Mumbai: Essar Projects (India) Ltd, the unlisted engineering and construction firm of the $20 billion steel to oil refiner Essar Group, has undergone a restructuring programme similar to the exercise at larger rival Larsen and Toubro Ltd(L&T) designed to unleash the potential of its constituent businesses, making them more competitive.
“We started the process two years or so ago and decided that we would split our business into verticals and each one of those verticals will focus on a particular business,” Alwyn Bowden, president and chief executive officer, Essar Projects, said in an interview last week. “They would build on the track record that we’ve gained with our sister companies and take that track record to external markets.”
Reliance Industries Ltd (RIL), too, had similar plans to offer its expertise to build refineries to third parties. But the project did not take off and it is largely focusing on captive projects such as refineries and petrochemical plants. An RIL spokesperson declined to comment.
L&T restructured itself into nine business verticals that act as independent companies with internal boards to be more competitive and offer a planned transition to senior management.
It has carved out power equipment, hydrocarbons, heavy engineering, infrastructure, buildings and factories, metals and minerals, electrical and automation products, electrical construction, machinery and industrial products as separate entities.
Bangalore-based infrastructure developer GMR Infrastructure Ltd has also set up an in-house engineering, procurement and construction (EPC), division aiming at saving costs on projects and meeting deadlines. GMR, which runs and builds airports and lays roads, has an EPC division that mirrors that of L&T.
Essar Projects, the first company started by the Ruias of Essar group 41 years ago by building a breakwater project for the Chennai Port Trust, later expanded to civil and industrial construction.
It built Essar Energy’s 14 million tonnes per annum (mtpa) refinery at Vadinar in Gujarat and Essar Steel’s 9.6 mtpa integrated steel plant at Hazira.
Each of the businesses is being turned into a separate company under the parent with its own chief executive and business plan. They will bid for projects independent of each other—both internally and externally.
The businesses are steel, power, offshore, hydrocarbon, ports and jetties, pipelines and terminals, civil and building, heavy engineering and refinery expansion.
“Any large group which has experience in executing large infrastructure projects such as refineries, ports, roads, steel plants and other projects develops significant expertise and project management skills around equipment procurement, engineering and construction management,” said Jai Mavani, executive director at consulting and audit firm PricewaterhouseCoopers Pvt. Ltd (PwC), the Indian arm of the global audit and consulting firm. “Therefore, starting a dedicated project division is a natural extension of the skill sets and experience.”
Mavani did not want to comment on company specific developments, but added that with many large infrastructure and industrial projects being implemented, existing engineering, procurement and construction companies were stretched for bandwidth.
The company, which currently earns around 65% of its revenue from executing orders for group firms, also wants to eventually move the mix of internal to external orders to 50:50 and derive half its revenue from overseas. Two years ago, around 90% of revenue came from executing projects for Essar Group companies.
“The reason for wanting to do this is to have diversity, to protect ourselves from cycles, from unforeseen events, so it’s a risk management positioning as much as anything,” Bowden said.
“For large projects, quite often, you need companies with significant balance sheet depth to prequalify. Therefore, entry of a reputed player is always welcome,” PwC’s Mavani said.
The decision to offer its services to third parties is already paying off. Over the past two years, Essar Projects has secured two contracts from Oil and Natural Gas Corp. Ltd worth a total $450 million and a $304 million order from Indian Oil Corp. Ltd for building a refinery at Paradip in Orissa.
Overseas, it recently won the mandate to build a private airport for Exxon Mobile Corp. in Papua New Guinea for $55 million and secured a $320 million mandate to build a jetty and tanking terminal for the Jurong Aromatics Complex in Singapore.
On the back of the robust increase in its order book to $5.2 billion as of March, the company expects annual revenue to rise to almost $3 billion by the end of the current fiscal year from $2 billion at the end of the last one.
Still, it hasn’t exactly been a cakewalk for the company. Despite having executed such a large number of projects for sister companies, it wasn’t a case of winning orders by default because of the Essar name.
“It’s not mandated that an Essar Group project has to come to us. We’ve lost projects because it was felt that another entity was better placed to deliver,” Bowden said.
Still, while various group companies have evaluated Essar Projects’ performance against rivals and have gone through the process of discussions and negotiations with both companies, “invariably, the decision is to continue with us”, he said.
To be sure, winning so many orders from group companies has its drawbacks. It has often been disqualified for government projects at the pre-qualification stage as the experience of executing projects for group companies is discounted.
“The hardest task masters are your own sister companies because for them it has to be delivered on time and it’s the company’s own money again. To me, it’s not the right kind of argument,” Bowden said.
Consequently, it has tied up with other infrastructure companies to bid for upcoming road projects. India was scheduled to hand out road projects worth $50 billion in the fiscal year that ended 31 March, but has consistently missed targets for building roads, ports and other infrastructure, dampening private interest.