Lanco's Rao: It's all about aggressive strategy

Circa 1964 when Lagadapati Amarappa Naidu decided to switch from agribusiness to construction, little would he have thought his company under its second generation leadership would some day grab national attention. Lanco (LAN being the initials from his name) has done just that. In the first week of June, it outbid Reliance Energy and Essar Group to bag a 1,000 mw thermal project at Anpara in Uttar Pradesh. "We did quote aggressively since we feel we have the competence to execute it," says Naidu's smiling, 40-year-old nephew and current Chairman of the company L. Madhusudhan Rao.

For Rao, the project is also important because it is located close to the 4,000 mw ultra mega power project proposed at Sasan in Madhya Pradesh. Lanco has already tied up with international players and filed the bids for pre-qualification for the Sasan project and another at Mundhra in Gujarat. Rao is betting on Lanco's capabilities in EPC (engineering, procurement & construction), and its in-house operational and maintenance strengths (at times it has reduced costs by re-engineering spare parts). Lanco is now setting up an office in China to source equipment at competitive prices as part of a global procurement strategy.

Back in 1991, Lanco was just another construction company with revenues of Rs 2 crore and an asset base of Rs 1.5 crore. The big moment came in 1997 when one of its projects (the 368 mw Kondapalli unit) was among the first to be cleared by the Central Electricity Authority under the tariff-based international competitive bidding route for independent power projects. Lanco got it commissioned in record time by year 2000. Currently, it is generating 509 mw through gas and biomass power plants. Further, it has under development 600 mw in Phase I of a 1,200 mw coal-based power plant in Chhattisgarh, as well as hydel projects aggregating 800 mw in Sikkim, Himachal Pradesh and Uttaranchal. In end-May, it took over Nagarjuna Power's 1,015 mw thermal power project in Mangalore. This 4,300 crore project is expected to achieve financial closure this year. In all, Lanco will be investing Rs 17,000 crore in various projects over the next three years. With 80 per cent of this to be funded by debt, the equity component would be in the region of Rs 2,500 crore (or close to Rs 900 crore per annum). The company hopes to raise the equity either by way of strategic partners or may even look at an IPO.

Rao's goals are clear-cut. "We want to grow 10 times in four years." Its current asset base is Rs 2,200 crore and the aim is to hit $5 billion (over Rs 21,000 crore) by 2010. Turnover is expected to grow to Rs 8,000 crore from Rs 1,200 crore today by then. "Much of this is achievable based on our existing projects alone," says Rao.

Lanco also has mega ambitions in infrastructure and realty. It is scouting for international partners to bid for Kolkata and Chennai airport projects. It's also working on a unique project comprising 18 million square feet of mixed development property integrating it parks, housing, malls, hotels and entertainment centres at a capital outlay of Rs 3,500 crore. Rao also talks of setting up a 90-storey residential complex. "The only other well known 90 floor residential complex today is Trump World Tower (where Donald Trump stays)." Now that's no tall story.

The IPO Party Crashes
Issues are pushed back. It's no more a walk in the park.

Prime focus was just another Mumbai-based post production firm until it announced its intention to go public. With high-profile investors like Reliance Capital and Rakesh Jhunjhunwala on board, Prime Focus strode into the primary market in late May with an initial public offering (IPO) with a price band of Rs 450-500. The track record of recent IPOs on Dalal Street indicates an oversubscription spree with most bids coming in at the upper price band. The response to Prime Focus's offering shouldn't have been too different. Unfortunately, like Deccan Aviation before it, the post production company found itself caught amidst a global equities meltdown. The benchmark Sensex was down 15.8 per cent from its peak on the day Prime Focus's IPO opened on May 25. The free fall continued till the issue closed on June 3, by which time the Sensex had sunk to 17.5 per cent from its peak on May 11. Result? Prime Focus became the second company to bring down its price band, from Rs 450-500 to Rs 417-500-a 7.5 per cent reduction at the lower end. The issue was supposed to close by May 31 but was extended by three days (as per regulations). Prime Focus eventually scraped through with a 1.23 per cent oversubscription, with virtually all the bids coming in at the lower price band.

The first IPO to revise its price band after the Securities & Exchange Board of India (SEBI) issued such guidelines was that of Deccan Aviation. It took a Rs 4 cut to Rs 146 at the lower band. The issue was oversubscribed 1.13 times. Says, S. Subramanian, Head of Investment Banking, Enam Financial Consultants: "We will be living in a fool's world if we think the secondary market will not have any implication on the primary markets. Players have to learn that primary market will not always make money for them." Adds Sanjay Sharma, Senior Vice President and Head (Equity Origination & Capital Markets), DSP Merrill Lynch: "We are going to see lower valuations (for IPOs) and bidding will mostly be at the lower end."

As BT went to press, that trend was slowly but surely gaining ground. According to market sources, the price band of an IPO by Vigneshwara Exports, which opened on June 7, was trimmed from Rs 140 to Rs 121 at the lower end. And as the indices continued to spiral downwards, the spotlight was trained on two high-profile issues in the pipeline: Those of GMR Infrastructure and DLF Universal. Whilst GMR has indicated its resolve to go ahead by end-June, the grapevine has it that the DLF issue will be deferred. However, bankers to the DLF issue are confident the issue will sail through on a lower valuation-down to $25 billion (Rs 1,12,500 crore) from $30 billion (Rs 1,35,000 crore). Over the next six months, close to Rs 25,000 crore worth of IPOs are expected to hit the markets. Whatever their fate, there's one phenomenon which won't play out any longer: Issues won't be oversubscribed within minutes of opening for some time to come.

-Mahesh Nayak

Chennai Calls, Again
After Nokia, it's Motorola's turn to make (cheap) phones here.

Motorola's Vandrevala: Price play

Last fortnight when Motorola decided to set up a manufacturing unit just off Chennai over 300 acres in a special economic zone (SEZ), mobile phone users across the country-as well as those keen to own a handset-had another reason to expect more affordable phones. True, Motorola phone prices have anyways been falling-a Motoslim introduced at Rs 12,000-plus seven months ago has come down by Rs 3,000, and the Motorazr launched a year and a half ago at Rs 42,000 can be bought for under Rs 10,000. Now, consumers eagerly look forward to mobile phones under Rs 1,500, or sub-$30, once they're made in India. "We intend to be at this price point," says Firdose Vandrevala, Chairman, Motorola India. With as much as 40 per cent of the software for handsets coming out of its India development centres, he feels this is possible. Even better news for phone users is the reaction from market leader and neighbour-in-Chennai, Nokia, which also has a manufacturing unit in that city. "We have heard of announcements relating to even sub $20 handsets (under Rs 1,000). We will be competitive feature to feature," says Jukka Lehtela, Director (India Operations), Nokia. Five hundred million mobile connections by 2010 suddenly doesn't look like a pipe dream.

-Nitya Varadarajan

Refuge In The Long Term
Should private equity investors worry? Maybe not.

Stock markets are now facing what looks like a bear out of a three-year-long hibernation and private equity (PE) funds seem to be bearing as much of the brunt as the retail investor. Stocks of companies they have invested in, over the last year, are today available at prices close to the cost of acquisition, and some have even sunk below it. (See Buyouts Take A Knock). The deals are across sectors (such as textiles, media, it software, and financial services) and some of these have seen an erosion of as much as 20-25 per cent in value. For instance, investments by ICICI Ventures in Gateway Distriparks and by Temasek Holdings in Welspun India have been substantially marked down from the acquisition cost price post the May 18 downturn.

Private equity funds are nonplussed. Says Puneet Bhatia, MD of Texas Pacific Group and Newbridge: "No one likes to see a stock going below their investment price, but private equity funds have the least to worry about. They take a long term fundamental view of a company they are investing in, and make sure there is enough substance and value in the company." However, he cautions that investments which have been "momentum plays" when the Sensex was reaching new peaks every week, will probably fall apart. "If a fund has invested at 20-30 times earnings, then they need to be worried," he says.

Of course, some funds got it right by riding on a surging Sensex, and exiting before the crash. For instance, ChrysCapital put $20 million (Rs 90 crore) in Gammon India in November 2004; it exited in 15 months after its investment had appreciated five-fold. Similarly IDFC Private Equity raked in an over 100 per cent return when it sold its 8.14 per cent stake in Hotel Leela Venture within a year of investment. Says Luis Miranda, Investment Manager to the IDFC Private Equity fund: "The last couple of years have been so good that some funds have looked to sell early, though they normally invest in the long term potential of a company, for over four to five years." The recent meltdown, however, gives the PE funds who haven't exited yet little choice but to stay long-term investors.

-Shivani Lath