Mumbai: India’s largest toll road operator, all of 11 years old, has an unlikely role model: the country’s largest telco, Bharti Airtel Ltd, itself a start-up that’s just a few years older.
IRB Infrastructure Developers Ltd, an early believer in the government’s so-called public private partnership model of building roads, won four contracts to build roads, collect toll on them for a fixed period of time, and then transfer them to the government. That takes the total number of projects in the company’s portfolio to 16. And 11 of these are operational, says Virendra Mhaiskar, 38, IRB’s chairman and managing director.
Right track: IRB chairman and managing director Virendra D. Mhaiskar, who calls himself ‘a child of the Indian reforms’, says this is one of the best businesses to be in, as one has clarity on the revenues. Ashesh Shah / Mint
Mhaiskar hasn’t met Bharti’s Sunil Bharti Mittal, but to him the similarities between his company and the telco are significant. “They (Bharti) had a similar story. They entered the telecom sector when it was nascent. They went in for an aggressive roll-out, and the rest is history.”
Mhaiskar is not doing too badly either. From his 11 projects, Mhaiskar earns a gross revenue of Rs2 crore daily, and the number is rising. In a few days time, the government is expected to issue a notification, which will enable his company to collect toll from Surat-Dahisar highway. That will also add to the 1,150km of highways that IRB currently manages.
Mhaiskar, who calls himself “a child of the Indian reforms”, joined his father in 1990 in a business which was set up in 1977 to construct roads for municipalities and make asphalt. “In 1995, we got the first breakthrough because of the privatization policy that allowed public-private partnership,” he said. In 1998, Mhaiskar incorporated IRB. As he built the portfolio, the family created a structure that would serve as a holding firm for all the special purpose vehicles that owned different toll road projects, after private equity investors asked for more transparency and clarity in business model. This was finally achieved in 2006 when Mhaiskar bought out the stake of all other promoters and made all the special purpose vehicles 100% subsidiaries of IRB.
In February 2008, Mhaiskar, prodded by his private equity investors decided to make an initial public offering of shares. It wasn’t the best of times to sell shares to the public; two companies better known than IRB, Emaar MGF Ltd and Wockhardt Hospitals Ltd were also in the fray around the same time to tap public money. While Emaar, the real estate developer, and Wockhardt decided to opt out in view of the poor response from investors, IRB’s public issue was oversubscribed 4.3 times and listed at a premium of 2.19% to the offer price of Rs185. Shares ended their first day of trading at Rs189.05 each. The three private equity investors—Deutsche Bank, Goldman Sachs and Merrill Lynch who collectively owned 10% stake in IRB—have since exited the company. Mhaiskar said the private equity firms played an important role in transforming a family run business into a listed entity that is a professionally run company with 3,000 employees.
The transformation has helped IRB tap a lucrative market.
IRB and companies such as Larsen and Toubro Ltd, Reliance Infrastructure Ltd, the GMR group, Gammon Infrastructure Ltd and Patel Engineering Ltd are eyeing the potential in constructing and tolling expressways.
As Pawan Kakumanu, an analyst at Alchemy Share and Stock Brokers Pvt Ltd, wrote in a 29 June report on IRB titled, “Paving the path to growth”, “India boasts of one of the largest road networks in the world second only to the United States. However, the usability of these roads had remained seriously under question. The majority of the Indian road network constitutes of rural and other roads. Expressways constitute a mere 200 km of the network. National highways constitute only about 2% of the total length and yet carry about 40% of the total traffic. Only 12% of the national highway network is four-laned with 50% two-laned and remaining single-laned.”
The economics of running a toll road is simple, and explains why the business has attracted several large companies. “This is one of the best businesses to be in, as one has clarity on the revenues. Once the toll structure is established, it is very difficult for the business model to go wrong. What can go wrong is the growth rate in vehicular movement. Once the construction risk is out of the way and revenues are established, then forecasting a growth model is the only unknown in the business,” said Mhaiskar.
It helps that IRB has been conservative in bidding for projects. According to Mhaiskar, IRB was eligible to bid for eight projects in the recent round of bidding. Instead, the company bid for five and won four projects, the maximum a single company can win under new government rules.
“We highlight that the company has won projects at bids which were very close to the second highest value. This instills confidence in the bid values of IRB with likelihood that the company has not bid too aggressively on the projects,” said Kotak Institutional Research in a 24 June report. IRB’s order book, with the new projects, is worth around Rs10,000 crore.
Proximity to politicians?
IRB’s success, like that of several other relatively young infrastructure companies has been credited to Mhaiskar’s alleged proximity to local politicians in Maharashtra, but Mhaiskar denies this. He said that all four projects won by the company recently were “national highway projects”, implying that it would be difficult for local politicians to influence their award. “It (the bidding and award process) is very transparent,” he added.
“If you are in the business you have to know everybody as one interacts with them,” he said.
Mhaiskar’s family literally controls the entry points into Mumbai. It runs the MEP Toll Road Private Ltd, part of the family business but not an IRB subsidiary that operates the toll gates on the five entry points into Mumbai. A recent addition is the Bandra-Worli Sea Link, where the firm operates the toll gates.
Mhaiskar, who is currently reading Chinese philosopher Sun Tzu’s The art of war isn’t keen on speaking about where he sees his company five years from now. “Today we are managing 1,100km of road, we want to double that in five years,” he said after much prodding.
IRB is also looking to diversify.
“Hydro-electric projects in the North-East and greenfield airports are areas where our expertise in construction can come into play. Both have a civil engineering component of almost 70%. It can also give us an integrated approach,” Mhaiskar said.
IRB is the sole bidder for an airport project in Sindhudurg, a coastal district in Maharashtra. “Sindhudurg will be straight competition for Goa. It is 80km from Dabolim, the naval airport in Goa,” he added. Sindhudurg, according to some analysts, could be a tourist hot-spot. It has 11 almost-undiscovered beaches. The airport project, however, isn’t worth much—only Rs150 crore.
Companies such as IRB, however, are counting on the aggressive intent of new highways minister Kamal Nath, who has said he wants 25km of highways to be built every day.
“What we saw in former surface transport minister Brigadier B.C. Khanduri (of the National Democratic Alliance government that ruled India between 1999 and 2004 and is credited with launching the country’s highways programme) is what we are now seeing in the new incumbent Kamal Nath,” said Mhaiskar.