One of the sectors worst affected by the economic slump of the last few years has been infrastructure . Star companies of the 2000s - the GMR Group, the GVK Group, or Lanco Infratech - have been reeling under debt and struggling with delayed projects. This, however, is not the whole story. Many lesser-known infrastructure companies have prospered despite the adverse circumstances.
A common feature of most of these resilient companies has been their business model. Different from the asset-owning developer model of the likes of GMR, GVK and Lanco, these are construction companies. They have largely stuck to the traditional EPC (engineering, procurement and construction) format, in which the client is billed and pays for the costs incurred for the project, rather than the BOT (build, operate and transfer) one, where the company raises its own funds and recoups them after completion by imposing a toll on users or getting an annuity from the client. Until the downturn struck, the BOT route was all the rage for mega-projects, with government departments rooting for it and many companies responding enthusiastically. But all that has changed. "In today's environment, EPC is a better model because capital is not easily available for companies," says Shirish Rane, Head of Research at IDFC Securities, who has tracked the sector for years. "In future, most projects will come on EPC basis and that will be good for EPC players."
Apart from the choice of model, sharp focus on the segments and geographies they are most familiar with, as well as a tight rein on costs, has helped these companies. "Chances of growth are greater for those companies which have good execution skills, are able to manage their cash flows well and have minimised their exposure to BOT," says A.A.V. Ranga Raju, MD of NCC (formerly Nagarjuna Construction Co.), which has largely focused on EPC. NCC is now concentrating on cash contracts, but wants to monetise its assets and reduce its Rs 2,200-crore debt. "If there is, say, a one year delay in completing an EPC contract, project costs go up by five to six per cent, but if there is a similar delay in a BOT project, they rise 20 to 25 per cent."
BT profiles six companies - Transstroy (India), Sadbhav Engineering, IRB Infrastructure Developers, MBL Infrastructures, PNC Infratech, and J. Kumar Infraprojects - which have beaten the overall trend.
Transstroy (India): Dam Politics
Along with the futuristic international airport, built by the GMR Group, the eight-lane Outer Ring Road is one of Hyderabad's infrastructural marvels. A 22-km stretch of the road, en route to the airport from the city's IT hub at Gachibowli, was built by Transstroy (India), which gets its tongue twisting name from its Russian joint venture technical partner. In Russian, Transstroy simply means "transport construction". Its CMD and CEO Sridhar Cherukuri is related to Rayapati Sambasiva Rao, formerly with the Congress and now a Telugu Desam MP, but insists the political connection has nothing to do with his success. "This is a company run on professional lines by professionals," he says. He readily admits Rao's wife has a 24 per cent stake in the company, but points out that he and his immediate family own 74 per cent.Transstroy also made headlines two years ago when it bagged a Rs 4,054-crore contract to construct part of the headworks of the Polavaram project, the biggest it has taken up so far. The Rs 16,000-crore mega-project, which will provide both power and irrigation, involves diversion of water from the Godavari river basin to the Krishna river basin. Rumours claim Transstroy was helped by its proximity to Rao, who was then in the ruling Congress party. "The process happened without any involvement on Rao's part," says Cherukuri. "It is unfortunate people think it was because of him."
Started in 2001, Transstroy too prefers the EPC mode, though it has taken up BOT ones - and variations of BOT to include design and finance - as well. "Though we have BOT projects, our focus since 2013 has been only on direct EPC ones," says N. Kalyana Sundar, Vice President, Accounts and Corporate Affairs. With revenues of Rs 4,538.1 crore in 2013/14, it built its reputation and strength through road building, but in the last two years has diversified considerably. "Till 2013, roads brought in about 80 per cent of our revenues," says Sundar. "Now it is down to about 50 per cent. But roads have been the key growth drivers for the company." Of the remaining 50 per cent, 45 per cent comes from irrigation and the remaining from power and port infrastructure. About 35 per cent of its projects are in Andhra Pradesh and around 30 per cent each in Tamil Nadu and Madhya Pradesh.
With a Rs 21,000-crore order book, Cherukuri is optimistic. "We will be growing at 10 to 15 per cent every year for the next five years." But he will have to take care of one major problem, like many other infrastructure companies. Transstroy today has a Rs 4,000-crore debt, according to Cherukuri. He is likely to sell some of his road assets - 13, of which four are generating revenue - to bring the debt equity ratio down to 3:1 by 2016/17. Even for Polavaram, half the land needed for the project has yet to be handed over to the company.
Sadbhav Engineering: Ruling the RoadSadbhav Engineering has just completed the public issue of its asset-owning subsidiary, Sadbhav Infrastructure Project (SIPL). While the parent is a pure EPC player, the subsidiary takes up BOT projects. In 2014/15, Sadbhav Engineering had Rs 2,969-crore revenues, while SIPL had Rs 526 crore. "Unlike many who have spread their interests, we have stayed focused on our core area, which is largely roads, followed by irrigation and mining," says Nitin R. Patel, Executive Director. Sadbhav Engineering's current order book is around Rs 10,000 crore, confined to projects in these three segments - 60 per cent from roads, 25 per cent from mining and the rest from irrigation projects. The company does not believe in outsourcing. "We have our own equipment bank worth around Rs 850 crore with a good asset turnover ratio of around 5:5," adds Patel. After the IPO, Sadbhav Engineering controls 68 per cent of Sadbhav Infrastructure. Patel says that though both companies will continue to focus on roads, their bidding and implementation strategies will remain differentiated. "The group's net worth is now around Rs 3,000 crore," he adds. "What differentiates us from others is that many of them are pure developers with little execution capacity. But we have both." Of the dozen projects SIPL, which was incorporated in 2007, has taken up so far, eight are already operational, with six completed before the deadline. Though it has a pan-India presence, Sadbhav Engineering is focused primarily on roads in Karnataka, Maharashtra, Gujarat, Madhya Pradesh, Rajasthan and Haryana. The mines it works in - as a Coal India subsidiary - are in Jharkhand, the Odisha-Mahanadi coalfields and northern coalfields. Its irrigation projects are in Gujarat, Madhya Pradesh, Uttar Pradesh and Andhra Pradesh.
Patel is confident that roads, in particular, will continue to provide good business. "In the current financial year, we have added Rs 2,600 crore worth of new business, and by the time it ends, we hope to get another Rs 5,000 crore to Rs 6,000 crore worth of business in roads alone." To grow competency and strength, in its core sector, he says, as against one tendering department that the company had four to five years ago which looked at all road, irrigation and mining contracts, each tendering department has now been separated. This too will help to improve margins.
Vishnubhai M. Patel, CMD of Sadbhav Engineering, attributes another reason for the company's success. "We have not lost sight of the need to take care of the interests of our employees," he sums up.
IRB Infrastructure Developers: Building on BOTThe BOT route is not necessarily a dead end. IRB Infrastructure Developers has been prospering despite taking up numerous BOT projects alongside its EPC ones. It has an asset base of Rs 15,000 crore and an order book worth Rs 11,000 crore. "In the last five years, we have avoided diversification and stuck to our core competency of building toll roads on a BOT basis," says Virendra D. Mhaiskar, CMD. Not surprising it exercises a good deal of caution. "We have done a close analysis of our execution capability, including how much equity we can invest based on the surpluses we are generating. We know that given the size of our balance sheet, we cannot build more than 300 to 400 km of roads a year and we stay within this limit. That's what has enabled us to grow our BOT asset base to Rs 14,000 crore from Rs 4,000 crore six years ago, without allowing the debt equity ratio to go beyond 3:1."
It is also careful about which states it invests in. "We are very clear that we will only take up projects in states where there is no law and order problem and there are bright prospects for economic development," Mhaiskar adds. IRB has built, for instance, the entire Ahmedabad-Pune corridor of about 650 km, barring the Vadodara to Bharuch stretch (which was done by L&T). "Collecting toll on this high traffic corridor has been a key driver of growth for us," he adds. "We consolidated in this belt between 2004 and 2011 and it has been doing quite well."
Doubts, however, have arisen over the company's return on equity (ROE), down from 19 per cent in 2009/10 to around 13 per cent in 2013/14. "That is because the government has changed the duration of concessional agreements," says Mhaiskar. "Earlier these were for 15 years, but since 2009, they are usually between 25 and 30 years. The longer tenure concession means a longer gestation period, which brings the ROE down."
MBL Infrastructures:Prudence the WatchwordThere are trade cycles in every industry," says Anjanee Kumar Lakhotia, promoter of Delhi-based MBL Infrastructures. "There are always external factors over which we have no control, but what we can control is our response to those factors." The company, begun in 1985, and employing around 1,500 people, engages in all kinds of civil construction projects - around 70 per cent of its revenue coming from roads, flyovers and highways, 10 per cent from railway-related construction (including metro projects), 10 per cent from housing, and the rest from a variety of other projects. In 2014/15, it had revenues of Rs 1,950 crore and net profit of Rs 80 crore. With a net worth of Rs 675 crore, ROE between 15 and 21 per cent, and equity to debt ratio between one and two, MBL is comfortably placed. "Our current order book is Rs 3,724 crore of contracts across 10 of the 14 states we work in," Lakhotia adds. Beyond the emphasis on EPC projects, his watchword is prudence. "From around 2009, there was an industry trend towards aggressive bidding," he says. "But if someone starts running without clearly thinking out beforehand where he wants to go, he is bound to fall and hurt himself. It happened with the BOT model, since bankers were willing and funds were freely available. Some companies invested heavily in BOT projects and when those got stalled, they found themselves heavily leveraged or without enough working capital, or money to invest in plants and machinery."
Some EPC players were also affected by the mood. "People started quoting lower and lower and got trapped in a vicious cycle," says Lakhotia. How did MBL avoid the pitfall? "We kept ourselves away from all this, focusing on execution in keeping with our fundamentals," he adds. "There were times when, for three or four quarters, we did not have any fresh orders. Some of my rivals said MBL was going down as we were not getting any fresh fare. But I told them I was happy with what we were eating. The strategy has worked for us."
MBL is involved in some BOT projects, but mostly as an EPC player in the special purpose vehicles (SPVs) set up to implement them. Here too Lakhotia is choosy. "We go for clients such as National Highway Authority of India (NHAI), Delhi Metro Rail Corporation (DMRC), Steel Authority of India (SAIL) and projects in states which have World Bank or Asian Development Bank backing. There is a professional environment here and funds are never a problem."
Hailing from Lakshmangarh in Rajasthan's Sikar district, Lakhotia admits he has a soft spot for the state. Even so, he does not let sentiment overwhelm him. He was keen to take up the 50-km Sikar to Reengus highway contract, but ultimately held his hand. "I was emotional about it and would have even done it on a no-profit, no-loss basis," he says. "But the bidding was aggressive and irrational, so I decided not to participate." He did, however, bag the over Rs 500 crore project for developing and operating Bikaner to Suratgarh section of NH-15 in Rajasthan, one of the few BOT projects he has taken up. "What drew me was the kind of traffic this stretch will attract," he says. "There is a national highway and several roads leading to Bikaner from different cities of Rajasthan, but they all terminate at Bikaner. Similarly, there are roads from Suratgarh to both Punjab and Delhi. But there is no other good road between these two points."
Lakhotia is optimistic about the future, as the government has no choice but to keep improving infrastructure. "We expect a compound annual growth rate of 25 per cent for the next five years."
PNC Infratech: Rigorous Due DiligenceThe downturn has had its effect on Agra-based PNC Infratech. Its revenues had remained stagnant at an average of around Rs 1,300 crore for about three years since 2011/12. But in 2014/15, its consolidated revenue picked up to Rs 1,860 crore. Thanks to the EPC mode being its mainstay - 84 per cent of its revenue (Rs 1,560 crore) came from EPC contracts - its EBITDA (earnings before interest, taxation, depreciation and amortisation) margin has been increasing. "In every project, we make sure the EBITDA margin will be at least 13 to 15 per cent," says Pradeep Kumar Jain, the eldest of the four brothers who run the company. "If that is not possible, we do not bid for it." His brothers, Chakresh Kumar Jain heads finance and procurement, Naveen Kumar Jain looks after quarrying and operations, and Yogesh Kumar Jain, the youngest, handles business development, contract management and client relations. Much of their success also comes from the rigorous due diligence the brothers practice. The contract for widening the Rs 800-crore, 81-km stretch of the highway from Jabalpur to Lakhnadon (on NH 7) put out by the NHAI in May 2011, for instance, seemed attractive, but PNC did not bid for it. "We found that a section of the road went through a reserve forest and realised there could be problems with the environment ministry," says a company official. "NHAI awarded the contract to another bidder, but it has not been implemented yet." The company has a specialised team which inspects the project site and other feasibility aspects thoroughly before a bid is made. "In road projects, we examine the encroachments on the stretch," Yogesh Kumar Jain adds. "If there is a religious structure or high rise building in the way, we stay away from it. The same holds for reserve forests. We also check if there are quarries from which we can get the material needed for the road."
The company's focus area is clear - North India in general and Uttar Pradesh in particular. "We have worked in 13 states, but around 60 per cent of our total revenue comes from UP and about 90 per cent from the North," says Yogesh Kumar Jain. Working in and around UP helps since PNC has 11 stone crushers of its own in the state, which cut down its cost of transporting construction material. The brothers have taken up a few BOT projects, but never those in which premium has to be paid to the client (usually a government department). Instead, they make sure the government too puts in some money. Isn't it bothersome dealing with bureaucratic government departments? "That is our strength," says Yogesh Kumar Jain. "It is a skill the company has honed and perfected."
As of end-August, PNC had an order book of about Rs 4,000 crore, but the unmoving top line has been bothering the brothers. "We decided not to depend too much on NHAI projects, which are becoming very competitive," says Yogesh Kumar Jain. "We've been diversifying into fully-funded state government projects in UP, Delhi and Madhya Pradesh. In our order book, projects of these three states make up about 40 per cent." In the last five years, CAGR has been 15 to 20 per cent, which he hopes will rise to 20 to 25 per cent in the next five. "We are currently among the top 20 infrastructure companies in the country. Our goal is to figure among the top 10."
J Kumar Infraprojects: Self ReliantWith a Rs 1,356.2-crore revenue in 2014/15, a Rs 94.4-crore profit after tax (PAT), with a CAGR of 9.1 per cent in revenues in the last five years, Mumbai-based J. Kumar Infraprojects is sitting pretty. Its order book, as of June-end this year, was at Rs 2,886 crore, with another Rs 1,400 crore worth of contracts, for which it is the lowest bidder, expected to be awarded soon. Apart from its reliance of the EPC mode, what are the reasons for its success? "You need to control your expenses, improve productivity and instil a sense of belonging and ownership of the company in your employees," says Jagadishkumar Gupta, CMD. Integration of processes has also helped. "We make our own tar, our own cement, we use our own construction equipment, we have our own stone crushing plants and bitumen unit," he adds. The company does not believe in outsourcing anything. "If you subcontract or take machinery on hire you lose margins," says Arvind Gupta, CFO. Though almost 75 per cent of its total order book comprises projects in Maharashtra, the company has begun venturing outside in the last three years. Indeed, Maharashtra's share was down to 50 to 60 per cent a year ago, as the company made bold forays into Gujarat, Rajasthan and Delhi. It bagged two projects with DMRC in 2012. "We chose these states because they are among the fastest growing and also politically stable," says Arvind Gupta. "Apart from Delhi, they have the same government as at the Centre, which gets us faster approvals and makes work easier."
Currently, around 34 per cent of the company's business is in roads and highways, 25 per cent in flyovers, 27 per cent in metro rail projects and the rest in miscellaneous civil works. But the metro segment, both elevated and underground, is rapidly becoming its main focus. The company's main focus now is metro rail systems, both elevated and underground. "Every smart city will have a metro," Gupta adds. "In the next two years, Maharashtra alone will be awarding around Rs 1 lakh crore worth of projects. Many will involve metro rails."