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Brick ‘n’ Mortar Barons

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Every evening, 45-year-old T.V. Sandeep Kumar Reddy — an engineering graduate from the University of Michigan — spends hours in front of his computer following project bids and their valuations and keenly tracking competition. Sandeep, a second-generation entrepreneur who inherited Hyderabad-based infrastructure company Gayatri Projects from his father T. Subbarami Reddy — a Rajya Sabha MP, who is also credited with building the world's largest masonry dam Nagarjuna Sagar in 1967 — has big plans for the Rs 1,248-crore company, which is currently executing projects worth Rs 11,900 crore including a 2,640-MW power plant in Nellore district, with a project cost of Rs 5,151 crore. "The next 10 years is going to be a boom time for infrastructure companies such as ours," says Sandeep, managing director of Gayatri Projects.

Across the city, N. Seethaiah, managing director of Madhucon Group with an order book of Rs 6,415 crore, is confident of becoming a global player. One of its group companies, PT Madhucon Indonesia, has been granted permission to mine 97,900 acres at two mines in Indonesia. With 2,400 million tonnes of coal reserves, Madhucon expects to be a big player in the thermal power sector. It is building a 1,930-MW thermal power plant near the Krishnapatnam Port in Nellore at a cost of Rs 10,500 crore.

Reddy and Seethaiah are not the only ones keen on taking their infrastructure firms to the next level. Across Andhra Pradesh — and even Chennai — there are many companies waiting to break out on the national scene.

It all started during the Green Revolution in the 1970s, when Andhra Pradesh gave rise to many contractors to build irrigation projects. The project execution skills honed by some of these contractors gave birth a number of infrastructure companies from the state.

Two of these companies — GMR and GVK — went on to the world stage by bidding and managing power projects and airports. While GMR Infrastructure, the listed entity of the $3-billion GMR Group, had completed six large road projects in Tamil Nadu, it came on to the national scene when it bid and won both the Delhi and Hyderabad airport projects in 2006-07. While Delhi airport's cost of development was Rs 12,700 crore, Hyderabad cost Rs 2,470 crore. In 2008, it won bids to develop the Sabiha Gokcen airport in Istanbul, Turkey for Rs 3,153 crore. It is also modernising the Male international airport for about $511 million. Thanks to the airport projects, GMR Infrastructure rose from Rs 34 crore in 2007 to Rs 727 crore in 2011.

Similarly, the $2-billion GVK Group hit the headlines when its listed company GVK Power and Infrastructure won the bid to develop the Mumbai airport in 2006 for Rs 8,760 crore and the Bangalore airport for Rs 1,200 crore in 2010. The result: its turnover increased from Rs 17 crore in 2007 to Rs 123 crore in 2011.

Inspired by the success of these two firms, many other infrastructure companies in Andhra Pradesh are aspiring to play on the national and global stage. What's working in their favour is the fact that GVK and GMR grew from within their ranks. They might have gained national importance, but in terms of size, the group companies of Andhra-based infrastructure firms such as the $1-billion Gayatri Projects and the $2-billion IVRCL are similar to them.

Over the past two decades, most of these companies have grown multi-fold thanks to a combination of hard work, opportunities and contacts with local politicians and bureaucrats. However, they have continued to be region-based. It is only now that they are expanding — bidding for contracts across the country.



Take E. Sudhir Reddy, chairman of the Rs 5,561-crore IVRCL, which started in 1991. Its fortunes changed in 2005 when it bagged a Rs 600-crore project to build a desalination plant in Chennai. By 2011, its order book swelled to about Rs 24,000 crore. It is now building Phase 3 of the Indira Sagar dam on the Narmada in Madhya Pradesh and also the Indore-Jhabua road for $270 million.

Currently, IVRCL is building several national and state highway projects. "Roads have become a gold rush where everybody is dreaming of entering," says Reddy. The key to success, he says, is better quality and faster execution.

High Leverage
A PricewaterhouseCoopers (PwC) report on infrastructure says that the 800 infrastructure companies in the country have captured only 30 per cent of the market. Undoubtedly, there is huge scope for growth, attracting an ever-increasing number of players.

G.R.K. Reddy, who started a stock broking business 20 years ago, is one such player. A few years into the business, he realised that infrastructure was his true calling. To become a well-known contractor, he had to take risks including building a windmill farm in Naxal-affected Tadipatri area of Andhra Pradesh in 1996. "We were a mere executor of plans for our clients and to generate cash we had to take big risks," says Reddy, chairman of the Chennai-based Marg Group. The risk paid off and his small company had surplus cash of Rs 4 crore in 1999. Today, Marg Constructions has revenues of close to Rs 1,000 crore and has become a developer and contractor with interests in airports, ports, industrial parks and large townships.

break-page-break
The Marg Group is increasing the capacity of the Karaikal port to 21 million tonnes per annum at a cost of Rs 1,500 crore in the second phase. The first phase was built for Rs 700 crore. The company has also won bids to manage and build the Bellary and Bijapur airports on a build, operate, transfer (BOT) basis for 90 years.

But Reddy's dream project is the 1,000-acre Swarnabhoomi Township on the outskirts of Chennai, which he says "will replace existing cities". The project costs Rs 700 crore, of which Rs 406 crore is debt-funded.

Such huge investments have impacted Marg's cash flow, making it negative over the past five years. However, since last year, its assets have started yielding returns. Cash generated from operating activity now stands at Rs 115 crore.











MARKET CAP
GMR Infrastructure: Rs 9,964.63 crore
GVK Power & Infra.: Rs 2,384.61 crore
Ramky Infrastructure: Rs 1,177.70 crore
IVRCL: Rs 935.87 crore
Madhucon Projects: Rs 522.47 crore
Marg: Rs 302.09 crore
Gayatri Projects: Rs 166.65 crore
Source: AceEquity

In fact, that is something common to most of these companies. They are all highly leveraged. "Over the past three years, these upcoming groups have bid for plenty of projects and have over-leveraged themselves," says Sneha Rungta, senior analyst at Sharekhan Securities in Mumbai. She says that these companies have to balance their business portfolio between EPC (engineering, procurement and construction) contracts — which bring in immediate cash —and BOT projects which bring in steady revenue after completion of the project in three years. "A debt-to-equity ratio of 4:1 is healthy for an infrastructure firm, they just need to manage their working capital cycle and find ways to finance their new projects," says Sankara Ayyathurai, founder, SS Halcyon Investment Advisory.

Project delays could pull firms down. Projects are delayed when the legal clearances are not obtained on time. Deepak Purswani, senior analyst at ICICI Securities, says that companies need to both control materials and develop projects. The margins in this business can be as low as 5 per cent, and so one has to either diversify to hedge against the losses or acquire enough knowledge to own and execute projects.

Hyderabad's Ramky Infrastructure is heeding Purswani's advice. "I run my business to get cash first and then spread my risks," says Ayodhya Rami Reddy, chairman of the $1.5-billion Ramky Group of companies. "A company needs more assets that yield money in the long-run than be dependent on businesses that are subject to working capital delays," says Reddy.

Ramky has an order book of Rs 10,000 crore and has expanded to Africa and the Middle East. Apart from building large residential projects such as the Rs 400-crore Ramky Towers in Hyderabad, it is currently building five road projects for Rs 400 crore.

Rami Reddy, however has placed his bet on waste management and has set up a separate company called Ramky Enviro Engineers. But it is facing competition from politicians and local contractors who do not want the business of waste management to be organised by a corporate. "That's why my business is also focused on global projects for revenues and I want 50 per cent of these revenues to come from abroad in a few years," he says. He is working on a Rs 380-crore order to build a 1,000 acre special economic zone in Libreville, the capital of western African country Gabon.

Although Rami Reddy has tasted success, he has his own share of troubles. Recently, the CBI raided the premises of Ramky Infrastructure regarding projects that were offered to the firm by the Andhra government between 2004 and 2009, giving substance to whispers of a nexus between infrastructure firms and politicians.

Business Methodology
The business models of these companies are similar: create a special purpose vehicle (SPV) and execute projects on a BOT or BOOT (build, own, operate and transfer) basis individually or in partnership with the government or another firm. If 51 per cent of the SPV is owned by the parent company, then the SPV's loans get reflected in the parent's balance sheet. These SPVs, however, become operationally profitable only from the third year of operation. Ramky has 11 SPVs, while Gayatri Projects and Madhucon have 10 each.

The second business model is EPC contracts: the companies work on annuity basis, which delivers cash every six months. "These firms will eventually want to go for the BOOT route. For that they need good project management processes," says Neeraj Bansal, director of advisory business at KPMG. He adds that these are promoter-run companies that need a strong second line of management to survive in the long run.

And the long-run is what these firms are aiming at. "We don't share the same DNA (as GMR and GVK), but we have the skills to become large players," says Rami Reddy. Agrees Sandeep Reddy: "We are already national players; we just have tonnes of work to focus on before we build a brand."

vishal(dot)krishna(at)abp(dot)in

(This story was published in Businessworld Issue Dated 17-10-2011)