Since when did infrastructure sector become an industry for companies to invest in? If one looks back at the hype surrounding infrastructure, especially around construction of roads it all began about eight years ago with the golden quadrilateral project. Many big names like Reliance and L&T rushed in. L&T emerged as the most respected company in this area in five years. But it is also supposed to have lost a huge amount of money (about Rs 200 crore) in the process. Reliance set up an office, but it never took off. A few foreign companies entered the fray and faded into oblivion. Almost 80% of the entrants made huge losses.
There are many reasons why profits have been low for infrastructure projects. They require substantial investment in very large machinery which is not cheap. It is not possible to write off this expense in one project. Those in the business say that if you invest Rs 20 crore you can barely write off Rs 2 crore in the first project. But Indian business is known for its herd mentality. It decided that there was money in roads. So, people wandered into infrastructure without doing their calculations.
A lot of them started facing a liquidity crunch and the banks were not willing to lend. So, falsifying accounts became the norm for at least 30 to 40 percent of the industry. How did they do it? They had to get another government project by bidding low. To get these projects, people started under quoting. In government projects 10 percent advance, is guaranteed. Of this, 5 percent is meant for machinery and 5 percent for general expenses. What many in the industry did with the money was to settle their old debts. With the rest they invested in land around the project area. With new roads and new constructions, land price in most places does go up. But this also means that there is no money for new machinery which pulls down efficiency and productivity.
Till the financial meltdown hit everybody, India shining was the ruling anthem. So, everybody wanted to go public or raise money through private equity. Investment bankers offered valuations many times higher than the company?s PE ratios warranted. They convinced the willing industrialist that he was sitting on a goldmine. They based the valuation on, say, 11 times higher PAT for the next year.
Thus began the process of tidying up balance sheets. Figures were doubled. Bills to be paid were slashed from may be Rs 50 crore to Rs 30 crore so that a profit of Rs 20 crore could be shown. Claims were put in, invoices raised. All this was done in the IPO year. The company?s valuations zoomed. The promoter sold his shares at enormous profits and recouped his investment and more. If this didn?t work, he always had the land he bought when he was building the road. In the last few years, there has been a scramble for land in Mumbai, Hyderabad and Dubai, compared to other places. In a very happening area like like the Old Mahabalipuram Road in Chennai, land prices went up ten fold. According to industry sources, stories like this provided the inspiration for operation land grab.
Satyam was listed in NYSE in 2001. According to the promoter?s own confession the account fiddling started in real earnest at this time. Again, it was during this period that a little-known Satyam Constructions became Maytas properties and Maytas Infra. People in the business say that Maytas used to quote at least 10 percent lower than its competitors and yet managed to show larger margins than the others. They were not considered anymore efficient than the other well-known names in the business.
The IT business grew in India right under the government?s nose. It really doesn?t need favours from politicians. On the other hand, no big land deal in India can be completed without the blessings of politicians. So, is it any surprise that it?s the love of land which finally brings people down?
?sushila.ravindranath@expressindia.com