Chowdhary says: “We do not want to over-commit it and under deliver. That also comes with its own financial consequences apart from reputational consequences. So opportunities right now are like buses on a bus stop, you know, every five minutes, there is another one coming in. So which one we get into without injuring ourselves is what we have to choose.”
Let me first talk about the recent QIP, the fundraise of Rs 700 crore where marquee investors have participated. How is it that you are planning to utilize and deploy these funds?
There is a lot happening in the sector and the whole infrastructure story in India is, I believe, just about beginning. Coupled with that, the Make in India and Atmanirbhar Bharat policies of the government have really been a big booster for industries like us, manufacturing industries which are in the infrastructure space like us. Whatever we are being able to do is directly a result of that.
In terms of the reaction to the QIP, we are very honoured, very humbled. We have received a very good response from the marquee-st of the marquee investors. And the purposes of the fund utilization have already been announced. Part of it is to repay debt. Part of it is for the long term working capital, etc. As not only for the QIP, but as an overall growth plan, we are now setting up additional lines to manufacture the Vande Bharat coach, which will, of course, require substantial capex. We signed the agreement with ABB, the cooperation agreement, the strategic partnership agreement, where we are setting up the entire propulsion and the ECMS manufacturing. So a lot is happening in the sector, as you very rightly summed it up.
In terms of total fund requirement for the capex, post the QIP, can I say that you do not need capital for next two, three years?
Yes. As far as the current plans are concerned, whether it is the Vande Bharat, whether it is the ongoing projects that we have, we believe that for both the capex and the working capital, apart from the debt that will need to be taken for both, to some extent, the working capital, etc., that we should be well funded at least for the next two, three years.
I would like to put the caveat that that is for what we are doing now, what we have in the visibility now, but the government or the country is moving so fast. One year ago, we did not know that Vande Bharat would be such a great opportunity. One year ago, we did not know that wheels would be produced in India. One year ago, we did not know what freight targets would be or two years ago, we did not know that freight targets would be set to 3 billion tons.
We need to keep pace with the kind of speed that the Honourable Prime Minister and the government is taking the country forward with. I can only speak at this point of time, where we are today, what we have planned, we should be well funded, as we are also generating cash from our existing operations.
How is it that you are trying to cash in on this boom in opportunity, if one can call it that because recently also the railways has floated that tender for the procurement of those 20,000 new wagons, I guess the delivery is slated between July 24 to December 25. And then, Vande Bharat is a sizable opportunity as well. What is the status on the contracts that you have bid for or tenders in the pipeline that you are working with?
As I mentioned, there are opportunities and it is very important that companies at such junctures are careful of what they do. As far as we are concerned, we have an order book pipeline, which we already have for almost two and a half years for the freight wagon side. The tenders of the 20,000 or the additional 10,000 or as we hear from newspaper reports, there is going to be additional tenders coming out very soon.
All of that we are bidding on the basis of our available capacity so that we do not want to over-commit it and under deliver. That also comes with its own financial consequences apart from reputational consequences. So opportunities right now are like buses on a bus stop, you know, every five minutes, there is another one coming in. So which one do we get into without injuring ourselves is what we have to choose.Problem with so many buses is that it leads to traffic jams and traffic jam in your terminology is competition, right? I spoke to one of your peers yesterday and they said, look, we are looking at expanding in the high end wagon category, you are doing the same, is not there going to be competition because if the pie is so large, even global players could come in now?
Competition is not always a bad thing. It is a good thing, it keeps people on their toes and as you said yourself, the pie is so large and thus everybody has a share of the pie. What we are looking at is being most cost effective, most competitive. We have never been in a monopolistic industry, nor do we want to be. Competition is there and competition will remain there. And as long as we can stay ahead of the curve in terms of keeping our own competitiveness, we do not care about it.
There was a time when the government orders were, in a sense, not very popular with the corporate sector because there was endless delay in terms of payment and receivables. Has that situation improved?
That was the situation more on EPC contracts. We are not in EPC business at all. We are into supply contracts. Touch wood, for the last 26 years that I have been in this business, the railways are a very responsible and efficient buyer. We have not had delays in payments, I am not talking about a few days, on quarter ends, or year ends, etc, that is a normal thing that happens in industry or in commerce. But on a larger basis, our industry where even our price variation formula, you do not need to kind of involve any mind into it.
Everything is very well defined. There is no ambiguity in the contracts. There is no kind of negotiations that need to be done for settling invoices, that is where I understand and I do not know too much about the EPC business, so I am just telling based on my understanding, that is where the delays actually happen. It is not something which is in our industry.
Yours is structured against LC, which is that as you deliver, you get advance and then you get the full payment. Is that how structuring is done?
From the railway contracts, we have an option for LC, but even if we do not take the LC, because that entails costs, the payments happen after delivery in a certain number of days.
What is the risk to your business? You were talking about the frequency of buses coming in at the stop, could this really slow down with the upcoming elections, for instance?
I am not a crystal ball gazer, but I believe in Newton’s laws of motion; everything in the state of motion will continue to be in motion. So, I do not see slowdown happening in India because I believe India’s time has come and the way the situations are, for my sector, for the railway sector, India in order to become a $5-10-30 trillion economy, the logistics cost has to come down from the current 14% to 9% and that cannot come out by magic.
It has to come out by efforts and that effort is basically moving the road and air to rail and water. So, I do not see that there should be a challenge. On the passenger side, people are continuing to travel. We see the kinds of congestions that are there in the airports, ticket prices have soared. If there is a viable, comfortable, safe, alternative available, even a person like me would love to travel by the new Vande Bharat that we are now building.
On June 25, we launched the Vande Bharat. We would really be happy if people ditch aircraft or air travel to go by Vande Bharat. So, the infrastructure story, the aspirations of young India are so large, that the sector that we are in should not get impacted.
I want to get a sense from you on your margin picture, because last quarter they swelled up to about 12.3% and that was largely aided by the operating leverage. What is the outlook in terms of your margins? Given the intense competition, perhaps it would continue to remain at these levels?
We operate in two business segments, the freight and the passenger. On the freight, the normalised margin is about 11-12%. The margins can differ on a quarter-to-quarter basis and that is really not a very strong benchmark because when you deliver a certain set of contracts which may be to a certain set of customers, the margins might be higher in that.
But on a blended basis over, let us say, four-six-eight quarters, the margins in the freight business with the kind of operating leverage that we have been able to achieve should be in the vicinity of about 12%. A couple of points here or there. Not percentage, but just decimal points here or there. In terms of the passenger business, we are just about starting. We still have not hit the runway to take off. We are doing about three-four coaches per month right now which we are delivering the Pune Metro, then we will be having the Bangalore through CRRC, then the Surat and Ahmedabad, then Vande Bharat.
The capacity that we are planning is to get up to 72 coaches a month. That is when we can talk about operating leverages kicking in and also the TCMS and the propulsion business that we are going to backward integrate with. That business typically should give us a slightly better margin once we have completed the entire picture but that is going to take a couple of years.
You are in the railway business and you are talking about buses? Now, you are talking about airlines and taxi and runways. Are you looking at diversification?
That is competition for me, not competitors.