Q1. Could you start by giving us a brief overview of your professional background, particularly focusing on your expertise in the industry?

Having completed my Mechanical engineering study from REC Surathkal (Now NIT) way back in 1985 and a short study at IIM Ahmedabad on Materials management, during my first 20 years of industrial career, I worked on product development, vendor development, materials management, and green field plant development for 2/3 wheeler manufacturing, auto components manufacturing, and heavy components manufacturing for railways. 

Over the last 21 years of my industrial career, I have worked on upgrading manufacturing capabilities, improving processes, and developing new products for the machinery-building and heavy fabrication industries. Major time during the last 21 years was spent on the upgradation of various boiler pressure parts manufacturing. 

My exposure to the automotive and automotive components industry helped me implement a line manufacturing concept for pressure parts, enhancing total production output by a factor of 10. Having spent 4 decades in industry, I learned, experimented, and implemented various operational improvements to increase output, enhance quality, and achieve business goals. 

 

Q2. In your view, how close is India’s cost-per-tonne for precision-fabricated equipment to matching Chinese benchmarks, and where is the 'efficiency tax' highest?

While comparing the cost per tonne between India and China, the following cost components need to be reviewed:

• Indian labour cost for skilled, semiskilled & precision work (precision machining, fabrication, welding and assembly) is almost at par with China and sometimes even cheaper by about 10%
• Electricity cost to industries is also competitive or, to some extent, cheaper in some areas in India
• Productivity and automation in China have an edge over Indian manufacturer

Because of this, a typical 5-10% cost advantage is seen in China, especially for high-volume items. 

The term efficiency tax relates to non-value-added costs, comparing costs in India with China, the higher logistic cost, higher capital cost due to higher interest rates, and higher input costs like steel cost etc.

To sum up, there is a difference of about 10% in average cost between Indian and Chinese manufacturers. 

 

Q3. Where are the specific 'blind spots' in Indian domestic engineering capabilities that still require high-royalty technology tie-ups?

The Indian manufacturing capabilities for cutting, welding, fabricating, or machining are at par with the world, so India is globally competitive in fabrication and static equipment. The real blind spot, to my mind, leading high royalty technology tie-ups are:

Process technologies - process patents, operating datasets, and years of performance data curves

Automation and Control Systems

Turbomachinery/ high precision machine tools, etc.

 

Q4. In your experience, what are the primary drivers of unbilled revenue and 'trapped cash' in large-scale EPC projects, and how has the shift in local steel sourcing impacted your cash conversion cycle?

In a large EPC contract, the unbilled revenue and trapped cash are mainly due to:

• Delayed certification by the client
• Delayed renegotiation and settlement of change orders
• Mismatch in cost curve and milestone structure etc.

The local steel sourcing has a positive impact on the cash conversion cycle due to:

• A shorter lead time results in lower inventories
• Better payment terms, from LC term to credit up to 60 days
• Nil foreign currency fluctuation risks 

 

Q5. In your experience with heavy engineering, how effective are current price escalation clauses in protecting margins against 20% volatility in raw material costs?

Typically, in heavy engineering, the raw material cost is around 50% and the margin ranges between 10-15%. A 20% input cost escalation will definitely wipe away the margin. 

Normally, price escalation clauses are linked to major raw materials like steel and alloying elements but are also linked to published price documents. The time lag between actual purchase and the date of document publication causes a risk of not recovering the real escalated cost. 

As it is linked to major RM, it does not recover the entire escalated cost.

Due to the escalation, the higher cash flow-linked cost also does not get recovered.

 

Q6. What is the most common reason for Liquidated Damages (LDs) being triggered in the final 10% of project execution in India?

Typically, in a large project, 90% of the work takes 50% of the time, and the remaining 10% takes 50%. Because of this, the LD is mostly triggered in the last 10% of the project execution.

The major reasons are delays in readiness for inspection, delayed inspection, delays in completing final commissioning steps, or delays due to extra time taken for fine-tuning during commissioning.

Improper coordination with the site team, inspection authority, and client also results in unavoidable delay, triggering LD.

Other reasons are often due to delayed engineering finalisation, resulting in delayed input supplies, which were assumed to be recovered during manufacturing but could not be.

 

Q7. If you were an investor looking at companies within the space, what critical question would you pose to their senior management?

As an investor, my intention would be to deeply review the following:

• Order book
• Performance record of projects executed in the last 3 years
• Cash flow situations, month on month, for the last 1 year and the next 6 months' projections
• Overall inter-departmental cohesiveness, and the team's response to individual failure in the chain of execution
• Profitability in the last 2 years and projection/plan for the next 3 years

The question to the top management would be "how they look at the above items and how they will handle the adverse situation.