Hindustan Construction Company discontinues 3 verticals thermal power, ports and hydrocarbons

MUMBAI: At 62, Ajit Gulabchand cuts a lean and trim figure; a gym in his South Mumbai home in the NCPA apartment complex coupled with the occasional jog at his Alibag abode play their part in keeping the chairman of Hindustan Construction Company (HCC) fit and in fine fettle. These days, however, Gulabchand is focusing less on his own health and instead seeking to replace flab with muscle at his flagship construction company.

HCC has discontinued three verticals – thermal power, ports and hydrocarbons – that were started nearly a year ago. The thinking at that time was that big business could be generated in these sectors. However, the economic slowdown that followed has ensured that the contribution of these verticals to HCC’s current order book of roughly Rs 18,000 crore is insignificant.

Only one of these three verticals, thermal power, bagged an order for Rs 230 crore in the past one year. The ports vertical has been implementing a Rs 608-crore construction works for Naval Dockyard in Mumbai but the order was bagged before the vertical was formed. HCC will complete these two projects, but will not look for new business for the three verticals.

Gulabchand says that the verticals have been “merged” to create a leaner organisation that can chase large projects. “The verticals were created because of huge planned expenditure that was anticipated in these sectors. Now, the potential of these businesses becoming big does not exist,” says the chairman.

Gulabchand did not share any numbers on what this rationalisation and current economic slowdown will mean on the employee front. But he points out that HCC is not taking any drastic measures to remove people.

Instead, it will not fill up vacancies created by resignations. But one person close to the development said that the employee strength at the HCC headquarters in the eastern suburb of Vikhroli may be brought down from 500 to 300. HCC employs 3,000 at the officer level, 1,715 of whom are engineers.

HCC’s focus will now be on five verticals: hydro power, water, nuclear power, transportation and EPC (engineering, procurement & construction). The restructuring at HCC has been triggered by the woes of the Indian construction sector. The industry’s order book shrunk by 38% in the quarter ended September 2011. This setback came after five years of 20% average annual growth.

The party poopers include delays in government approvals, rising commodity prices and high interest rates. HCC is one the worst-hit companies, recording no fresh orders in the second quarter of the fiscal year.

Top line declined by 6% to Rs 829 crore and it slipped into the red with a net loss of Rs 40.5 crore against a profit of Rs 12 crore a year ago. It is sitting on a debt pile of Rs 4,034 crore, almost equal to its last year’s turnover and two-and-a-half times its current market capitalisation.

Operating profit margins declined by 255 basis points to 10.9% in the September quarter from what it was a year ago. HCC has constituted a task force to recover Rs 1,500 crore-plus outstanding from government agencies; this is largely responsible for its worsening debt condition.

Gulabchand attributes the economic slowdown and debt burden for HCC’s poor financial showing, but some analysts think otherwise. S P Tulsian, a Mumbai-based research analyst, says HCC has suffered due to Gulabchand’s diversion of interest to Lavasa, his pet real estate project that was forced to shut construction works for over a year due to alleged violation of environment norms.

Gulabchand partially agrees. He says although he has five heads for as many companies he needs to attach more importance to an arm when it needs special focus. The stoppage of work forced Lavasa Corp, a 64% subsidiary of HCC, to incur a loss of Rs 2 crore a day and defer its Rs 2,000 crore initial share sale.