mitigate client risk better. We have focussed on timely execution and profitable growth, and that has led us to where we are today. Many lessons have been learnt. I world say the most important of them has been not to lose focus of the basic fundamentals and principles of your business, and your values. Second is not to chase one business parameter, while neglecting another. And lastly, try to create a business model that can sustain macro and micro economic shocks – because we operate in a highly volatile industry, dependent on multiple external variables.

With a stable government now in place, which has traditionally focused on building infrastructure, how do you see next few years in terms of activity, and which key areas, according to you, could get more attention?

With the same government coming into power with such a decisive mandate, a sense of continuity should prevail and I feel that infrastructure growth is only going to increase. I believe there is going to be more activity as far as social infrastructure is concerned, as far as affordable housing is concerned and there is going to be growth in areas where not only are we present geographically, it is going to spread to other areas also, but we still need to wait and watch.

How do you see the overall macro environment today? Is there a pick in macro activity post the general elections? How do you see it over next few months?

Post general elections, we are seeing a general economic slowdown. Orders awards are being deferred, payments are delayed, and there appears to be an overall lethargy in the system. Few of our projects have faced execution delays, due to delay in approvals and clearances. I would like to hope that this is a temporary transient issue – of a new government taking charge. In that case, we should witness momentum pickup in a few months. But if it doesn’t, then it might be symptomatic of some bigger challenges that the economy is facing.

The construction industry is quite atypical in the sense that you have a large No 1, L&T, as over Rs 1.5 trillion in revenues – falling down to maybe NCC at Rs 120bn – and no other player between the two. So there is no credible No 2 – while there are scores of companies in the range of Rs 20-50bn of revenues. What do you think drives this nature of the industry, and do you see it changing over the next few years?

The construction industry has typically been made up of local contractors, which have superior knowledge of specific regions, and hence cost advantage. Even most of the large pan-India companies have a specific catchment area, where they get large share of their orders from. L&T has been the only company to be able to make a formidable pan-India presence. But then you must also understand that L&T OR NCC have diversified portfolio and project mix. One should look at construction industry segment wise.

What is your vision for Ahluwalia Contracts, for the next 10-15 years? Where do you want to see the company, in terms of revenues, or any other parameter that you might have identified?

As a company we do not believe in chasing growth at the expense of profitability. We always want to chase profitable growth. If you see our order inflow trends as well, we always wait out periods of aggressive bidding, and take projects only when we get them in our desired range of margins. Thankfully we have a strong balance sheet – so we do not mind growing at a steady pace – as long as we maintain profitability at desired levels. We focus on quality of clients, and on timely execution of projects – so that we received payments on time, and create value for our shareholders. We intend to maintain the steady growth 20- 25% per annum given the economic condition of the country allow.

What are key challenges facing the industry today?

The key challenge that the industry has been facing is working capital. Though we have one of best working capital cycles in the industry, payments from govt bodies often get delayed, due to various factors. Since the entire industry operates on thin margins (10-15%), any delay in payments impacts the profitability of not just one, but multiple projects. Another challenge is dealing with multiple layers of govt authorities. And of-course, for our segment, the slowdown in real estate sector, is also impacting the growth.

Talking of real estate sector, why do you think we are witnessing such a slowdown in this sector, for such a long period of time? Do you see the situation improving in next few months? How is Ahluwalia Contracts impacted by this?

Real estate sector is going through a structural downturn, for almost a decade now. While earlier part of the cycle was due to excessive supply and tepid demand, recent regulatory steps like RERA, demonitization and GST have impacted the sector significantly. While these steps have enhanced transparency of the sector, they have also made it difficult for small and marginalized developers to run business. But I feel the govt needs to take some steps to revive the sector, for the simple reason that it is one of biggest employment generator, and has a multiplier effect on the economy of the country.

In your discussions with customers on future orders, are you seeing any signs of pick up in the private sector activity at all?

Not on the residential side, but in the commercial space is concerned, yes there is a pickup. We are continuously getting increase in our existing orders from the clients with whom we are working. And adding some new one but again we are care full whom we do business with.

Ahluwalia Contracts operates in very specific and niche parts. It is operating in the buildings segment only, and does not have a strong presence in West/South India. As you grow, do you see that changing and the segments expanding for the company? Any plans to foray into segments like metros or roads?

We continue to focus on our strength areas – north and east. We have also bagged few project in the western part of the country. South remains a relatively uncharted territory for us, but that doesn’t mean we are not open to doing project in south. We will be selective and opportunistic, when it comes to the geographies. Segment wise, we have forayed into airports, railway and metro stations as on EPC basis to and we continue to explore are business where we can leverage our strength and open new vistas in EPC.