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July 30, 2006

Engg. & Construction Cos.: Riding the infrastructure spending boom

Businessworld has a detailed cover story on the boom in the Indian engineering & construction industry triggered by rising infrastructure spending.



Together these 10 companies (see ‘Billions In The Bag’) have combined sales of over Rs 18,500 crore from the infrastructure construction business, which could easily double to Rs 40,000 crore in two to three years. What’s more, they have a combined order book of a staggering Rs 69,624 crore. At this very moment, they are building many strategic blocks of the country’s infrastructure. These include the Bangalore, Hyderabad and Delhi airports; big parts of the ambitious metro programmes in four cities; the Bandra-Worli Sea Link and hundreds of kilometres of roads; the Kakinada port and gateway terminals at JNPT (Jawarhalal Nehru Port Trust) in Mumbai; the Kudankulam Nuclear Power Project in Tamil Nadu; the GSLV Mark-III space launch complex in Sriharikota (and even a cricket stadium for the World Cup in the West Indies!).

...Most of these companies started off as small contractors. Till the mid-1990s, many had sales of less than Rs 100 crore. (L&T and Jaiprakash were the only big exceptions.) Some like HCC, Simplex, Gammon and Patel have been around for as long as five to eight decades. Over time, they have developed the expertise to build large and complex projects. Now, many are graduating from being mere contractors to full-fledged infrastructure developers, investing thousands of crores.

Three broad business models have emerged. The first are the pure-play construction companies. They only build; they neither own nor operate the infrastructure. These include HCC and Simplex. Second, a few companies have graduated from pure construction into ownership and operation of infrastructure. The big names here are L&T and Gammon. Third, a few corporates with deep pockets and without too much construction experience are directly getting into infrastructure development.

Grandhi Mallikarjuna Rao, chairman of the Rs 1,400-crore GMR Group, is perhaps the most daring in the third category. Between 2000 and 2002, he raised Rs 1,000 crore by selling his businesses in banking, insurance, IT and brewery, and pumped it all into infrastructure development. He was the first to stay away from the less risky construction business, and focus on the pure infrastructure development model instead. He went after the really big projects like the Delhi and Hyderabad airports. In just a few years, he has invested in 12 projects with a capital outlay of Rs 12,200 crore — Rs 3,500 crore of which has already been implemented.

Arun Natarajan is the Founder of Venture Intelligence, which tracks private equity and venture capital in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.