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G. Madhan

Madhucon Projects, a Hyderabad-based engineering and construction company, has a strong presence in road and irrigation projects. The company, which recently completed a portion of the Tada-Nellore expressway — one of the largest BOT (build-operate-transfer) road projects — gets 60-70 per cent of its revenues from road projects, and has benefited much from the improved investment in the sector. The Chairman and Managing Director, Mr N. Nageswar Rao, shares his views with Business Line on his company's prospects.

Excerpts from the interview:

What challenges are you facing in bagging contracts?

Pricing pressures is one of the major challenges we face. Bidding rates have come down as several new players have come in. In the past, only six-eight players used to bid for projects.

Now, as many as 60-70 players participate in the bidding process. Since, we have a good team of people, machinery and experience we manage to compete.

Does pre-qualification criteria have an important bearing in bagging contracts?

Yes. In the past, projects in the road segment did not exceed Rs 40 crore. But in the last five years, the National Highways Authority of India (NHAI) has taken up large projects such as the Golden Quadrilateral. Since then the package size has become larger — the length of each range is 40-60 km, and its size Rs 150 crore-300 crore. Hence, experience in constructing roads, apart from turnover and the required machinery, is important for bagging projects.

When we bagged the first Asian Development Bank road project in 1995, we met the pre-qualification criteria by forming a joint venture (JV) with a Malaysian company and successfully completed the project. Over time, we have increased our turnover and obtained expertise in some areas. In my opinion, the Government's insistence on pre-qualification criteria is appropriate. Otherwise, everybody will enter (bidding for these contracts).

They may either spoil the quality or not be able to complete the projects on time. Ultimately, both the contract and the client will suffer.

Since net worth is a key pre-qualification criterion for BOT- and annuity-based road projects, do you plan to augment your capital base?

Not really. Every year our net worth is growing by 10-15 per cent.

This year also we expect the same. Besides, we also have the net worth of our group companies. We are also pre-qualifying for the BOT and annuity projects through the JV route, where we have already qualified for Rs 300 crore-Rs 500 crore worth road packages.

What is your current order book position?

Our order book size is about Rs 900 crore. Sixty-65 per cent of these are government-based projects. We have also pre-qualified ourselves for projects whose worth is cumulatively more than Rs 2,000 crore.

Are you facing problems collecting receivables, since a major source of your revenue is government-based projects?

Our concentration is mainly on projects funded by World Bank, ADB, and NHAI among others, where there is no problem in financing. They pay us on time, as they have sufficient funds.

However, we also suffered in some cases. For instance, we are yet to receive a sizeable amount, from the Rs 110 crore Krishna Valley irrigation project in Maharashtra.

How has the sharp rise in steel prices during the last year impacted your margins?

The extent of surge in steel prices is something not seen in the last 10-15 years.

Whenever there was a rise, the steel price went up by a maximum of Rs 1,000 per tonne. But this time it has gone up by Rs 5,000 per tonne. To some extent, there is definitely an impact on BOT projects, where we do not have the escalation clause.

Of the total order book size of Rs 900 crore, how many projects do not have the escalation clause?

All the irrigation and national highway projects, except BOT ones worth Rs 310 crore, have an escalation clause.

However, at the time of bidding (for BOT projects), we estimated the maximum inflation and deflation during the construction period and factored it in the bidding price.

Do you expect the pressure on margins to continue?

Since many new players have come in, there is intense pressure. At present, we would like to maintain margin at current levels, and plan to improve it.

In the last four-five years our operating efficiencies have improved on the back of imported machinery, enhanced efficiency of the manpower and the systems. Further, we expect margins to improve by 1-2 percentage points, let us say over a two-three year horizon.

What strategies have you adopted to sustain the current level of growth?

At present, we do not have any projects outside India. But we are trying for that also.

On the domestic front, we are thinking of moving towards BOT and annuity-based road projects which have longer tenures of about 15-30 years. In the next five years, 25-30 per cent of the revenues should come from these projects.

What will be the key focus areas of the company?

In the future our focus will continue on infrastructure and irrigation segments. We are also keen on engineering, procurement and construction (EPC) and turnkey projects.

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