'Why take this crap? Going private is a tempting thought'

New Delhi-based Punj Lloyd is the second-most diversified group in the engineering and construction space after Larsen & Toubro, with a presence in varied businesses such as oil and gas infrastructure, defence, aviation, marine engineering, and even newer arenas such as nuclear power.

The company’s performance suffered in the quarter ended December, with a net loss of Rs225 crore compared with a net profit of Rs92 crore in the corresponding period in the previous year.

An increase in costs and a Rs215 crore provision over an order from Saudi Basic Industries Corporation (Sabic), being executed by subsidiary Simon Carves, did the damage. The dispute with Sabic is subjudice in the UK. “We expect a favourable settlement in March or April 2009,” Atul Punj, founder & chairman of the group, told DNA a few days ago. Excerpts from an interview:

Can you take us through the Simon Carves vs Sabic dispute?
Simon Carves is a company that came along with another company we acquired, called Sembawang Engineers & Constructors. It had a couple of legacy projects, which we are trying to complete now and they are close to completion. We are in a legal dispute, so it is subjudice. Our position is, how can you call a performance bond on a project that is 99% complete with two months to go for completion? It is patently, in our mind, illegal. So we followed the adjudication process in the UK. It is a three-month fast-track settlement process compared with the usual one year. So, we are hoping that we will be able to get some relief in March, or April.

At the same time, the strong position that I am taking on accounting is that, instead of putting the amount under contention in contingencies, let us just write it off. We want to be extremely cautious rather than the other way round. Actually, the contract was awarded by Huntsman Petrochemicals, which was acquired by Sabic, to Simon Carves, which was bought by Sembawang, which, in turn, was bought by Punj Lloyd.

It is not that there is a general sense of gloom in the industry or in our company. It is a one-off thing. It has been niggling for a couple of months. We thought instead of letting it niggle, we will just bite the bullet; and if we get a write-back later, great.

When do you see a resolution of the case?
March-April. We filed the case in December, but because of Christmas and New Year, the adjudicator asked for an extra month. So instead of February, we may now see resolution in March-April.

So that provisioning will hang over profits for a while?
That’s fine. Our topline is showing extremely strong growth. It is only the bottomline that has been dragged down by a couple of legacy projects. Overall, we find ourselves in a very good place. But we need to write this one off as it is a fact of life and we can’t wish it away. That is the challenge of our business. We could have one odd project that goes off.

Some of the actual shareholders we shared this with turned around and asked us, “Why are you even telling us this?” I said, “Excuse me! What happened to transparency and being as upfront about bad news as about good news?” They said, “Nobody else tells us.” Then we had our company do a scan on how many companies have ever admitted to a bond being called. The answer we got was “none”. The next question is, how many companies have admitted to getting into an arbitration? The answer again is none. And oddly enough, I read a report saying that Punj Lloyd is a litigious company. I don’t know how people can even say such things. This is our first litigation abroad. This is the first bond in the history of the group that has been called.

What do you think is the reason for the dispute if you have stuck to deadlines?
Honestly speaking, it is because of some interpersonal issues. I don’t see any other reason. I have been told subsequently that they expect contractors to behave in a subservient manner and we were not behaving that way and we laid bare the facts.

Is this liability priced into your acquisition cost?
No, we never even dreamt in the wildest of our dreams that this would happen. We can factor in something like the company would make a 10% profit or a 2% loss. Never in our history have we faced something like this. If you start pricing in the value of your liquidity damages or your performance guarantee, you will never be able to win a bid.

Are there any other projects where there is a litigation going on or is likely?
In India, we have had litigation with GAIL, ONGC and various other companies, and we have won all of them. Currently, we are fighting GAIL on the Vijaypur-Dahej pipeline project. We completed it five months before schedule and they held us for liquidity damages. This is the madness of the way the system works here. Contrast this with the picture outside: the oil minister of Qatar knows me as “Mr Dahej”. In March, we got the contract and we finished it in December. The contractual completion was five months later. Somewhere in the contract, there is a provision that intermediate liquidity damages will be applied if an activity started is not completed. During the monsoon, if I had stopped work due to inclement weather, I would have got two extra days as per the contract. Because of their request, we bugger up our equipment, increase productivity and spend unnecessary amounts of money in the interest of the project. The intermediate activity was, once you weld the pipe, unless you bury it, it was not complete. We could not bury the pipe because of the monsoon. They came out with a full-page ad saying the project was completed five months ahead of schedule, but they then screw the contractor.

What is the one perceptible change you have noticed in terms of velocity of order flows in the past six months?
Nothing. We are now in 20 countries with an order backlog of Rs 22,000 crore. India represents about 20% of that. We play basically in oil & gas infrastructure and non-oil & gas infrastructure. We don’t play in real estate-related projects. The common perception is Middle East equals Dubai and real estate equal construction, which is not true at all. In early December, one of our HR guys came and told, “Boss, all the companies in our space are slowing down, even we need to watch out.” I asked why? In November, we did $3.6 billion of bidding and in December it went up to $5 billion. We are fortunate that we are spread across the world, so that we are not dependent just on South Asia or Central Asia. Five years back, oil was at $12. When it spiked to $30, everyone thought the world was coming to an end, when it went up to $40, the world went berserk. When it touched $60, it was believed that was the way of the future. And then it went up to $140 because some analyst said the world was consuming more than it has. Then when it came down to $35, the world had crashed. When people ask me about slowdown, I say I don’t see one. Only in two cases in Qatar, our client said, “Don’t submit your bids in December, do it in March, not because of project viability or financial viability, but because the falling material costs could be priced in by March.” We said fine. If you ask me about real estate, I would say yes, there is a slowdown.

What kind of exposure do you have to real estate?
Out of our order book of Rs 22,000 crore, maybe Rs 50 crore is in realty. We have about 15 acres in New Delhi. That is it. I guess somebody was watching because we were thinking everybody else is in it and we should also get into it, but just as we were getting ready, the slowdown started.

Has the downturn in prices of steel and non-ferrous metals kicked into your margins?
It will from Q4 onwards. A lot of projects that we bid for in the last six months are being finalised now, particularly overseas. Clients have not asked us for a pricing-down. But you can’t run this business on upsides and downsides. You factor in your risks and hope you get it right. This is a one-off phenomenon in commodities. The world won’t see anything like this for years. We will see a correction in prices.

So the input problems of last year could even out from this quarter onwards?
Commodity prices have gone down, but cost of money has gone up. Somewhere, things balance out.

There is an accusation that as a company, you have stretched yourselves too thin…
A year back, people told us, “There is so much work in India, why are you wasting your time outside?” The same people are now telling us, “You were the smart guy, you went abroad and nobody else did.” Stretch is a function of management. What we have is a very high quality of management. I travel 20 days a month because 80% of our work is outside (India). In India, I can build a relationship with anybody I want, but when a tender goes to the government, even if I want it, the relationship means nothing. But if I invest my time in the Middle East or North Africa, that relationship has a financial value. In India, we spend time to build a reputation. We have already done that. It is not that I am looking for a licence or policy change or spectrum allocation. In my business, I don’t need to spend time with politicians.

Do you see the share of Indian contracts in your order book going below 20%?
If we win an offshore contract in India, say it could be worth $800 million. That would skew the (order book) ratio in favour of India. Generally, I would like to keep India at 25%, Southeast Asia at 25%, Middle East at 25% and North Africa at 25%. That is how I would like to spread myself. I started out in V P Singh’s time. As much capability as I thought I had, there was no work for two years —- except Mandal Commission. At that point, I swore to myself that I should never risk myself to any one country. We might move to sub-Saharan Africa next.

Is betting on gas a good gambit?
Yes, it is already happening. There have been large finds at the Krishna-Godavari basin. I think gas is the way forward. I don’t see the Turkmenistan-Afghanistan-Pakistan pipeline or the Iran-Pakistan-India pipeline happening now. They will happen at some point. But whether they will happen in my lifetime or my son’s, I don’t know. We need to make sure that we get very active on the diplomatic front and not let some other country take away our reserves.

Are contracts in the Middle East being reworked because of lower crude prices?
The projects that are likely to be affected are not the oil & gas ones, but the petrochemical ones, because that cycle has almost fallen. It is a fact of life. Another thing is the real estate boom in UAE. There were huge towers coming up every month … it was absolute madness. Those who got out of that early are safe. We have no exposure to realty there. When we look at the other sectors and hear talk of doom, I feel fortunate that we made the effort to go outside India. Getting into the UAE is an 18-month process and then you have to get projects. So it is anywhere between 24-36 months.

What about the fabrication space?
We avoided getting into the fabrication space last year when we got into the offshore oil & gas platform space. That came to us because Sembawang had acquired a company , which allowed us to qualify. We did not have a yard so we had to outsource the fabrication to a yard in Malaysia. That had its own problems so we decided on doing fabrication on our own. Otherwise, I have always believed fabrication is a pure commodity play. We looked at locations in Indonesia, India and Malaysia and then we came across an opportunity to become the co-promoter of Pipavav Shipyard. There our No. 1 priority is defence; then oil & gas; the last is commercial shipping. Our priorities are different. We are the only shipyard of a relevant size outside of the government. It is the third or fourth-largest in the world in terms of size.

In defence, you would be pitted against L&T…
There is too much work there. Hindustan (Construction Company) can’t handle it. L&T can’t handle it. That’s why everyone wants us online quick.

When do you see the joint venture with Thorium Power gaining traction?
The agreement is to be signed by March. It is a great tie-up. Thorium Power invested in nuclear technology 20 years ago when the world gave it up.

Why thorium?
It is abundantly available in India. It is outside the purview of the International Atomic Energy Agency. And India has the second-largest deposits of thorium. Thorium Power has already signed an agreement with the Abu Dhabi government for a series of plants. Thirty years from now, Abu Dhabi won’t be dependent on hydrocarbons at all. It is expected to be approved by the US authorities by the end of the year. Many other companies have been trying, but they are way behind.

In which regions would the venture function?
Middle East, South Asia and Southeast Asia.

How long do you think before you can get going in India?
I guess 24-36 months.

How long would the construction of a plant take?
Three years. It should not take more than five years.

What would the capacity be?
It would be in blocks of 1,200-2,000 mw.

Where will you begin work first?
In Abu Dhabi, we expect to start work on the plants by 2012.

Coming back to margins, is there a distinct upside to margins because of the caving-in of input costs?
In this environment, the first thing I have to ensure is I have a good deal flow. Yes, I do have a good order flow. Then I have to ensure margins are good. Our outlook is good. There will of course be a one-off project (that’s a hit or a miss). I tell analysts we are not a quarter-to-quarter company. We are a project company and we are building an institution.

There were rumours about your company in the stock market…
People shorted our shares ... there is an underground cartelisation. The market is spooked by rumours. An analyst called me the other day and asked whether one of my directors had refused to sign the balance sheet. The other rumour was that we are another Satyam (Computer Services) in the making because we are a high-growth company. Hello, where is the connection? The market is not going to give you capital in the next 2-3 years. They have crashed the market capitalisation from where it was to where it is, all of it based on some spooky rumours. As an entrepreneur, you want to focus on your business, your projects. You don’t want calls from analysts based on some rumours. How many times has the world written the obituary of the Ambanis, Mittals and Ruias? It is when you stay focused on your business that you emerge out of it. An entrepreneur can have only so much of a thick skin. Why do I need all this crap? Let me take my company private. Frankly, I think in the next one year, a few companies will be taken private. Whether Punj Lloyd will be one of them, I don’t know. But it is a tempting thought.