International ventures have set the firm on a super league path
Manu Kaushik September 15, 2011Lagadapati Madhusudhan Rao, the 45-year-old Executive Chairman of Lanco Infratech, calls himself a lucky man. Or was he just the right man at the right time? Circa the reforms of 1991, Rao was earning his MS in Industrial Engineering in Wayne State University, United States, when brother L. Rajagopal, then chairman of Lanco, made him an offer he could not refuse.
Rajagopal wanted his tiny construction company with annual revenues of `2 crore from turnkey projects to set up a pig iron foundry in Tirupati to meet the rising demand from industry there. Rao, apart from being family, was also a highly qualified engineer. "We built the project in 11 months as against the industry standard of 24 months. It was a big leap that gave us confidence," says Rao over phone from Australia.
The next big jump came in 2000, when Andhra Pradesh opened up power generation to the private sector and Lanco jumped into the bidding to win and set up a 368-megawatt, or MW, gas-based project in Kondapalli. Today, Lanco (an acronym for Lagadapati Amarappa Naidu & Co.) is India's largest private sector power company, with an installed capacity of 3,292 MW, ahead of Tata Power (3,182 MW), JSW Energy, Adani Power and CESC. It plans to stay that way, aiming for a capacity of 15,000 MW by 2015.While Lanco has five verticals -power, EPC or engineeringprocurement-construction, solar, infrastructure and natural resources - power and EPC are the mainstays of its revenues.
Chief Financial Officer J. Suresh Kumar says Lanco is all about integration. In power, Lanco is into construction, development, operations and management, or O&M, transmission, and trading. "Except Reliance Power, Jaypee and us, no other player is in the value chain from day one." Because of Lanco's engineering capabilities, it has won orders from other players such as Moser Baer and Mahagenco to set up projects for them: a 1,200 MW project for Moser Baer and a 1,980 MW one for the latter. Kumar says the business of building power projects has huge potential. "India will be spending close to $1 trillion over the next 20 years in adding capacity," he says. "New players will have to either rely on international EPC contractors or us. We certainly offer a better value proposition."
It is not just thermal power projects that excite Lanco. It is developing solar photovoltaic, or PV, as well as solar thermal farms, too, with a total capacity 300 MW, including around 130 MW for clients. Rao reckons that thermal tariffs will rise over the next six to 10 years, and converge with the high feed-in tariffs now offered to solar power producers. "When solar and thermal tariffs converge, people will start shifting. We are building for the future," says Rao. Lanco has taken its solar business to Europe and the US as well.
This March, Lanco bought Australia-based Griffin Coal for A$730 million, or `3,400 crore, to secure its coal supplies, and so entered the mining sector. India's coal production will fall short of demand by 200 million tonnes per annum, or MTPA, by 2015, making coal imports essential. Griffin's current production is four MTPA; by 2015, it will be 15 MTPA. The Griffin acquisition has hit a rough patch, with a client, Perdaman Industries, suing Lanco for breach of contract, but Rao is confident the matter will be resolved. Griffin commands reserves of over one billion tonnes of coal, and has a strong team.
Entering businesses aggressively is in Lanco's genes. In 2006, it had bagged the Sasan Ultra Mega Power Project with a tariff offer of `1.19 a unit, then considered unrealistic. It later lost the project to Reliance Power over alleged discrepancies during bidding.
C. Parthasarathy, Chairman of Karvy Group, says: "Lanco does give the impression of a group with a vision and a desire to chart an aggressive growth path. How they keep pace with their aggressive growth plans is to be watched."
The numbers tell the tale. Lanco's revenues have grown from `542 crore in 2006/07 to `5,721 crore in 2010/11 - a compound annual growth rate, or CAGR, of over 80 per cent. This is way ahead of rivals such as IVRCL Infra (24.93 per cent CAGR), Gammon India (31.85 per cent), Thermax (22.35 per cent) and Punj Lloyd (18.79 per cent).
In 1991, while returning to India from Detroit in US, Rao's situation was completely different. "I was very hesitant... The pull to stay back in US was bigger than coming to India and joining the family business," he says. Today, his aim is to achieve the size and scale of global EPC giants such as Bechtel, Fluor Corporation and SNC-Lavalin. "In India, there is no comparable EPC company," he says. "Indian companies are more of construction companies than pureplay EPC." The efforts are paying off. In June this year, Lanco won its first international order to build two gasbased power plants for the Iraqi government. It is also looking at power projects in Bangladesh, Indonesia and West Asia.
Lanco has always been seen as a regional player that benefitted from the political patronage provided by Rajagopal, its erstwhile promoter, who quit the business in 2002 to join the Congress party. In 2009, Lanco shifted its base from Hyderabad to Gurgaon near Delhi. Lanco had outgrown Hyderabad; being in Delhi brought it closer not just to the centre of power, but also to a huge talent pool, because the capital is also the headquarters of public sector corporations such as NTPC and BHEL.
Even as a student in the US, Rao used to dream big, often visiting Rolls-Royce dealerships even though he could not afford the cars then. Today, he owns a Rolls-Royce Phantom and a Ghost, apart from a Bentley and a Mercedes-Benz S-Class. And on the fifth floor of Lanco House, one of the four office towers it has in Gurgaon, where Rao and his core team are based, paintings by the likes of M.F. Hussain, Anjolie Ela Menon, Francis Newton Souza and Satish Gujral adorn the walls.
From an asset base of $500 million and 450 employees in 2005, Lanco has grown to $5 billion and 7,000 employees. The next milestone, as Rao puts out, is to reach $15 billion asset size and 20,000-plus employees by 2015. "The plan is to build, consolidate and build, and take some giant steps to join the global league," he says.