First it was BSES. Then it became Reliance Energy. Now, it is Reliance Infrastructure. The change in name reflects how Reliance Infrastructure (RInfra), a part of the Anil Dhirubhai Ambani Group (ADAG), has got engaged in the vast infrastructure sector. From power generation, transmission and distribution to undertaking EPC projects for power entities, and now building roads, airports, ports and metro railways, the company is doing it all. The company’s standalone revenues and net profit have grown at a CAGR of 24 per cent and 38 per cent respectively through FY03-09 since it acquired a 58 per cent stake and took over management control of BSES in January 2003. Consolidated revenues and profit have also grown at a CAGR of 37 per cent and 27 per cent respectively in two years from FY07. Lalit Jalan, CEO and whole-time director, Reliance Infrastructure, explained to Priya Kansara Pandya how the company has successfully spread its wings in the infrastructure space and how it is preparing to capitalise on the huge opportunities. Excerpts from the interview:

What made the company focus more on infrastructure when there is huge opportunity in power?

After taking over BSES in 2003, Reliance Energy revamped the power business and it has now emerged as a full-fledged private player in generation, transmission and distribution. But the generation projects have a long gestation. So we decided to spin off the power generation business to group company Reliance Power (RPower) in 2008, and also created huge value for our shareholders in the process. Our 45 per cent stake in the company is today valued at over Rs 20,000 crore, nearly 12 times the Rs 1,700 crore initial equity that we put in.

Excluding generation, EPC and real estate projects, our order book stands at more than Rs 30,000 crore

We also realised that transmission and distribution is still a licensed business and progress depends from state to state. Since we had gained substantial experience in executing power projects, we thought of capitalising on the power business. So, we also started undertaking EPC (engineering, procurement and construction) projects for other power players. We are doing several projects for Reliance Power worth over Rs 14,000 crore, and we are open to doing projects for other private players also. Today we have projects worth about Rs 20,000 crore executable over the next three years.

Infrastructure is an area where we see huge opportunities and we think we have the skills, namely project management, a strong balance sheet and sector knowledge. So we’ve entered all infrastructure segments, starting with roads in 2005 and then airports, metro rail and ports.

We have one of the largest road projects portfolios (seven) and one project is operational (NK Toll Road in Tamil Nadu). We are the only private sector metro rail player in the country with two projects in Mumbai and one in Delhi. Our metro project I (Versova-Andheri-Ghatkopar) will commence two years ahead of contractual schedule in 2010.

In the last three years, we have emerged by far the largest infrastructure player in the country. Excluding generation, EPC and real estate projects, our order book stands at more than Rs 30,000 crore. For sustainable growth, we plan to capitalise on opportunities across the entire infrastructure space. This would be the main catalyst for our future growth.

Of the total projects worth Rs 13,000 crore, which we are executing, projects worth Rs 10,000 crore have completed financial closure

Given the opportunity in the infrastructure space, would you transfer the entire power business to RPower at some stage?

Transmission and distribution (T&D) will be done by Reliance Infrastructure (RInfra) as RPower will be busy with generation projects worth Rs 1 lakh crore over the next 5-6 years. We have not taken any decision to transfer the power generation business of 941 mw now with RInfra to RPower as these are regulatory businesses that are not easy to transfer. Nothing is cast in concrete. However, all future generation projects will be with RPower and the T&D business with RInfra.

What are the prospects in T&D for private players and where do you stand?

The country requires about Rs 2 lakh crore worth of transmission projects every five years, which means Rs 40,000 crore every year. Though Power Grid Corporation and the respective states will play a major role, a large chunk of the business will have to come to the private sector owing to the sheer size of investments required and the projects capacity. Of the private sector’s share, estimated at Rs 60,000 crore-Rs 70,000 crore in the first five years, we hope to win about 10-15 per cent. The private sector’s share in transmission, like in generation, will only get bigger.

Of the eight transmission projects put out for private players, we have qualified for seven projects worth Rs 10,000 crore and the bidding for these will take place over the next three months. Our current transmission projects, WRSS (Western Region Strengthening Scheme), Parbati Koldam and Mumbai Strengthening will be commissioned in a phased manner from Q3FY11 onwards.

The distribution business is yet to open up to private players on a large scale, outside Delhi, Mumbai and Orissa. What we are seeing now is a tendency to open the sector through a franchisee model, like it is happening in Bhawandi, Agra and Kanpur. The bidding process has been initiated in UP and Bihar. Maharashtra is also expected to open five more circles for retail power distribution in the coming days.

What have been the key achievements for RInfra in the distribution segment in the last 3-4 years?

We are the largest private sector power distributor. We serve two out of three homes in Mumbai and Delhi with a total 6.5 million customers. Mumbai continues to be the most efficient utility company in the country with AT&C losses of less than 11 per cent, against the country average of over 35 per cent. Our distribution joint venture with the Delhi government has been a stunning success of the public-private-partnership (PPP) model. In Delhi we reduced AT&C losses from over 55 per cent in 2002 to about 20 per cent, which is the best loss reduction levels ever achieved in such a short time anywhere in the world.

What kind of mix are you looking at in the infrastructure order book over the next three years?

We are not limiting ourselves to any particular segment in infrastructure. As long as we get over our threshold limit of 20-25 per cent return on equity, we think we are creating value for shareholders. Moreover, we are in multiple areas, as there is huge opportunity across the infrastructure space, but a lot depends on the respective ministers and the government’s focus.

Clearly, as things stand today, with a new minister at the helm and the opportunities in the sector, roads will be the frontrunner. Mr Kamal Nath has brought a breath of fresh air into the sector. India’s GDP is expected to grow at 8 per cent over the next few years and automobiles should grow at 15 per cent on the aspirations of people at bottom of the pyramid. So, investments in roads will have to grow at 20 per cent, taking into consideration the huge backlog, as against 2-4 per cent currently.

Of the more than 100 projects worth about Rs 1 lakh crore this year, we hope to win about 15 per cent. We have pre-qualified for projects worth Rs 18,500 crore, whereas an additional Rs 10,000 crore is in the L1 stage.

What are the opportunities in other infrastructure sectors?

We plan to spend Rs 23,500 crore over the next three years in various businesses. We have decent cash and cash equivalents of over Rs 9,000 crore

Every metro city is to have a metro railway. So, besides the big cities like Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad, even smaller cities like Pune, Chandigarh and Ahmedabad will have metro railways. In Mumbai itself, there are going to be 12 routes that will cost Rs 40,000 crore.

In the airports segment, we have won all five projects put up for bidding in Maharashtra. We have also pre-qualified for projects worth over Rs 4,000 crore. About 35 projects have been identified across India, including Andhra Pradesh and Maharashtra. We hope to maintain our success rate.

What is the value of projects that have achieved financial closure?

Of the total projects worth Rs 13,000 crore, which we are executing, projects worth Rs 10,000 crore have completed financial closure. These include Mumbai Metro I, Airport Metro Express Line (Delhi), WRSS and five road projects in Tamil Nadu.

The Mumbai Metro Line 2, worth Rs 11,000 crore, which we got recently, will take some time, but the Rs 780 crore GF Toll Road is expected to complete financial closure in a couple of days. The sea link project (Rs 5,100 crore) and NCR expressway project (Rs 4,000 crore) for which we are the preferred and sole bidders respectively have not yet been awarded.

You must note that the Reliance Infra group (including Reliance Power) is the only player to have completed financial closure of projects worth Rs 32,000 crore in FY09 and that too during the turbulent times of the credit crunch between October 2008 and March 2009.

What are the potential risks the company faces?

We have a presence across different verticals in the infrastructure space, from power generation, transmission, distribution, roads and metro rail to airports. Thus, like any other infrastructure company with long gestation periods, we too face execution risk, political risk and regulatory risk. But we are prepared for this.

Do you plan to give contract work for your infrastructure projects to the EPC division?

We have started this, although on a small basis, with one road project (GF Road in Haryana). In future, EPC work for our infrastructure projects will be given to our EPC division on a competitive basis, just like for an outside player. We treat our EPC and infrastructure businesses separately. They can use each others services if they find the prices attractive. Our EPC division also bids for Reliance Power projects like any other outside player.

What is the capex planned over the next three years? How are financial requirements arranged?

All future generation projects and hence capex will be done by Reliance Power. We plan to spend Rs 23,500 crore over the next three years in various businesses, such as distribution in Mumbai and Delhi (Rs 2,500 cr), roads (Rs 3,000 cr), metro rail (Rs 14,000 cr) and transmission (Rs 4,000 cr). This is not a problem as we have Rs 10,000 crore of cash on our balance sheet. We have healthy cash flows of Rs 1,300 crore-Rs 1,400 crore annually from our generation, transmission and distribution and EPC projects. Moreover, we have Rs 3,000 crore pending warrants of promoters which would result in a net worth of Rs 16,000 crore. Considering a debt to equity ratio of 2:1, we have the scope to raise Rs 32,000 crore from the current level of just Rs 4,500 crore. For our order book of Rs 30,000 crore worth of projects we would need equity of about Rs 7,000 crore out of which Rs 1,000 crore has already been invested in FY09.

What kind of growth is expected in the top line and bottom line?

We expect to grow our top line, bottom line and order book with a CAGR of 20-25 per cent on a sustainable basis. However, top line growth will be skewed. As and when our projects get completed, we will get into that hyper growth.

What if there is a replay of the October 2008 scenario in the global financial markets and liquidity dries up? Is there a contingency plan?

At the net level, our company is currently debt free. We have decent cash and cash equivalents of over Rs 9,000 crore as of June 30, 2009. Further, current cash flow levels are adequate to extinguish the entire gross debt.

What about de-merger plans?

Right now, every project, whether it is transmission or roads, is done through special purpose vehicles (SPVs), which are 100 per cent owned by Reliance Infrastructure. After the de-merger plan is approved by various entities (which will be effective from March 31, 2009), we will have six subsidiaries that are 100 per cent owned by Reliance infrastructure. For example, all road sector SPVs will be clubbed under roads as a company. Likewise, all transmission SPVs will be under the transmission company, and so on. However, the EPC division will remain with the parent company. We already have heads for individual verticals, but we still have to hire the overall segment or company head.

How will the de-merger help?

This re-organisation will enhance our operational performance and offer benefits like (a) a simplified business structure, (b) focused leadership and management attention in each business, (c) greater transparency in the performance of individual businesses, and (d) attribution of appropriate risk and valuation to different businesses based on their respective risk-return profile and cash flows.

Would you to list these subsidiaries to unlock value?

Yes, if it is required.