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ShareNew 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.
