The $2.5-billion Shapoorji Pallonji Group set its sights on the infrastructure sector in the early 2000s by acquiring a majority stake in Afcons Infrastructure. At the time, the group did undertake construction but had no presence in the infrastructure sector. Afcons Managing Director K. Subrahmanian chats with Business Today's Anand Adhikari about the company's strengths, financial turnaround and the future. Excerpts:
Q.What was the strength of Afcons Infrastructure when the SP Group acquired it?
A. Afcons had a long history of doing infrastructure projects in India. Initially, it was a building foundation company. It added marine in 1963. Today, it has a presence in every port in India. In the 1980s, Afcons was amongst the first few companies to enter road projects. The company also entered the bridges space. Technically, it was a very sound company, and was known for specialised foundation work in the infrastructure space. The company fitted well into Shapoorji Pallonji's portfolio, which was into construction and building.
Q. Tell us about Afcons's journey after the SP Group took up the reins?
A. In the first three years, we focused on financial turnaround and consolidation. The company was under some financial stress when the Shapoorji Pallonji Group made its investment. It even plunged into its first loss. Somewhere in 2002, the Group realised that there is a need to professionalise the whole management structure of Afcons. The task of rebuilding Afcons started soon after with the new management.
Q. So what changed in terms of strategy?
A. First, we put in place a sizing strategy. The company earlier did projects of all shapes and sizes. Today, we have an average order size of Rs 400 crore. We also set limits for different segments of the infra businesses. In order to de-risk the business model, we have decided to go for a partnering strategy for large projects. We also started focusing on the overseas market quite vigorously. Afcons actually entered the overseas market in 2005 and set a target of achieving 25 per cent of its revenues from overseas. We have consistently achieved this target for the last five years. We have now set a bigger target of achieving 50 per cent of turnover from the overseas market in the next three to five years. We never fell for any temptation to aggressively grow business in the best of times for the economy. We are focused on value creation for all stakeholders.
Q. Have you added any new infrastructure verticals since you took over the company?
A. We forayed into new areas like hydro and offshore oil and gas in the last 10 to 12 years. In 2004, we realised that the hydro market is shifting with lots of new players getting in. We have been quite selective on hydro since then. These two new verticals are relatively small today in terms of contribution to revenues. Today, marine and transport dominate the company's turnover.
Q. Is there a way infrastructure players can de-risk their business model?
A. We have developed a risk management framework in consultation with our knowledge partner. There are 63 parameters based on which we evaluate a project. There are certain clients where we are very clear to have certain clauses. For instance, we don't participate in a project without an arbitration clause.
Q. Afcons planned an IPO way back in 2007 but didn't go public. What was the logic?
A. Public listing on the bourses gives visibility to a company. We also needed funds for funding our expansion into the overseas market and new verticals in the mid-2000 period. At that time, we were also entering the overseas market and there was a belief amongst the foreign clients that a listed entity has a better corporate governance structure. We adhere to the best corporate governance practices even as an unlisted company. Today, more than 50 per cent of our directors are independent. We are also one of the few companies in the construction sector with a 1:1 debt-equity ratio. Our ratings in the infra space are next only to L&T.
Q. Have you set any target for Afcons?
A. Given the current challenging environment, we want to be a Rs 5,500-6,000-crore revenue company by 2015. We are not looking at top-line growth as a strategy. Our mantra is to have profitable growth. We want to do good projects.