Real Economy Check: It’s Survival Of Fittest In The Real Estate Slowdown, Says Innovators Facade Systems’ Rohit Sharma
The slowdown in the real estate sector is a “true test to determine survival of the fittest” according to Innovators Façade Systems Ltd.
If an organisation has a good product and delivers consistent performance, it can generate demand no matter how bad the economy is, Rohit Sharma, the company’s director, said on Real Economy Check—a special series on challenges faced by India’s small-and-medium enterprises. Mumbai-based Innovator Façade Systems makes building facades and counts 14 Indian airports and the Lodha Group among clients.
There has been a reduction in the number of projects available to companies like his, but Sharma points out that has also improved the quality of projects and benefited businesses like his. “...with RERA coming in, with demonetisation and building standards going high, the number of projects reduced from 100 to 30. But all these thirty are good for us, and are the kind of projects where we would want to bid. When we had hundred earlier, we were bidding only for thirty. So, for thirty, we were only concerned about thirty percent of budgeting but now, 30 out of 30 are my kind of projects so 100 percent of them is what I want to be in.”
Sharma also suggested adopting better technology as a solution to survive competition, diversification and expansion.
Watch the full video here:
Here’s the edited transcript:
Tell us about yourself and your company? What do you do?
Innovators Facade Systems is a one-stop solution to the exterior facades of a building. We do anything which is high rise and are currently working on the second tallest tower of the country which is the Lodha World Towers. So, we deal with all kinds of products that are available in the market which is required for the exteriors. We’ve done around thirteen airports in the country, including the Chandigarh airport done by us two years ago. So, you see curtain walls, the high rises coming up with all the glass facades around them, we design, manufacture and install them.
How has business been in the last twelve months?
Business has been a little slow, but I would say that it does not really affect everybody. Survival of the fittest is a true saying in our industry. So, if your product is good and you’ve been consistent over a period of time, no matter what kind of a turnaround comes in the economy, there will be demand and though expectations of the market are usually very high but a realist businessman wouldn’t be too worried about it.
The two key sets of customers that you spoke about, one—the real estate companies and two—the airports which would mean either dealing with the state or the central government depending who your customer is. What is happening to the cash flows from these pockets because understandably the real estate is in issues and the government capex has noticeably slowed down.
I would say that the market has definitely been affected because there was too much inflation happening in the last three to four years. People were getting paid over what they deserved and that is the reason all the prices went up but accordingly, not the income of the people. So definitely, when the spending power of the customer reduces, there are fewer sales in infrastructure and that ultimately affects the planning of the developers and the amount of debt that they have taken, they are unable to repay because the income is not coming from the consumers in a similar way. So, the demand has decreased and ultimately it has affected us as vendors to provide the solution to clients. So, the only difference is, earlier we used to have a 100 projects available in the market. But, only 30 of them were useful to us. By useful I mean, they were quality conscious clients, time driven clients, they wanted to deliver projects with esteemed quality. But with RERA coming in, with demonetization and the building standards going high, the number of projects reduced from 100 to 30. But all these thirty are good for us, and are the kind of projects where we would want to bid. When we had hundred earlier, we were bidding only for thirty. So, for thirty, we were only concerned about the thirty percent of budgeting but now, 30 out of 30 are my kind of projects so 100 percent of them is what I want to be in. So, the quality of projects has become better though 70 percent of projects which were of lower standards or had a lot of technical deviation from government policies, they all have been cut down.
So, what are you doing to tackle the issue of working capital flows that might not be coming from your existing clients? Are you expanding geographies, moving from where are you right now, are you expanding sectors? Two, how are you taking advantage of the positive point that you spoke about? How are you taking advantage of all the thirty projects that you want to bid for? Are you saying that therefore you are bidding more and winning more? Is it that your revenues might actually go up in these times?
Apart from this change that has happened, there is a lot of internal introspection that has being going on for the past one year. We have been working on our productivity, evaluating each and every process, team and all the HODs. What is their strategy, how are they optimizing things? So, we are working on more of technology so that we could take our output to at least two times with half of the resources. We are trying to become more competitive by adopting technologies and we are also looking at the other two options of expanding our geography and diversifying. We have an facility in Wada where we do fabrication work and a lot of installations which were solely dependent on the development sector. So now we are using the same resources and looking towards the pharmaceutical industry and other industries where a similar value addition is required so we are not dependent on one sector as of now and we are always flexible whenever the market turns around. This market is going to be dynamic no matter when. 10 years ago, 20 years ago, people used to talk about inflation or the market being bad, but that situation is a cycle, it comes every 10 years. It is about surviving, the survival of the fittest, you need to change according to them and move ahead so we’ll be doing all we can. The only thing is we are not being too optimistic, we are staying on ground, we are trying to enhance our strength. We are not trying to diversify too much from the fabrication business that we are doing right now.
What about borrowing costs? People are saying despite rate cuts happening, borrowing costs have gone up for SMEs. What has your experience been?
Borrowing costs have gone up so any project we are taking, we try to be in a situation where we are not the ones funding the project, but it is the client who is funding. So, we just want to be a facilitator, a service provider. The client is putting in the money, we are providing a service and we move out. It has been difficult when we try to penetrate through a market, try to create a niche or when you try to create a brand, you compromise on them on an earlier stage. We have matured over the time, we are a 20-year-old organization so we try that our cashflows are intact and the client is the one who is responsible to fund the project and ensure that his product is given most priority by us because he is funding the project and we provide only the service what he/she wants. So financial burden is something which we have been trying to avoid over the time, and we haven’t been 100 percent successful but it’s a good step that we’ve taken.
How much have borrowing costs gone up by?
I am not sure at this moment right now.
What would happen if the large real estate clients are not able to pay back the money on time or aren’t able to pay back the money at all? How much of your working capital has been stuck in the space and do you believe that 100 percent will be repaid even if there is a bit of a lag?
I am pretty much secure about 90 percent of the project value that we are working on. The 10 percent is always dependent because it comes in when the client takes over and the product is fine, and we get a sign-off or a handover. So, till the 90 percent of the project, our cashflows are intact. Once we deliver the materials on site, we get paid for it. We don’t have to install them. The clients are more eager so that the materials on site so we get 90 percent of the payments in our hand. The balance 10 percent is our rapport, it’s our service and the kind of process that we have in the project where the installation of a product leads to the delivery of the next part of the process. So, we have tried to keep a balance but 90 percent of the money is safe where we get payment against delivery.