When Virendra D. Mhaiskar joined his father’s construction company in 1995, it was just making asphalt and building municipal roads. Toll roads were a natural extension of this process.
There was never any doubt in the young Mhaiskar’s mind about what he wanted to do after finishing with his education.
“My ambition was very clear from my school days—to join my father’s construction business,” says the chairman and managing director of IRB Infrastructure Developers Ltd, which executed the country’s first build-operate-transfer (BOT) road project and is one of the largest operators of such ventures with a total length of around 800km under management. BOT is when a private developer builds a road, operates it for a certain period, and then transfers ownership to the state.
Those who have bet on Mhaiskar include Deutsche Bank, Goldman Sachs and Merrill Lynch. Between them, they have picked up a 10% stake in IRB.
Inorganic growth: IRB Infrastructure’s chairman and managing director Virendra Mhaiskar says that out of 16 projects, eight have no debt, and profit from these will be ploughed back into the company for new projects. Ashesh Shah/Mint
The company collects Rs1 crore a day as toll from various road projects, but the wealth he sets greatest store by is experience. Mhaiskar prefers his veteran colleagues to anything that international consultants can come up with when it comes to taking his company to the next level.
“I learnt the work on the site from scratch,” Mhaiskar says. “Now I have a core team within the company. The critical decisions are taken and evaluated by our team of engineers who have been with us for the last 13 to 14 years.”
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IRB, which built the Thane-Bhiwandi bypass in Maharashtra as the country’s first BOT project, says it has a market share of 7.56% on the Golden Quadrilateral, which will link the country’s north, east, south and west when it’s completed.
The ministry of road transport and highways has set an ambitious target of constructing 20km of highway per day against 2-3km a day currently. Transport minister Kamal Nath said on 29 October that the government was looking at mega road projects worth $1 billion (Rs4,710 crore) with a length of 500-600km.
As much as 2,000km of roads have already been built this fiscal and the target of 3,000km is well within reach, Nath said.
When Mhaiskar set up IRB in 1998, it was based on a “co-creation model, not an inheritance model”, he says. The family members would plough profits back into the part of the company that they were running. Later on, he decided to take fuller control of the company.
“Since I was inspired by some infrastructure companies creating holding firms, I decided to buy out the remaining minority stake from my family members in my special purpose vehicles,” Mhaiskar says.
The company also has a pipeline of work that should keep it occupied for the foreseeable future, while keeping capacity in reserve should it need to be deployed, according to Vishal Sharma, an analyst with brokerage BNP Paribas Securities India Pvt. Ltd.
There’s no lack of funding as far as Mhaiskar is concerned, but specialized equipment and skilled people are in short supply. “There is no dearth of capital. The scarcity is for resources,” Mhaiskar says. “We had already created a bandwidth of people and equipment. You cannot give important jobs such as toll collection to a third party.”
IRB scores points against rivals by being able to save on costs because of its focus on these areas.
“Additionally, the company saves costs by owning stone aggregate quarries (essential raw material in highway construction) and construction equipment worth Rs2.2 billion, hence boosting profitability,” the BNP report said.
According to a 3 November transcript of the analysts’ conference call on fiscal results for the quarter ended 30 September, IRB can execute projects worth around Rs6,000 crore from internal accruals and has around Rs1,500 crore to Rs2,000 crore of head room to bid for projects.
What next? Mhaiskar says the future could be big road projects such as expressways and allied infrastructure.
IRB had already entered into real estate and airport development after winning the mandate to develop a new airport in Maharashtra’s Sindhudurg, 90km from Goa, at an estimated cost of Rs150 crore. It has also proposed an integrated township of 1,400 acres along the Mumbai-Pune Expressway.
“Airports are a niche area that we want to get into. In the case of Sindhudurg airport, it is ideally located and is close to Goa,” Mhaiskar says. “There is huge resistance against building another airport in Goa and there are limitations in expansion at Goa airport since it is a naval airport.”
Besides road and bridges, allied infrastructure will be a key diversification as it gets further engaged with the real estate business.
Mhaiskar plans to make IRB a debt-free company that will be able to compete and diversify in new areas: “Out of our 16 projects, eight have no debt. These eight road projects will become well-oiled financial machines of IRB... The profit from these debt-free projects will be ploughed back into the company for new projects. Likewise, we will make all assets debt-free one by one.”
That will pave the way to inorganic growth, he says. “Once more projects become debt free, we will be able to buy assets from other companies when the industry is ready for a consolidation. In future, there will be very few players.”
There is an element of risk in the business model. “The highways sector is highly regulated in the country,” the BNP investor note said. “As a result, any changes in the regulatory environment will have an impact on the business.”
While the developer bears the risk in case traffic growth is below projections, BOT projects are long-gestation ventures that are very sensitive to traffic growth, BNP said.