Business Today

Taking a breather

Suman Layak, Manu Kaushik and K.R. Balasubramanyam         Print Edition: July 8, 2012

Politics and industry - mining or otherwise - often walk hand in hand in Karnataka. In the first week of June, the state government organised a global investor meet in Bangalore to showcase the state's investor friendliness.

Veteran industrialist Sitaram Jindal used the opportunity to air his angst. The Chairman and Managing Director of Jindal Aluminium said that when he came to Bangalore 45 years ago, the state machinery was very friendly, whereas today's bureaucrats are hardly courteous.

"Now, Karnataka's single-window system for investments has many backdoors and ventilators, and industrialists are made to run from pillar to post," he said.

Jindal's outburst was an expression of frustration - the state government has failed to hand over land to his company eight months after acquiring it from its owners.

While such public outbursts are rare, it is a fact that Indian industrialists have to jump through hoops to get their projects going. With the slowdown compounding their problems, companies are being forced to come up with alternative strategies.

Take Larsen & Toubro (L&T), for instance. The company has converted its proposed information technology (IT) and information technology enabled services (ITeS) special economic zone (SEZ ) in Malumichampatti, Tamil Nadu, into a non-SEZ project.

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Reason: the proposed Goods and Services Tax regime will make SEZs less viable by eliminating all special benefits. In fact, L&T officials indicate that the company is giving the business of building SEZs a relook.

Mukesh Ambani, too, is grappling with governmental delays. Reliance Industries has around 12 oil and gas proposals pending approval. Company officials say that if approvals do not come through quickly, the oil and gas business will fail to justify further investment.

The power sector, in particular, has been suffering intense distress, forcing some to adopt a wait and watch approach.

Around this time last year, uncertainties over supply of natural gas by Reliance Industries put paid to GVK Power & Infrastructure Ltd's (GVKPIL) plans to expand the capacity of its projects in Andhra Pradesh's East Godavari district: Jegurupadu III and Gautami Power II. After placing orders with EPC (engineering, procurement and construction) contractors, commencing civil work and spending Rs 200 crore, the company found that gas supply was falling even for its existing projects, which are today running at 50 per cent capacity.

"Where was the question of allocating gas for newer projects? We decided it was too dangerous to continue because then we would be sitting on an asset with an investment of around Rs 6,500 crore. So, we pulled back," says GVKPIL Director and Chief Financial Officer Isaac A. George. The only consolation, he says, is that "tomorrow, if we get gas supply, we will be in a position to continue with the same EPC contractors if their pricing is proper".

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L. Madhusudhan Rao, Executive Chairman, Lanco Infratech
We have restructured the company and moved key people to the power business: L. Madhusudhan Rao
Anil Ambani's Reliance Power has stopped work on its 3,960 MW ultra mega power project at Krishnapatnam in Andhra Pradesh. The company cited new regulations introduced in Indonesia forbidding sale of coal below a benchmark price.

Reliance Power requested the Government of India to ask states that have agreed to buy power from the project to absorb the additional costs. The Centre lobbed the issue to the states - Andhra Pradesh, Tamil Nadu, Maharashtra and Karnataka - but they have refused to budge.

Fuel supply is not the only issue in the power sector. There are other issues, such as environment and finance.

"Most banks have reached their sectoral cap for power projects and therefore may not be in a position to lend more," notes George. These realities have forced Lanco Infratech, the bulk of whose revenues come from power and EPC, to re-wire its strategy. It has quit some businesses and decided to focus on power and infrastructure.

"While we continue to focus on these two sectors, we have dismantled our other businesses completely. These include roads, power transmission, and oil and gas," says L. Madhusudhan Rao, Executive Chairman of Lanco Infratech. "We have restructured the company and moved all our key people to the existing power business."

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Lanco has 4,400 MW of projects under operation and another 5,000 MW in advanced stages of construction. The company has already invested close to 65 per cent of the total money to be spent.

"We will continue to build these projects. But we have decided to put other power projects - expansion of the greenfield Anpara and Himavat projects, and the Amarkantak power plant (unit V and VI) - on hold. In Anpara, we have bought the land. We have another 18 months time to achieve financial closure, so for that reason, we will be slowing down," says Rao.

The surge in prices of imported material is not helping. Sunil Sikka, President of Noida-based Havells India, says prices of some raw materials and finished goods imported from China, Europe and Thailand, including glass and table fans, have jumped nearly 20 per cent.

"Our import bill has gone up by 20 per cent to around Rs 250 crore in the past one year. We are now looking at sourcing some raw materials locally."

In the infrastructure sector, where special purpose vehicles (SPV) are finding it difficult to raise equity on their own, IDBI Capital, the merchant banking and securities arm of IDBI, is trying to fund companies by providing debt to their holding company.

 Anant Goenka, MD, Ceat Ltds
We export to 80 countries and we can sense a general slowdown: Anant Goenka
"The RBI allows holding companies to borrow up to 50 per cent of the equity infusion in infrastructure SPVs," says Abhay Bongirwar, MD of IDBI Capital. "We will provide working capital like debt funding to the parent so it can keep its infrastructure SPVs capitalised." The financier is trying this model out with a premier construction company.

One of the areas worst affected by the slowdown is real estate. The sector's woes have also hit a number of its ancillary industries. Hindustan Sanitaryware (HSIL) is one of India's largest building products and container glass companies, with revenues of Rs 1,422.15 crore.

Last year, the Gurgaon-based HSIL announced plans to invest Rs 650 crore to expand into Andhra Pradesh, Rajasthan and Haryana and build new plants in Gujarat and Rajasthan over the next three years.

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The company has been growing at a compound rate of over 30 per cent over the past two years. Given this, the management decided to also line up a second round of investment, amounting to Rs 1,200 crore, to set up three more plants by 2015/16. Now, more than a year later, HSIL has spent nearly Rs 420 crore of the planned Rs 650 crore investment. But it has decided to defer its second round of investing. Joint Managing Director Sandip Somany cites lack of clarity on where the economy is headed as the reason.

"There are no visible signs of a slowdown in our business. But if the economic turmoil continues for a few more months, we could see our growth falling by three per cent," says Somany. "It's not sane to make such a big investment now."

It's a stark warning of things to come.

Take Ceat Ltd, for instance. After a bad year, the company shelved its plan to shift its Mulund plant to a new location in Ambernath, near Mumbai. "The next six to nine months will be slow. We export to around 80 countries and we can sense a general slowdown. The real has depreciated in Brazil and Europe has its own problems ," says MD Anant Goenka.

For industrialists, the government may be a part of the problem rather than a part of the solution. But with shareholders to answer to, they have already turned to Plan B - sitting tight on their hands and hoping the winds change.

Additional reporting by E. Kumar Sharma

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