Powering on

Executive chairman of Lanco Infratech Ltd L Madhusudan Rao is in the middle of a turbulent year. But the company, which marks 20 years, in sync with the India liberalisation story, is learning fast the international game as it steps abroad, say Sarika Malhotra & Subhomoy Bhattacharjee

On the dense car snarl just outside the Lanco Infratech campus in Gurgaon, the black Rolls Royce of Lagadapati Madhusudan Rao naturally stands out. Rao, the executive chairman of Lanco Infratech Ltd, is clear he wants to take on the stand-out company in the engineering space, L&T, soon. “That company now occupies number 1 to 10 rank in that category, we aim to provide competition there.”

Meanwhile, as Rao walks us down the Hussain and Souza-lined corridor to his office, he talks about how the world changes for mid-sized Indian companies when they begin to swim in the open global pool. On the same week when the Lanco Infratech campus was savouring the win of a R365-crore project in Iraq, it was hit by a R16,500-crore law suit in Australia. The suit is roughly three times the size of the company and has contributed to its share value tanking by 65% since January.

But to take the challenge to L&T closer, his company has to take these risks. In Iraq, few Indian companies have entered in the past decade. “It’s quite significant,” says Rao. “Iraq is our first engineering, procurement and construction (EPC) order outside India.” And, playing the EPC game is like a home stadium advantage for Lanco. It will construct a 250 mw, gas-fired power facility in the western province of Al-Anbar.

Yet, even before the company valuations could take off, the Australian $3.5-billion suit by Perdaman

Chemicals in Australia has mauled its scrip badly through July. In February, Lanco had bought the thermal coal division of Griffin Energy for A$750 million, but then began a long, hard look at some of its long-term supply contracts. The company said some of those “may not be financially sustainable in their present form”.

One of those is for supply of coal to Perdaman, a coal to Urea Company. A key clause in the contract says the supply would depend on Perdaman achieving financial closure of its plant, for which the deadline has been extended once.

Perdaman, owned by Vikas Rambal, an Indian, has filed the A$3.5 billion suit in the Supreme Court of Western Australia, claiming the ‘long, hard look’ upset its financial closure plans.

Lanco has obviously read its contracts well when it made the statement. A company insider said they were quite aware of the Perdaman position when the deal with Griffin was signed with its administrators.

These are new territories for the R5,872-crore company that began life as a construction business but took off big time in 1991, the year India’s liberalisation began. Madhusudan Rao is aware of the connection. “In 1991, we were at the right time at the right place. Had it been a decade later, probably there would have been other companies in this position.” It was a 90,000 tpa pig iron plant which came up as Lanco Ferro in that year. The pig iron to construction linkage worked.

The big break was, however, setting up of the 368 mw, gas-based power plant in Kondapalli near Vijaywada in Andhra Pradesh in 2000. From there to 3,287 mw and Lanco has emerged as the largest private sector power utility by 2011. Along the way, Rao says all the ventures were subsumed in 2006 under the Lanco Infratech banner. Its founder-chairman and his elder brother Rajagopal moved on as a Member of Parliament even earlier, by 2002.

The Iraq and Australian forays are follow-throughs of these forward and backward linkages. The Iraq venture builds on the concept to commissioning expertise in the EPC space, which Lanco is betting on as its USP. “EPC acts as a backbone for creating the engine strength for our other businesses. If we take this model outside India to emerging markets, our belief is that we can compete and create value,”

Rao explains. The four other he talks about are power, solar, natural resources and infrastructure.

The coal venture as part of the natural resources business is meant to provide the raw material security to its power projects in India.

Towards that end it is also building a berth at Bunburry port in Western Australia. Griffin Coal is a billion-tonne resource and is today mining about four million tonnes annually. Of this, Lanco expects about 75% will serve domestic commitments in the continent and the rest exported.

The company is learning to adapt. Just as the French government role became critical to sew up the Arcelor deal for LN Mittal and the UK government, post the Jaguar deal for Ratan Tata, Madhusudan Rao is sure the Australian government would make the right interventions. “The Australian government is willing to support us on building port infrastructure. It will be a three-four year process and we are working on that.”

Rao says Australia will be on his radar for quite some years, as “we are looking at other properties there”. It helped that Lanco took over the cost of running the government-administered mine. Because Perdaman is not the only battle that Lanco faces. There are other committed supplies like those to Bluewaters Power Station, a power producer that lights up almost 10% of Western Australia, as well as the carry through of A$1.2-billion power business of Griffin Coal to Kansai Electric Power last year, again on the talks of the new look at the coal supply deals from the now Lanco-held mines.

While there is a possibility of a retaliatory clamp down on exports of coal by the federal government, Rao is confident he will sail through. Other Indian companies eyeing the vast mineral reserves of the island continent are keenly tracking the way Lanco handles the tricky negotiations.

Rao is putting his cards on the table. “We want to focus on the (Western Australia) region and Griffin is a very important asset for us. There are some challenges with respect to Griffin. It had long-term contracts that we have to commit to. It’s a mine that we acquired through the administration process and its management cannot be taken for granted. So we want to focus on Griffin and make sure that we make a success of it.”

His CEO (business development), K Nagaprasad, says, “We are confident of the proactive role of the Australian government and the way it treats foreign investors.” This is important to retain the confidence of the investors in the company, as it has run up a debt-equity ratio of about 4 to finance its acquisitions. As interest costs mount, those could hurt.

In a way the international foray of Lanco is pretty much like Rao himself—ambitious, yet steady. Last year, the company set up its international division with headquarters at Singapore that is now scouting for coal mines in, besides Australia, Indonesia and Africa, while bidding to set up power projects in Nigeria, Ghana, South Africa, Vietnam, Bangladesh and the Philippines.

The man, who has mentored the phenomenal rise of the group over the past two decades, was, however, a late entrant in the family business. “When my brother (L Rajagopal) called me to India in 1991, it was a turning point in my life, what I call destiny,” says Rao. He was working in the US after completing his MS degree in industrial engineering from Wayne State University, Detroit, at that time. Rao joined as the joint managing director at Lanco Ferro and there has been no looking back since.

“In 1991, all of us were youngsters with no experience; Lanco was trying to take a jump from a small construction company to a sizeable manufacturing company.”

But there’s more on his mind than business. Rao prides himself on being a voracious reader, who is an ardent follower of “a lot of books on management and history”. But his first love is cars, collecting art comes next. When in college in the US, Rao was a Rolls Royce fanatic, to the extent that he spent much of his time drooling over the beauties at Rolls Royce showrooms. So it was dream fulfillment three years ago when he got his own custom-made Royce. Art, Rao believes, is an acquired taste that slowly grows on you, to the extent of intoxication. “You pick up the nuances and start understanding artwork and the artists themselves along the way,” says Rao, as he shows us one of his most prized artworks, a large Hussain painting.

Ever the optimist, Rao is not perturbed by the current political and economic environment in the country. “The past four months have been a little disturbing, but I strongly believe in the fundamentals of the country. We have seen these cycles before and this too shall pass,” adding, “I believe at 170 gigawatt today to 700 gigawatts in 20 years is a gigantic number for India, which will require an investment of $600 billion. The fundamentals are in place and it’s just about getting there.”