Even until two years ago the odds seemed stacked against it. First, it was seen as a regional player in the infrastructure sector. Second, to the world outside, the largely family-run company seemed to thrive under political patronage. If that was not enough, over the years the group had diversified into unrelated areas which made the operations unwieldy.
After more than two decades of operations, the Rs 8,000-crore group — which started its innings in 1986 as SV Contractors — found itself in the unenviable position of having to reinvent itself or risk being pigeonholed.
Then in March this year, Lanco Infratech — the new group holding company — threw up a surprise. The not-so-well-known player beat peers as big as Tata Power, Reliance Power and Adani to become the biggest private sector power generator in the country. While its leadership may soon be challenged when Tata Power commissions new capacity later this year, Lanco with 3,300 Mw of generation capacity realised that with a clearly marked strategy it could really take on the big players in the infrastructure industry.
So began a mammoth rebranding exercise in May this year that entails reorganising the different verticals as strategic business units with independent unit heads. To convey its aspiration to become a globally recognised infrastructure company, Lanco has unveiled a new corporate logo. While
Lanco’s old brand identity came from the group’s ferro alloy business in the early nineties, the new red logo boldly proclaims the group name, Lanco, with a small upward arrow placed on the cross-bar of the letter ‘A’. The logo, dubbed The Edge, symbolises the company’s drive to nurture people who fulfill the three dimensions of leadership, entrepreneurship and ownership (LEO), says the group.
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The company currently operates in five business segments — power, EPC (engineering, procurement and construction), solar, natural resources and infrastructure but the number of chief executives who run these business are double that number, somewhat like how the US-based GE runs its organisation. Rao says that the company is looking to restructure the businesses over a period of time. “Today, these CEOs are reporting to the board; over time there will be one head for one vertical. Finally, we will have five different heads for five businesses.”
Can Lanco make the transition from being a family-run business to a tightly run professional outfit?
Changing face
Even about a decade ago, the group was largely run by family members. When Rao’s elder brother, L Rajagopal, was chairman in the 90s, there were six people running the show, all part of the family that belongs to the powerful Kamma community of Andhra Pradesh. Each of them focused on a particular segment. The only ‘outsider’ was Y Harish Chandra Prasad who joined the Lanco group in 1995, to head its power division after a short stint with Spectrum Power Generation.
In 2002, the first ripples of change began to be felt. In fact, the year was in many ways a game changer for the group. It sold majority stake in Lanco Industries to Kolkata’s Electrosteel Castings. The same year, its founder chairman Lagadapati Rajagopal, son-in-law of Congress leader and former Union minister P Upendra, exited the business to join politics. He later became a member of parliament from Vijayawada. Next year, Rajagopal’s younger brother L Sridhar gave up an active role in the company to pursue his celluloid dreams. By 2004, all but two of the original six went their different ways. The family is now represented in business by the third brother, Madhusudan Rao, and his sister’s husband G Bhaskara Rao who is currently executive vice-chairman.
The 2002-03 period was the consolidation phase for the group. It downsized its construction business and drew curtains on non-core businesses like IT, which it entered during its experimentation phase. In fact, selling a majority stake in Lanco Industries in 2002 changed the course of business for the entire group. Lanco Industries manufactured DI pipes and wanted to rope in French multinational Saint Gobain — originally a mirror manufacturer, it now produces a variety of construction and high-performance materials — as a partner. But when it did not work out, the family decided to sell stake to Electrosteel Castings. “These were early times. We were young and there were lots of opportunities,” says Rao.
Looking at the competitive landscape, the company felt selling out to the market leader was the right decision. The deal earned the promoters five times the equity value of the company whose turnover was Rs 200 crore then. Though the family still retains 26 per cent holding in the company that continues to carry Lanco in its name, it is no more involved in the functioning of Lanco Industries.
Image makeover
From the fire of a metal kiln in the old logo to the new identity of a company with an edge in power and infrastructure, it has not been a very long journey for Lanco. The company likes to think of itself as ‘25 years young’. Named after Lagadapati Amarappa Naidu, the paternal uncle of Rao and a source of inspiration for the family, the company started its journey as SV Contractors. “It was a small construction company till 1991 when we decided to venture into manufacturing. Our turnover was Rs 1 crore then,” says Rao. SV Contractors still exists as a partnership firm but does not do any business itself.
About two years back, the Hyderabad-based company shifted its corporate office to Gurgaon near Delhi — a move seen by many as the first step towards shedding its image of being a regional player. “Right from 2005, our two biggest businesses — power and EPC — were being operated from Gurgaon. As a corporate, we moved to Gurgaon in 2009. Being an infrastructure company, doing a range of things, we feel Gurgaon is a better place to be. All our relations in human resources, banking, consultancy and regulation are in this region,” says Rao.
The acquisition of Griffin Coal for A$730 million (about Rs 3,400 crore) in March this year catapulted the company to a new league. Though it is the company’s first overseas foray, it is the second biggest investment by an Indian company in Australia after the Adani acquisition of Linc last year for $2.7 billion. The company recently ran into trouble when Australia’s Perdman Chemicals & Fertilisers alleged breach of coal supply agreement. Lanco responded with advertisements in Indian newspapers dismissing the charges. Rao says Perdman needed to fulfill certain conditions before the supply agreement could be honoured.
Lanco is often perceived as a group that has grown with tacit support from the Congress party. In 2007, knives were out in the media when Lanco emerged as the winner of the Sasan ultra mega power project in the first round of bidding. It eventually lost the contract to Reliance Power when the raging controversy forced the government to call for fresh bids under the supervision of a group of ministers.
Rao pooh-poohs suggestions of political patronage. “There is a perception that we are close to a certain political party because Rajagopal is the son-in-law of P Upendra but that connection hasn’t helped us in any way. The first project we did was Kondapalli in Andhra Pradesh. When it came up, the political party was Telugu Desam and Chandrababu Naidu was the chief minister.” Similarly, the Aban power plant in Tamil Nadu went through two political regimes under AIADMK and DMK. “I do not think political support helps,” says Rao. “Everyone has some association to some extent. Politics and business have to be separated.” Way forward
Looking ahead, Lanco wants to be cautious about acquisitions and not go for aggressive bidding. The group is leveraging synergies among group companies to scale up. For instance, the EPC segment with an order book size of Rs 30,162 crore provides support to group’s power generation business that has 6,024 Mw under construction. Then there is the natural resources vertical which does mining that fuels power.
For the five verticals, there are more than 20 companies under the Infratech banner. “As we grow in size, it may not be a good idea to have such a large portfolio under one umbrella. Even for investor community understanding the company is difficult, thanks to the diversified portfolio.” Demerging the various businesses and setting them up as independent business units is an onerous task and will take time, Rao admits.
The first to be demerged in the next two years will be power that constitutes about 55 per cent of Lanco Infratech’s business. The group’s tryst with power started with the Kondapalli power plant in Andhra Pradesh. The company became the first independent power producer when it put the plant won through competitive bidding into operation in January 2001. “Putting up Kondapalli helped us get exposed to working with multinational investors and companies like Dosan. We learnt a lot through our partnerships with these companies. This also led us to introduce a lot of rigour at the board and the operating level.”
Lanco is bullish on power. With around five conventional, fo ur mini-hydel and three non-conventional power plants besides the nine coming up, the company will have a capacity of 15,000 Mw by 2015.
With about 10 per cent deficit, the power sector offers a big opportunity for companies like Lanco Infratech. The company plans to invest Rs 35,000 crore to take its installed capacity to 15,000 Mw by 2015. While it has achieved financial closure of 6,000 Mw, which is under construction, a capacity of 6,200 Mw is under advanced development and will need an investment of Rs 35,000 crore. In the next 10 years, Lanco is also looking at commissioning 5,000 Mw internationally. Last month, it bagged its first global EPC contract in Iraq and is now looking at Bangladesh, West Asia and Indonesia for more orders.
Such break-neck capacity expansion will require huge capital infusion. Lanco brass is certain it can fund the plans through internal accruals. Going to the public for demerged power business is not ruled out — it will happen at an appropriate time, says the company.
What could spoil the party for Lanco and that of other companies looking to add capacity is high-cost fuel and public uproar against land acquisition. Rao says that post 2006 many big players threw their hats in the ring given the huge power deficit but what they did not take into account was inflation and the sharp increase in the cost of capital, fuel and interest, besides the fluctuations of foreign exchange.
So Lanco plans to tread cautiously. Rao’s mantra: 75 per cent of the group’s efforts should go into consolidation of its current businesses and 25 per cent into growth.