Mumbai: Essar Projects (India) Ltd, the unlisted engineering and construction arm of the Essar Group, is looking to generate more business from overseas markets, including West Asia and Africa, as it seeks to offset the impact of a slowdown in India.
The UAE-based firm that gets 60% of its business from group companies is also looking to expand the proportion of work it gets from other companies.
Essar Projects is increasing its focus on projects in locations such as West Asia, South-East Asia and Africa in a bid to meet its target of becoming a $6 billion company by 2016, Alwyn Bowden, president and chief executive officer, said in an interview on 30 May. Sales in the year ended March stood at $2 billion, with less than 10% of its business coming from overseas markets, he added.
Bowden hopes to get around 50% of its engineering procurement and construction (EPC) projects from West and South-East Asia in the next three years, which will also “help spread risks”.
“We are already 18 months late” in trying to tap companies outside the group, Bowden said.
“It was not a mistake but we were caught out,” said Bowden, pointing to the proportion of revenue coming from executing orders for group firms. He added that he would like to “see a complete reversal” going forward. “The contracts we do for our group companies will be limited to just 10%.”
In 2011, Essar Projects split the company into six special business units (SBUs)—minerals and metals; hydrocarbons; power; concessions; infrastructure; and offshore subsea—that started working independently as stand-alone businesses. The company is now structured in a way that makes it possible for it to independently bid for projects in these segments, said Bowden.
“We are looking at projects worth $500 million currently, two power plant projects—one in Algeria and another one in Tanzania, a large refinery project in Africa and a hydrocarbon project in Saudi Arabia.”
Analysts point out that India’s largest engineering and construction company, Larsen and Toubro Ltd (L&T), similarly reorganized its operations in early 2011 into nine units to simplify its structure to manage growth.
Essar Project’s order book is around $3.2 billion, according to Bowden. L&T’s order book stood at Rs.1.54 trillion on 31 March.
“Right now, we may be doing small projects. But our intention is to do large-scale projects. It does not matter where they are and we have identified a cluster of large-scale projects, and they are primarily in West and South-East Asia,” he added.
Infrastructure companies have been shifting focus overseas to make up for the slowdown in the domestic market. For instance, on 22 May, L&T also said it will be chasing more orders from overseas in order to meet its order inflow guidance.
From the beginning of the year till date, the CNX Infrastructure Index has fallen 9.13% while the National Stock Exchange’s benchmark Nifty was up 0.24%.
According to Arvind Mahajan, partner and national head, energy, infrastructure and government, KPMG, the trend (shift from captive to third-party contracts) is not specific to Essar alone. Many companies are moving to third-party contracts, he said.
“It will be better if the group goes abroad to bid. In India, its parent—Essar Group—is seen as a competitor by most companies,” Mahajan added.
A sector analyst, who requested anonymity, said many infrastructure companies, including L&T, Punj Lloyd Ltd, Tata Projects Ltd and Essar Projects, are looking at West Asia and Africa.
“There will always be risk, especially when you are looking out for scale, which is only available in such markets. What is crucial is to partner with someone local and chose your countries carefully,” said Mahajan.
Bowden said Essar Projects is in talks with local partners, but did not divulge any names.
There are other risks too. Some experts say the move to step up the hiring of citizens in West Asia could also escalate project costs besides which Chinese contractors could undercut Indian companies.