HCC (Hindustan Construction Company) got reprieve from the lenders last week with the invocation of S4A (Scheme for Sustainable Structuring of Stressed Assets) scheme, released by RBI to tide over the bad debt crisis. The invocation of the scheme reflects lenders confidence in the strength of the company. A ninety-year old company should ideally fall in the category of ‘too old to fail’, but somehow, it almost lost the plot in the last 6-7 years going through painful phases of CDR, debt restructuring and now S4A.
HCC’s case is, in some ways, a reminder of Nokia CEO words, “We didn’t do anything wrong, but somehow, we lost”. HCC’s strategy can’t be termed overly aggressive unlike many of the companies in the similar space, yet it landed in this crisis. (However, a testimony to management and financial principles is that others who were overly aggressive are in bigger mess and going through bigger uncertainties). Lavasa was a big bet but it was spread over a large time period hence posed reduced risk.
Yet, Lavasa was among the key factors for the company’s woes, further worsened by the economic conditions which quite suddenly turned tough. The change in environment led to fewer projects and hence more pressure on companies to bid at lower margins. Another factor adding to its problems was acquisition of Karl Steiner AG, Switzerland based loss making construction company, not a bad decision but did not come at the right time. These big projects led to significant expansion in company’s balance sheet leading to near doubling of borrowings between FY09-11 and tripling by FY15. The fall out of this was five fold increase in finance cost from Rs 276 crore in FY10 to more than Rs 1,350 crore in FY16.
While the expansion in business did result in higher revenues with sales rising by as much as 80% in FY11, this did not result in higher profits due to reversal in market conditions and increase in fixed cost related to staff, establishment etc. Company posted first loss in FY11 of Rs 65 crore which worsened in FY12 to more than Rs 500 crore, leading to company seeking Corporate Debt Restructuring (CDR). The period subsequent to that has remained challenging and company continues to make losses which averaged at Rs 350 crore over the last four years.
The company’s problems is unique to an extent as it is not only due to profitability issues alone but also due to cash-flow management issues. Its increase in receivables and inventories rose from less than Rs 600 crore in FY09 to Rs 1,200 crore in FY10 and further to Rs 1,800 crore, almost 30% of sales. More importantly, the receivables were not simply slippages but part of claims and arbitration largely with the government agencies. A rough estimate shows company would have saved almost Rs 200-250 crore of interest cost annually, a significant sum for company of this size, if these claims had got settled expeditiously.
The outlook for the company certainly brightens with interest outgo coming down by up to half with S4A clause which would turn the company profitable as per current financials. While the equity dilution would reduce the future earnings available to shareholders, that would a small price to pay for the revival of the company which would hit a century in a decade.!
(Image courtesy of koratmember at freedigitalphotos.net)