Kirloskar Brothers Limited Q3FY Investors/Earnings Conference Call January 25, 2013

Transcription

1 1 of 17 Kirloskar Brothers Limited Q3FY Investors/Earnings Conference Call January 25, 2013 Moderator: Ladies and gentlemen, good afternoon. Welcome to Kirloskar Brothers Limited s Third Quarter Earnings Call. Joining us today in this conference room are the Chairman and Managing Director - Mr. Sanjay Kirloskar; Executive Director - Mr. Jayat Sapre; and Vice President, Finance - Mr. Umesh Shastry. Mr. Umesh Shastry will take us through the result highlights for the period ending December All participants are requested to refer to the presentation available on the company website As a gentle reminder, during the duration of the presentation, all participants are in a listen-only mode, and there will be an opportunity to ask questions at the end of the presentation. If you wish to ask a question please press * and 1 on your telephone. Please be advised that this conference is being recorded today. I will now hand the conference over to Mr. Umesh Shastry. Over to you sir. Umesh Shastry: Good afternoon, ladies and gentlemen. Before I proceed with the presentation that we have already loaded on the company website which I am sure all of you have seen, I turn your attention to our disclaimer on Page #2 of the presentation, which I hope all of you have gone through. Now moving on to the company-wide highlights; we have always been telling you that we are making initiatives to improve the balance sheet quality over the last 4 or 5 quarters and we believe this is definitely showing results because we have been able to actually reduce our borrowings by about 33 crores in this quarter. So the thrust and the focus on improving the balancing sheet quality definitely continues. We have also said that we are focusing more on the Product sectors. This also shows results because on a YOY basis there is a 22% increase in the sales of the Product sectors, and the operating profit has actually grown in excess of about 50% on this 22% growth as far as the product sector sales are concerned. Regarding projects, close monitoring continues to retain schedules as well as clear the punch list that we have drawn up. For our Dewas products, we have started a market-based pull system, this will definitely help to improve the planning, delivery as well as lead to optimum inventory for Dewas as well as for the distribution sector. Regarding the Project sector as far as the power projects are concerned there were certain issues such as fuel and water linkage as well as the lack of financial support mainly to the private players which continue to hamper the progress in the power sector in this quarter as well. And as far as the Order Board is concerned the project order board continues to decrease, because the payment terms still continue to be unfavorable because of which the company has not accepted project orders during the quarter which is our philosophy as we have been telling you for the last several quarters as well, that we will only accept those orders which have payment terms which we believe are the right payment terms for us. Moving on to individual sector highlights, we closed five sites as far as the irrigation sector is concerned. Two of them the projects have actually been commissioned and for the other three the projects have been contractually closed. We have handed over the Rural Electrification

2 2 of 17 project at Jamtara which was pending for an inordinate amount of time. And we have also managed to collect about 5.5 crores of retention money, out of the approximately 8.25 crores from the Sardar Sarovar Narmada Nigam Limited. So this also shows our continued emphasis and focus on ensuring that receivables are brought down and the old retention monies are collected. Regarding the Water Resource Management sector here again about 16 crores of retention payments have actually been collected from out of old projects in this quarter alone. We have received an order from the Hyderabad Metropolitan Water Supply and Sewerage Board (HMWSSB) with 36 number of horizontal split case LLC Pumps and the order value is about 58 crores. We have also received an order from Megha Engineering Hyderabad for about 174 numbers of Large Butterfly Valves and Multi Door Non Return Valves as well. This is for the Godavari Water Supply and Sanitation project (WSS). And we have further received an order from the Vizag Steel Plant (VSP) for about 3 crores for about 6 numbers of BHQ-62 Pumps. Going ahead to the Power sector, we have commissioned the largest VT Pumps ever manufactured in India for the Tiroda Thermal Power Plant. Similarly, the world s largest Cooling Water (CW) system was commissioned at Mundra Ultra Mega Power at the Coastal Gujarat Power Limited. We also commissioned the Cooling Water (CW) pump for sea water application at Lanco for the Udupi Thermal Power Plant. Similarly, we commissioned KBL s first De- Mineralized Water System at Koderma for the Damodar Valley Corporation. And one unfortunate incident that actually happened as far the power sector was concerned was that we had supplied certain Pumps in 2009 to Switzerland for a project which is known as the Grain project and performance bank guarantee worth about 2.5 crores was actually encashed by Alstom Switzerland during this quarter as far as these Pumps are concerned. We are pursuing the necessary legal formalities as far as this performance bank guarantee is concerned Our Gas Oil and Defense sector saw the fourth fire water pump package commissioned for the ONGC offshore platform. You would remember we have been talking about this in the last two quarters as well. We have also received an order from VA Tech for Reliance Dahej for about 2.5 crores and we have commissioned and handed over the wet basin project at Mazagon Dock for the ITD Cementation. The Industry sector basically just saw dealer review meets held at all the four zones in India during this quarter. The basic emphasis was on meeting the dealers and interacting with them and assessing the situation. The Building & Construction sector, the focus on Heating, Ventilation and Air-Conditioning and Refrigeration System and the Hydro Pneumatic business, which also we have been telling you about for the last couple of quarters continues and we have received approvals from all National consultants who constitute approximately 80% of the HVAC System market as far as supplying Pumps in this sector are concerned. Moving on to the dealer business for the distribution sector we have appointed about 130 new dealers during the quarter. Certain new products which were named MINI, Jalraaj and KS4 Submersibles have actually created pull as sales from these new products contributed

3 3 of 17 approximately 30% of the total sales which we made during this quarter, and we have started this (SMDS) system or the Synchronized Manufacturing and Distribution System for improving the supply chain as far as the distribution sector is concerned. Moving on to the Customer Service & Support, we launched a search engine on the KBL website for troubleshooting of Pumps during this particular quarter and we have also started implementation of the CRM 7.1, in fact this is expected to be completed by the end of this particular month, this will definitely lead to closer proximity to the customers. We inaugurated the warehouse at Wadi for Small and Medium Pumps Division (SMPD) where the spares are readily available for the customers whenever they need them rather than wait for longer delivery periods. If you remember we have spoken about the ASME certification either in the last quarter or before that. KBL was awarded with the N and NPT certification by the ASME or the American Society of Mechanical Engineers. This certificate was received by Kirloskarvadi on the 22 nd of November. The Kirloskarvadi Plant also received a Runner up Award in Excellence in Corporate Social Responsibility for Large Enterprises by Manufacturing Today. This also happened in November. Workman from the Kirloskarvadi Plant received the Gunawant Kamgar Puraskar which is the Excellent Worker Award from the Government of Maharashtra at the hands of two Hon ble Ministers and the first pump for CAN 220 was dispatched to the Nuclear Power Corporation of India during this quarter. The four factories of Dewas, Shirwal, Coimbatore and Sanand is what I will talk about next. The model called Jalverter successfully passed the IEC or the Environmental testing at the ERDA Baroda. We have also executed an order of about 920 Submersible Pumpsets for the Odisha Lift Irrigation Scheme (OLIC), these were supplied by the Dewas plant. The Sanand plant in Gujarat received the BIS License. Quality Circle Team at the Dewas Plant received a First Position in the 23 rd CII State level Quality Circle Competition. Dewas Plant begins its Golden Jubilee Year and the beginning was celebrated at the Dewas Plant on 22 nd December 2012, and the Dewas plant was also awarded with an Overall Excellence in Corporate Social responsibility at the Amity Award Conclave Furthermore, Coimbatore Plant was awarded an Outstanding Performer Award for Kaizen at a competition conducted by the Quality Circle Forum at Coimbatore. It also bagged Third Position in the State Level Quality Circle Competition which was conducted by the CII. And the Dewas plant was further honored with the First Prize in the Manufacturing Today Award for Excellence in Safety. So also our emphasis on safety, health and environment can be seen by some of the highlights that we have told you that happened in this quarter. The Kondhapuri plant or the Valves manufacturing plant completed the Underwriters Laboratories listing for the 50 mm to 250 mm Gate Valves. The QMS or the Quality Management Systems recertification audit was completed and it was recommended by Bureau Veritas. The Factory Mutual (FM) Surveillance audit were also completed during the quarter. And the CE Marking Recertification audit for Butterfly and Gate Valves was also completed at the Kondhapuri Plant during Q3. I go on to slide #15, which talks about the companywide pending orders now. You will notice that at the end of the third quarter, our total pending orders are at Rs. 2,253 crores vis-à-vis 2,281 which we had at the end of Q2 and the orders which we received in Q3 as a standalone is Rs. 372 crores which is more than what we actually received in Q2 which was Rs. 315 crores. And if you look at a consolidated order book the pending orders on hand currently are Rs. 2,652

4 4 of 17 crores vis-à-vis Rs crores at the end of Q2 and we received Rs. 635 crores of orders in Q3 at a consolidated level as compared to Rs. 519 crores in Q2. So as far as the inflow of orders is concerned in this quarter, I think it does not show any declining trend, in fact it is showing an increasing trend. Moving on to the financial highlights on a standalone basis, we would again like to say that the initiatives of KBL to improve the balance sheet quality is definitely showing results There has been a reduction in borrowings by 33 crores as we mentioned earlier and there has also been a reduction in the gross as well as net current assets as you would have seen in the results. We have got an improved sales and operating profit from Product sectors over the previous year and the Project sectors unfortunately continue to be sluggish from the liquidity as well as the profitability perspective which is actually hurting both the top-line and the bottom-line. If you look at the sales on a year-on-year basis, the Product sector sales which were 644 crores for the first nine month of the previous year have increased to 784 crores in the current year, which means that there has been an increase in the top-line of the Product sector by 22%, but the Project sector sales have dropped from 606 crores in the previous year to 525 crores in the current year which is a (-13%) and this is primarily again because as we have been telling you we are billing only as much as we collect. So since we have collected a certain amount of money we have only billed an amount which is equivalent to that or little less than the amount that we have collected from the Project sectors so far. Our selectiveness with the orders is also showing results because the civil sales is now down to only about 6% of the total sales, it was 10% for the first nine months of the previous year. There is a dip in the profit before tax, it is at Rs.27 crores as compared to Rs.67 crores in the previous year, but if you would remember previous year first 9 months included Rs.35 crores profit on Gondwana. We had the good ONGC order in the current year where we have made a profit of about Rs.12 crores which has actually improved the profit in the current nine months, but there have been losses and cost overruns which has been incurred for execution and closure of several old projects, and this is to the tune of approximately Rs.16 crores. But I am sure all of you would appreciate that it was necessary for us to actually execute and close these orders, because unless we went ahead and completed these orders, the retention money which is actually stuck as far as these old projects are concerned would not come in to the organization. So it was absolutely necessary contractually as well as from the point of view of the company to go ahead and actually execute these orders despite the fact that there were certain cost overruns and losses on them. Slide #18, shows the standalone picture of the company where you see the key financials for the period ended on December 12, 11 and 10 as well as for the year ended March 12. Here, you would see that the total income is actually a little higher for this quarter at Rs.1,325 crores as compared to the previous two years nine months. But the PBDIT is lower at Rs.76 crores and so also the PAT and the cash profit. This is primarily because as stated earlier, though the Product sectors have done well and made good profits, lot of it has been eaten away by the cost overruns and the losses which have been incurred on the Project sectors. If you look the PBT percentage it is only at about 2% and the ROCE is currently at about 6% for the period ended on December 12, but one more thing we must remember is that for the period ended December 11 and for the year ended on March 12, the results include the 35 crores profits on Gondwana. So definitely the results for December 11 and December 12 should actually be compared after eliminating the 35 crores profit on Gondwana for an apple-to-apple comparison.

5 5 of 17 If you look at the key figures of the balance sheet you will notice that compared to December 11 our total assets are down from Rs.1,247 crores to Rs.1,093 crores. The GCA is down from 1,639 crores to Rs.1,514 crores, you have 125 crores decrease. The gross current liabilities are at about Rs. 978 crores as compared to Rs. 956 crores. The net current assets are showing a decrease from Rs. 684 crores to Rs. 536 crores and the borrowings which have gone as high as Rs.451 crores in December 11 are now down to Rs.322 crores. On a consolidated basis the total income is currently at Rs.1,913 crores for the period ended on December 12 with a PBT of Rs.45 crores and a cash profit of about Rs.61 crores. Here also the PBT percentage is 2% and ROCE at 9% and here again we must definitely note that the results for the period ending December 11 as well as for the year ended on March 31 st 2012 include the profit of Rs.35 crores from the sale of Gondwana. With that we come to the end of the presentation that we have uploaded on the website. We would definitely like to throw the floor open to any questions that any of you may have and we will be glad to answer them. Thank you very much. Moderator: Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question please press * and 1 on your pushbutton phone and await your turn to ask the question when guided by the facilitator. If your question has been answered before your turn and you wish to withdraw your request, you may do so by pressing #1 on your phone. We have our first question from Mr. Kamlesh Kotak from Asian Markets. Please go ahead sir. Kamlesh Kotak: My question is sir out of Rs.372 crores orders that we got this quarter, can you just give some rough color as to which pockets or which business segment, Irrigation, Water, Power where from these orders are largely coming from? Umesh Shastry: About 95% of these orders are basically Product orders, hardly about 5% are Project orders. Kamlesh Kotak: And in business segment perception sir, Irrigation, Water, Power, Gas which segment is getting the orders traction? Umesh Shastry: You know that is why I said, the project orders are 5% are basically in the sectors of Irrigation, Water, Power and I think probably Water is the sector where we have actually received some order. I don t think any order as we received in Irrigation and probably no order has been received in Power as well. So it is primarily in Water that the order has been received for Projects and for Products it has been received right across, that is in Industry, Distribution, Building, and Construction also. Kamlesh Kotak: And in terms of subsidiary, whatever incremental orders that we got 635 minus 372, what orders are they coming from? Umesh Shastry: It is coming from all the subsidiaries that is the international subsidiaries and the domestic subsidiaries that we have, SPP Pumps, primarily Kirloskar Brothers Thailand and Kirloskar Brothers Europe and in domestic subsidiaries Hematic and Kolhapur Steel. Kamlesh Kotak: So is it possible to get some color on how much of this is export orders sir?

6 6 of 17 Umesh Shastry: I don t have a number with me right now but maybe I can send it across to you at a later stage. Kamlesh Kotak: Sir one more if you can help us understand out of these orders, which we have Rs.2,253 crores, can we divide that in terms of the tenure of orders, I mean how old are these orders, one year, two years or may be two years plus if some sense in that if we can get? Management: The project orders, I think more than Rs.1000 crores worth of orders would be more than three years old and that would cover Irrigation, Water Resource Management, Power sector and largely Irrigation because Irrigation was really going very strong at that time. Power would be a little later in the last 1 or 2 years, but Irrigation would be more than three years old. Kamlesh Kotak: And sir in terms of the pending orders from Andhra side, how much of that is pending out of the total? Management: About Rs.800 crores would be pending. Kamlesh Kotak: So that includes that toll projects which we mentioned last time. So how much would be that sir? Umesh Shastry: Rs.800 crores of orders have not even commenced actually. This is what we told you last time also. Remaining are moving at a snail s pace. Kamlesh Kotak: So how much remaining barring that sir? Umesh Shastry: The remaining is about Rs.400-odd crores of order which is still currently going on. Kamlesh Kotak: So sir, my question pertains to this that we have booked some losses on the completion of orders. So are those kinds of projects are still remaining to be executed, could we see this kind of write-off further as we complete the order? Management: Because those projects have to be done. We have committed to the customer and most of these customers tend to be government customers. So the loss would be greater if we don t do it not only in terms of money, but also in terms of reputation. Kamlesh Kotak: So by when we expect this to be completed sir? Management: I would love to be able to answer that because quite a large or majority of the orders that are stuck are stuck on account of the customer and it could be either relating to construction not being done or land acquisition still to happen. Kamlesh Kotak: And sir can you help us understand the performance of the subsidiaries, can you break it up in terms of key subsidiaries performance in terms of top-line or profitability? Umesh Shastry: We normally don t share the information by subsidiary even in our published accounts; we normally give a consolidated picture. So as of now I don t have that number with me because I have just shown you the consolidated number vis-à-vis the standalone numbers, so the gap is basically all the subsidiaries put together.

7 7 of 17 Kamlesh Kotak: And sir specific to Kirloskar Constructions, how that entity is now panning out, I mean what sort of work remains to be done and the plans about merger with Hematic Motor as we discuss, so how we go about it? Management: Our Deputy Company Secretary, Mr. Prashant Vaishampayan, is here, he would I think answer the question better. Prashant Vaishampayan: The hearing in Mumbai High Court is fixed on 15 th February and we are in process of filing petition in Chennai High Court in this week. Then we would be getting the date for hearing in Chennai High Court as well. But we are targeting that we would be able to give effect to the scheme before March end. Kamlesh Kotak: And sir in terms of the business orders which are yet to be executed in that entity, how much is still remaining? Management: About Rs crores which we feel would probably last for may be another 6-8 months because we are also going very slowly. Kamlesh Kotak: And sir about the outlook how do you see in terms of the ordering pipeline or the traction across the businesses, do you see some improvement over the last 1 or 2 quarters, so how do you see the outlook going forward? Management: If you look at the consolidated, the way it is going, the number of orders are going up. So if you look at it on a standalone basis the quarterly order booking is little erratic with 401, 315, 372 being the case. All I can say is that we are very clear that we will only take the project orders which meet our new guidelines which is how do you improve the financial health of the company rather than look at top-line. As far as Product orders are concerned I hope that the rise that we had seen can continue but I know that good things don t last for very long. So we will be cautious, but we are taking orders which are helping the company in a way because the terms are all very good terms that we take them on, most of the businesses cash up kind of business, we get most of the money within a few days if not a few hours of supply. So that is what we are promoting. Kamlesh Kotak: So that is from what we see in terms of getting the order or bidding for it, but my question was more pertain to the macro environment as to how the ordering across the three key verticals, Irrigation, Water and Power is happening, is there any improvement you see? Management: No, I would look at you, because you talk to so many customers. Even if it is a construction company we are only looking at certain areas relating to Water, but you could see things that are happening on Roads. So you would now far better how those things are going. On the Irrigation side we know that very little is happening though it is required. Water Resource Management again lot of work needs to be done in our country, but it is going at a certain pace and less said about power are better, because we need the power and you know what the situation is. Moderator: Thank you for your question sir. We have our next question from Mr. Mahesh Bendre from Quantum Securities. Please go ahead.

8 8 of 17 Mahesh Bendre: Hi sir, just one clarification. Out of Rs.2,253 crores order book and you mentioned that 800 crores orders from Andhra irrigation has not started yet. So out of the remaining 1,400 crores of orders, just wanted to know how much of this would be older than two years? Management: You could take the entire irrigation; you have the Slide #15 in front of you. So I would say all of irrigation may be less than Rs.50 crores may be new, less then two years old, because less than two years old are proceeding quite well, because they are with different terms. But these are the old ones out of Andhra Pradesh. Water Resource Management again like Mr. Shastry mentioned Rs.55 crores was the Andhra order which I guess is in the pending board, so close to Rs.200 crores worth of orders are the remaining and I would say there are may be 50% or less more than two years old, the rest is less than a year old and Power again, most of these orders are probably 2 or 3 years old. Mahesh Bendre: So just asking in dynamics, since we are not able to execute orders on time, so that is why we are booking a lot say I am just wondering what could be the quantum of this order book where we could book losses? Umesh Shastry: These old orders basically which our CMD just said which is about more than let us 1-2 years old which is roughly around may be Rs.1,600-odd crores, depending upon the stage of execution of the projects we will actually be able to really know what are the kind of additional losses or cost overruns, because as we have again been saying we will bill for these projects only when we actually collect money for the earlier deliveries. So the onus is upon the customer to pay us the money, subsequent to which we will do the billing process. So if he pays us all the money immediately the billing can happen faster and we will be able to come out of it faster and probably book lesser losses because finally time is money, so we would definitely like to do that. But putting a number on it really is something which is impossible for us to guess today, because it completely lies in the hands of the customer. Mahesh Bendre: No, but sir I mean out of this Rs.1,600 crores, Rs.800 crore orders, I mean those orders are yet to start. So basically whatever probably we will have cost runs will be limited to Rs.800 crores orders or is it spread to Rs.1,600 crores? Umesh Shastry: It is currently restricted to about Rs.800 crores, you are absolutely right, but for the remaining Rs.800 crores of the orders which have not yet started, which if you remember last time also our CMD had told you that we have actually written letters to the government authorities stating that since we work on these orders, these projects have not yet commenced, we would actually like to come out of them and stuff like that for which we have escalated this right up to the highest level, but we have not really received any replies whatsoever from those authorities. So we don t know really what the position of those Rs.800 crores of order is today. But for the remaining Rs.800 crores of orders which we are currently executing, definitely as the orders get executed we will really come to know about the extent of cost overruns or the extent of losses that we may actually have as we continue to execute those projects. Mahesh Bendre: But sir how long will we wait for these Rs.800 crores orders? We have been following probably this case for last so many quarters. Umesh Shastry: I think the customer should answer that question better than us, because it is the customer who doesn t want us to begin the execution of those orders

9 9 of 17 Mahesh Bendre: No, but if we are going to make losses from these orders because of their fault what is the point in carry forwarding this order from our end? Umesh Shastry: That is exactly the reason why we have communicated to them in writing to the highest authorities including the Chief Ministers of the states, etc. asking them to cancel the project and see to it that we are out of it because these projects have not started not due to any fault of ours or because of the fact that they have not allowed us to go ahead and start working on these projects. But being the government we have not really received any written communication from them. So that is why we cannot say anything with certainty today because we have accepted those orders years back. So as of today these orders have been accepted, though no work has been commenced on that. Mahesh Bendre: Sir in last nine months our consolidated order booking has been fairly strong. We have booked orders worth of around Rs.1,700 crores. Roughly about 40% of the total order booking is from our subsidiaries. So are these booking from the international subsidiary that is Kirloskar Brothers International or it is more in Hematic Motors which is domestic? Umesh Shastry: I would probably say that 60-65% would probably be international and about 30-35% would be domestic. Mahesh Bendre: And sir also one question about the order inflow, next calendar year we are going to witness general elections in the country and generally six months before that we generally see that government orders are basically frozen. So how do you see this going to impact our order inflow for next 9-12 months, I mean Irrigation and basically Water business? Umesh Shastry: Anyway as we have been saying, we will take only those orders which meet our conditions as far as the payment terms, profitability and cash flow is concerned. So it really doesn t matter because we believe today the kind of orders that are being tendered or being given by the government have payment terms which our ED wants to say something about this. Management: Recently, the Odisha government has come up with an Irrigation project which is about Rs.880 crores worth and the payment terms are 1% advance and 39% on supply. So it is impossible to do this kind of projects. So we have represented to the Principal Secretary and he says which company would like to. The Finance Ministry of Odisha Government has assumed corporates are very rich, let them finance this project. So we have now taken up a number of levels to improve these payment terms to 95% and 5% and otherwise we have told them, the whole scheme we have helped the government design it, we have put in lot of efforts for giving them the latest techniques and so on, like lowest life-cycle cost and so on. Now after doing that, if they are going to come up with 1% and 39% payment, we have said that we will not participate. So like that there are quite a few projects where we are struggling with the governments to make sure that the manufacturing companies or the EPC contractors who are going to be executing this, they don t fund this project. Mahesh Bendre: I just fully understand our view, I just want to only know that since elections are there probably next March or April; the tendering pattern will change, may be either three month or four month before that the government may not go with their plan or it might be the case by December, we could see majority of the orders will be tendered. So just looking for next 9-12 months, what could be the possible scenario in Water and Irrigation?

10 10 of 17 Management: I just give you an example of Irrigation. There is this one big project worth about Rs.880 crores, there is a similar project in Karnataka which is now on the anvil, which is about Rs.3,700 crores and we are going to be only taking part as far as the tenders are concerned only in Products, so we will be working with the EPC contractors. And there also we are bending backwards to make sure that the payment terms are favorable. Umesh Shastry: To answer your question may be in a nutshell it really doesn t matter whether these orders are floated or not, because we will continue our focus on the Products and make sure that we grow our Products business and continue to focus on the old projects from the perspective of executing and completing them and recovering our entire money. Mahesh Bendre: I am just wondering if the EPC orders people don t get order for some reasons I don t know how we are going to get orders for Project business. Management: So either we take direct orders or through EPC. The projects are floated and we are very confident that we will get the orders. Management: But the other thing is that Irrigation is a state subject, it is not a national subject. Since state government release these orders, it depends on whether that state is going for election as well. And Power is basically I don t think since they are either public sector undertaking or private power parties that it should affect. Water is mainly city, municipalities and everyone places these orders. So I think we are more affected by local elections. So the thing would be to see where there are local elections, what are the possibilities of business developing, what are the kind of terms, what is the way the government works and then we will know. Mahesh Bendre: Sir last question, in the financial release we have mentioned that the income tax department has initiated the additional tax liability and proceedings on and probably we are likely to ascertain that by this financial year and we are providing the income statements. So just wanted some details on that. Umesh Shastry: So let me rephrase what you said. If you read the notes carefully, I will just read out the notes once again, it says that consequent upon the proceedings under Section 133A of the Income Tax Act initiated by the Income Tax department, the company is in the process of ascertaining its additional tax liability. This has no impact on the financial results for the quarter ended on December 31, The liability pertaining to the earlier years once ascertained will be appropriately provided in the books of accounts for the year ended on March 31 st, So actually the Income Tax department conducted a survey in our company and they have asked us to produce some documents and some evidence to them. Now, we are in the process of gathering all those documents and we are presenting all those papers in front of them. And based on their going through those documents and evidence, if there is anything that comes forth as something which they would probably view as the potential liability upon us, then they will send us a demand notice based on which any additional tax liability will be determined and it will be paid if required. So as of today there is nothing crystallized per se. Mahesh Bendre: But sir this 133A Section covers for last six years? Umesh Shastry: Yes, that is right.

11 11 of 17 Mahesh Bendre: Because last year we had some tax rate was a bit lower but compared to previous years I think we were paying probably in excess of 25%? Umesh Shastry: Absolutely right. Mahesh Bendre: So may be it relate to only last year. I know you may not be able to answer this, but that could be the probable range? Umesh Shastry: No, they have asked us for certain information even for 6 years. That is a fact. Mahesh Bendre: Because if you see the tax rate apart from last year it has been higher, in excess of 20%. Umesh Shastry: Absolutely correct. Moderator: Thank you for your question sir. We have our next question from Mr. Himanshu Upadhyay from M3 Investments. Please go ahead. Himanshu Upadhyay: Yes, my question is related to our consolidated results. If we take out the results from standalone from consolidated for nine months, the revenue seems to have fallen although the PAT has reduced and the cash flow as well. Can you tell what is happening here in the thing, because from profit of Rs.20 crores what was there and subsidiaries in the nine month has reduced to Rs.7 crores and cash flow or cash profit which was Rs.30 crores has also reduced to Rs.18 crores. Can you tell what is happening and your top line has also reduced, in the subsidiaries what is the thing which is happening? Umesh Shastry: It is primarily because of Kirloskar Constructions and Engineers Limited which is KCEL where there has been practically no sales during the quarter, but there has been a loss of about Rs.9 crores which has been incurred by KCEL during this quarter alone for executing the old projects which are in the pipeline. So that is the single biggest reason which you see for the drop. Himanshu Upadhyay: And the second question is regarding this Kirloskar Ebara. The rating of that company has been reduced and again the company made losses in the last 6 months, from April to October what the rating agency has checked. Can you really tell what is happening because it was a good profit making company and then last year the profits dipped even when the revenue increased and let us say in the first half the company was in a loss? Management: Kirloskar Ebara actually has introduced a new product line which is Turbo Generator sets and this tend to be very large steam turbines which have been introduced in the Sugar sector, they have basically made a loss on the Turbo Generator business. The Pump business continues to be profitable. Because all the four gensets came out in one year, they went out in one year or was sold in one year and therefore they made a loss last year. This year again they are unable to meet to dispatch a few Pumps to a large customer and I believe that now the he basically use the company to keep his product till his issues were sorted out. He needs the Pumps now. So I expect by the end of the year you will see a different result. Himanshu Upadhyay: But can we expect the results for this year would be similar to last year no profit, no loss?

12 12 of 17 Management: It may be no profit, no loss or it may be in profits, marginal. Himanshu Upadhyay: And the third question is on this Kirloskar Constructions. We are merging with Hematic Motor. What is the rationale for it? Because initially we were thinking of selling off that company once the orders are reduced and all those. So what will be the benefit of merging? Umesh Shastry: Actually the first thing I would like to clarify is, it is not Kirloskar Constructions that is merging with Hematic, and it is Hematic Motors which is merging with Kirloskar Constructions in India. As far as the sale of KCL was concerned, we did try and find a buyer for KCL. We were hunting for a long time, may be something like close to 1.5 years and unfortunately we were not really able to get a buyer. So from the perspective of ensuring that we do proper consolidation of our subsidiary companies we felt that this demerger would be the right course of action from the perspective of the company going forward from the synergies and stuff like that rather than do anything else. Himanshu Upadhyay: So would the losses of Kirloskar Constructions can be carried forward or the benefit of the losses, the tax benefits can be taken by Hematic Motors? Umesh Shastry: Yes. Himanshu Upadhyay: So that would be the rationale, because the line of business of both the companies is completely different, right? Umesh Shastry: Yes, but that is not the only thing that is rationale, actually it is more, we would like to consolidate our subsidiary companies from a higher level perspective, just like we have KBI BV internationally which is one step down subsidiary where all the other subsidiaries are attached to, similarly even from the domestic front there is some long-term plan, so this would help in that. Moderator: Thank you for your question sir. We have the next question from Mr. Manish Goyal from Enam Holdings. Please go ahead sir. Manish Goyal: Sir just to clarify on this, other expenses have gone up. So is there any FOREX provision in the current quarter number one? And number two is the bank guarantee which was encashed 2.5 crores, has it been debited in the quarter? Umesh Shastry: Yes, the BG has been debited Rs.2.5 crores and the notional loss on FOREX is about Rs.4.6 crores during the quarter. So both of it is lying there. Manish Goyal: On the Projects business we have been saying that there is some Rs.400 crores of projects where basically they are old projects and unfavorable terms and we have been incurring losses. Because I heard that again this quarter also we mentioned that Rs.400 crores. So is that number coming down or just wanted to know what is the quantum of projects where we are seeing losses? Umesh Shastry: It is definitely coming down, Manish, because we would not have incurred this loss of Rs.16 crores during the quarter as we have already said in the analyst meet unless we had actually executed and closed some of the old projects. So the quantum is coming down,

13 13 of 17 this figure of Rs.400 is a rough number, it is hovering around that, but yes, it is definitely coming down quarter-and-quarter but probably not at the pace at which we would like it to happen. Manish Goyal: So this Rs.16 crores loss was in the quarter end not for the nine months? Umesh Shastry: No, it was for the quarter alone. Manish Goyal: Lot of has been discussed earlier, but just to further clarify, out of total order book Rs.800 crores is non-moving, right, and rest of which is executable. Out of that there is only Rs.400 crores of orders where we are incurring losses, but rest of the orders are the ones where we are not making losses, right? Umesh Shastry: Yes. Manish Goyal: This Rs.400 crores order, is there any timeline where it can probably get completed or is it possible to quantify that say probably in one year time how much orders could get executed? Umesh Shastry: Manish, again just to repeat ourselves, it is difficult to say anything now, because it is dependent on collection or recovery. So as the customer pays us, like I said the amount of billing which is done is basically equal to or less than the amount of recovery that we are actually doing. So it is very difficult today to actually tell you how long it is actually going to take. Manish Goyal: But all these are again Irrigation orders in Andhra Pradesh? Management: Largely it is. Manish Goyal: And is it possible to get a number as to what could be the incremental losses from these projects going forward? Umesh Shastry: Again, at the cost of repetition it depends on how long it will take us to actually execute these projects, because we really don t know how the customer is going to pay us based on the payment we will bill, so based on that the execution will take place, and if it happens in 6 months, you know the losses will be lower, and if it happens in 3 years, the losses will be higher so it is absolutely impossible to really peg a number at it today. Manish Goyal: So is it fair to assume that till date whatever losses that we think that the project will incur we have already provided for that and whatever incremental will happen on the execution only then you will be able to quantify and provide for that, is it a fair assumption? Umesh Shastry: More or less, because as per the Accounting Standard at the end of each quarter we are expected to revalue the project based on the current situation. So we are reestimating our cost structure for those projects at the end of each quarter. And in case there is something that is going to happen, extra cost estimate, that extra cost estimate is actually taken care of as far as the POC accounting is concerned.

14 14 of 17 Manish Goyal: And sir on this Rs.800 crores of order which is basically non-moving, have we received any advance, what is the status on that and does it include one order or there are several orders? Umesh Shastry: There are several orders and we have not received any advances as far as I remember for those orders. Manish Goyal: And also if you can give us some insight into going forward, what can be expected on debt reduction and reduction in our overall capital employed basically number one? Number two what is the retention money outstanding and do you expect any more retention money to be received in Q4? Management: I can only tell you that we will make our best efforts to improve the balance sheet. We will try and collect money from every customer that it is possible to collect from. We are trying to use any method possible including shutting down pump stations and things like that but that causes its own problem. Our idea is that we come out of this situation properly with our name intact. So one-by-one projects are being closed. Today, we just closed, we have taken something like 12 projects of irrigation to be closed, and we have already gone to 15. So every project sector has a job to do which is that they have to complete the project order that we have taken to the full satisfaction of the customer. So in that we are trying to make sure that we get all our money back, we are talking to the customer in case there is a belief that we could make a claim or we could do something or the other and we want to get out of there, because if we stay at each side then that means there is extra cost. So we are trying to ensure our best to come out of it as quickly as possible. It is very difficult to tell you a number because I can only hope that as it is March end, the government whether it is state or national government will be trying to use up their budgets and hopefully they will say that this is one company that has tried to live up to its reputation and meet its commitment and hopefully they will resolve and pay us that money. So I cannot really give you a number. Manish Goyal: And what is the retention money outstanding as on date? Umesh Shastry: It is approximately around Rs.500 crores for all the three sectors put together. Manish Goyal: And any significant amount which is outstanding for more than two years or three years sir? Umesh Shastry: Yes, about Rs.350 crores, if you remember last time also, somebody asked what is pending for more than 2-3 years, and we said it was Rs.350 crores. Management: So it may not be the same Rs.350 crores because some of the old ones are being low as the sites are getting closed, there are some power sector sites which are being closed after 7 years, there are some irrigation sites that are also being closed and I wouldn t say it is our fault or the customers fault, but at the end of the day we are coming out of it now. So that is what the situation is. Manish Goyal: Yes, so exactly that is what I was probably looking for is that probably in over a period of next six months to a year, out of this Rs.500 crores number based on whatever projects you are looking to close what number can we expect that you can probably recover?

15 15 of 17 Management: All I can say is that we also monitor how much is dependent on us of this retention, that number is coming down significantly and it is not a major amount when you look at that 500 crores. Most of the reasons are related to the customer which is why it is very difficult to give you an answer. Manish Goyal: Sir last question on the Products business which has been doing fairly well. But in Q3 we saw that growth rates have been little lower than what we saw in the first half. So if you can just throw some more light in terms of how do you see the Products business and which particular segment you expect to do well, say in next 6-12 months, and what are the efforts been put up to probably grow that business? Management: In Product sector, the last quarter was very vital for our Distribution sector, Distribution sector this is the season time for domestic for Agriculture, for Submersible Pumps and so. For the next three months for Distribution sector I am very confident will be very good. The Industry sector also is picking up very well, and so is the Building & Construction. So overall if you look at the four or five sectors which are predominantly product we will do fairly well in this next quarter. Moderator: Thank you for your question sir. We have our next question from Ms. Keerti Dalvi from Enam. Please go ahead ma am. Keerti Dalvi: Sorry to hop on the same issue, but as per your second quarter presentation we did almost Rs.550 crores kind of product revenue, and as of nine months it is Rs.784 crores. So probably in this quarter we must have executed Rs.160-odd crores kind of project revenue. Am I right on that part? Umesh Shastry: Yes. To tell you exactly it was Rs.234 crores in Products and Rs.166 crores in Projects. Keerti Dalvi: Out of these Rs.160 crores project revenues you executed, what was the share of your old orders where you had incurred loss? Umesh Shastry: All these Rs.166 crores revenue was basically old projects only. Keerti Dalvi: And as you said there are still Rs.400-odd crores kind of these projects where you see certain problems may come up probably you may incur other higher cost overruns or something like that. Am I right on that sir? Umesh Shastry: Yes, it is possible. Keerti Dalvi: But the duration would be probably more than a year or you foresee that probably in next one year we will be able to close those sites? Umesh Shastry: If the customer pays us we will close them immediately, and if the customer takes time to pay we will take time to bill. Keerti Dalvi: No, as our CMD mentioned that to keep our name intact we have to execute those orders, there is no backing away.

16 16 of 17 Management: Keerti, if the customer hasn t acquired the land yet, how do I execute the order? Keerti Dalvi: But there are certain projects where those preliminary issues are still pending? Management: And also if he is not paying us, we are in a situation where we are saying may be your site is ready but you still owe us money, so please pay us not only what you owe us, but pay us for what you will owe us after you ship, so they are going to be sufficient. Keerti Dalvi: Would it be fair to assume that there could be claims which can come back to us probably one year down the line wherever it is possible if we are negotiating with customers? Umesh Shastry: What kind of tariffs basically you are talking about? Keerti Dalvi: Certain cost escalation base because there are delays which has caused you to incur higher cost Umesh Shastry: We are writing letters to the customers, definitely. We are presenting our case to them. But whether they will actually pay us that money or not is something which today it is difficult for us to say because it is primarily the government and they will go strictly by the tender conditions. So unless there is something over and above the tender conditions which is probably by means of a new government orders or something like that which is probably released, those chances are fairly remote. Our claims will probably remain just in their files rather than anything else. Keerti Dalvi: Sir as of September quarter end we had Rs.130 crores order book in Kirloskar Constructions, am I right on that sir? Umesh Shastry: I would probably think that it was Rs.30 crores or Rs.35 crores at the end of last quarter. I don t think it was Rs.130, and this has come down to I think around Rs.25 crores now. Keerti Dalvi: And we did almost Rs.6.5 crores loss in the first half in the Kirloskar Constructions and Rs.9 crores in this quarter? Umesh Shastry: Yes, that is right. Keerti Dalvi: So probably by this year end all these orders will get executed and whatever the losses we are making in Kirloskar Constructions hopefully will get over by FY13? Umesh Shastry: No, there will be a certain portion which will get carried forward to the next financial year as well because as I mentioned a little earlier to similar question by one of the analysts, we believe by July or August actually all the work relating to these old orders of KCEL will get completed. So there will be some losses which will be incurred in the subsequent year also. And I would also like to tell all of you that once these orders are executed Kirloskar Constructions and Engineers will probably have no more orders to be executed. They have lot of plant and machinery which they have today. So we will also need to take a decision as to the disposal of the plant and machinery and equipment that they have because it would probably not be required by us. So there is going to be probably an impact of loss on the disposal of that plant and machinery. Though today it is difficult for us to quantify what could be the amount of