In 1996 when Grandhi Mallikarjuna Rao obtained permission to set up a power plant

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at Basin Bridge in Chennai many eyebrows were raised. After all, it’s not commonplace that an unknown company with little grounding in the energy sector, Varalakshmi Vasavi Power Projects (later renamed as GMR Infrastructure), floated by a mechanical engineer, wins such an important project. “Most of the energy projects had to go through heavy investment plans,” says GM Rao, recollecting memories of the first infrastructure project bagged by him. For a man who ran an agri-business (jute mills), banking (ING Vysya Bank) and ferro alloys (GMR Technologies & Industries), infrastructure was an entirely new animal. Nearly a decade and half later, people would say GMR has tamed it.

GMR Infrastructure today owns and manages three airports — Delhi, Hyderabad and Sabiha (in Turkey) — and recently acquired the Male (the Maldives capital) airport as well. It also has six operational and three under construction road projects with a total project cost of Rs 3,000 crore. The firm has 823 mw of operating gas-based power generation capacity, and an under construction portfolio of 2,400 mw.

The past decade signified the first significant privatisation of infrastructure ownership in India, but several things went awry. It was a time of massive asset creation and balance sheet expansion, which was, perhaps, not matched by returns and cash flows in most cases. The longer than expected implementation of an independent regulatory framework meant that the government ended up making a large amount of the decisions. But enterprising companies like GMR Infrastructure pioneered infrastructure asset ownership.

Risks

For Rajiv Gandhi International Airport in Hyderabad — the first greenfield airport in the private sector in the country — the GMR-led consortium beat international and local bidders by committing to tight timelines, a very aggressive move in light of what competition offered. Winning this bid also underlined GMR’s capacity to take risks. In 2003, in the bidding for country’s first privatised airport development, GMR’s consortium was in the forefront. This was at a time when the concession agreement had not even been finalised and most other developers were not willing to take the risk. Since then, GMR Infrastructure has employed PPP (public-private partnership) successfully to implement projects across the energy, highway and airport sectors. “GMR’s ability to accept the risks of PPP much before the formalisation of the concept and related policies and the company’s growth as a result of the new-age policies are reason enough for it to stand out among successful enterprises of new India,” the managing director (transportation division) of Feedback Ventures, Parvesh Minocha, says. Feedback Ventures is an integrated infrastructure services company backed by L&T, IDFC and HDFC.

Besides taking calculated risks, billion-dollar GMR Infrastructure has handled the ecosystem well. In October 2001 it signed the concession agreement for the Tuni-Anakapalli and Tambaram-Tindivanam road projects, the earliest deals in this sector for the company. The commercial operation of the 60-km Anakapalli road began on October 11, 2004 – 29 days ahead of schedule. “I believe that a part of GMR’s success could have been be powered by the way they managed their subcontractors. They deal well with subcontractors whether in terms of personnel management or timely payment,” said a top official of a competing company.

Execution

Even as the scam-scarred Commonwealth Games left India and Indians, GMR Infrastructure completed the modernisation of Delhi airport ahead of the Games. A consortium led by the GMR group, consisting of Fraport and Eraman of Malaysia, was awarded in January 2006 the concession to operate, manage and develop Delhi’s IGI Airport as a joint venture with Airport Authority of India. Besides upgrading the existing terminals, the joint venture, DIAL, commissioned a new runway 11-29 at IGI Airport on September 25, 2008. It also inaugurated the new domestic departure terminal 1D (T1D) on February 26, 2009. In March 2010, DIAL completed the construction of the integrated passenger terminal (Terminal 3), the sixth largest in the world, creating a capacity to handle 60 million passengers per annum. “The completion of the Delhi airport well ahead of the Commonwealth Games provides more evidence of GMR Infrastructure’s above average execution. We believe the airport will begin generating free cash flows in the financial year 2012, and could also make a net profit if management executes its game plan to pay off debt with further real estate lease-outs,” said India Infrastructure analyst at JP Morgan, Shilpa Krishnan.

Financial Chronicle asked officials at GMR’s peers such as the GVK group, Jaiprakash Associates and HCC for their opinion on GMR. None of them replied. But big or small, infrastructure companies share a deep respect for this Bangalore-headquartered giant. L&T’s executive director Shankar Raman said, "We respect what GMR has done till now and although they are our clients, we even compete for projects. We wish them all luck and hope they will continue the good work in infrastructure." Gammon Infrastructure director Parvez Umrigar said, "GMR has performed extremely well in the past and based on the plans they have outlined for the future, I believe they are bound to perform well."

Evolution

Financial services company IDFC (through its India Development Fund) put Rs 100 crore in GMR Infrastructure in April 2006, the first pre-IPO investment. But when GMR Infrastructure came to tap the domestic market in 2006, most experts doubted whether it would do well. A revenue model dominated by power projects and new ventures (airports and roads) made the Rs 800-950 crore IPO look weak even as the Delhi airport agreement was still under legal contention from one of the unsuccessful bidders. Plus, uncertainty over the Vemagiri plant's commercial operation (under renegotiation of certain terms) did not enhance the revenue outlook. Still, some investors were looking to bet on GM Rao. The IPO was oversubscribed about seven times even as another public issue, that of Tech Mahindra, was oversubscribed 70 times. IDFC executive director Vikram Limaye feels that GMR Infrastructure has turned the Indians-cannot-create-world-class infrastructure notion upside down. “We have been associated with the group over the past decade and have seen the group grow and evolve into one of the largest infrastructure developers in the country. GMR has proven execution capabilities across various infrastructure sectors such as power, airports and roads and their work at the Hyderabad and Delhi airports is testimony to the fact that Indian developers are capable of creating world class infrastructure,” said Limaye.

In the first one year after listing in August 2006, GMR’s financials and share price returns were very rewarding for investors but, thereafter, the company has not been able to sustain the performance (see table). From 2005-06 till 2006-07, GMR's net sales nearly doubled while net profit more than doubled and total debt was kept in check with a small 25 per cent rise. But the next three years have seen GMR struggling with lower growth rates in net sales and net profit. The net profit actually halved from 2008-09 to 2009-10. At the same time, debt shot up from Rs 3,706 crore at the end of 2006-07 to Rs 21,171 crore at the end of 2009-10. As a consequence of all this, for investors who gained 5.7 times between August 2006 and December 2007, it has been a downhill thereafter. It is worth noting that infrastructure as a theme, and not just GMR Infrastructure, has not fared well in the past two or three years.

From being totally power dependent in 2006, today GMR Infrastructure draws 40 per cent of its earnings from power and 40 per cent from airports, while roads contribute another 8 per cent as per second quarter 2010-11 results. The move from power to airports needed the visionary leadership of Rao and his team’s execution skills. Two aspects of GMR stand out, which bind this company to the economic reforms begun in 1991. The first is that the very sector it operates in, infrastructure, barely existed as an opportunity for the private sector before the reforms. “The second is that its founder-promoter GM Rao started out almost from scratch, with little more than his entrepreneurial skills, and managed to build this company in just 20 years. While not impossible, this would have been much more difficult in the stifling economic environment which existed before 1991,” feels Rajiv Luthra, founder & managing partner, Luthra & Luthra, a law firm which advised bankers on the $315-million qualified institutional placement of GMR Infrastructure in 2010.

Future

Other experts tracking the company feel Rao's next generation, which is now taking charge of the business, also has his best traits, including his humility and commitment. GBS Raju, managing director, is the elder son of Rao and has been on the GMR Infrastructure board since 1999. Raju is credited with successfully steering the group’s foray into the road business. Kiran K Grandhi, the younger son of Rao, led the company’s foray into the airport business, and he has also been on the board since 1999.

Srinivas Bommidala, Rao’s son-in-law and group director, is one of the first directors of GMR Infrastructure. He spearheaded the group’s recent foray into the sports arena. But unlike IT czar Azim Premji, who believes ownership and management are two different things, the GMR group promoters have always been closely involved with the management of each of the different verticals. Each business head is supported by a strong group of professionals. “Team members and family directors and members of the GMR group holding board are the biggest source of strength and support. A ‘can do, will do’ style describes us the best. We adapt to change, are flexible, compassionate and disciplined with commitment and have the humility to learn continuously. Today we are happy to have a strong and committed team of professionals who have grown with the company and are now in senior leadership roles,” says Rao. As the company gains size, Rao feels coalmines for fuel security (power plants) is also important because “fuel will be a major problem going forward”.

In addition to captive coal resources in India and Indonesia for power projects, GMR has a 33.5 per cent stake in Homeland Energy, which owns coal properties in South Africa. With cash in hand from the November 2010 divestment of shareholding in the Dutch power generation firm InterGen for an equity value of $1.2 billion, the company looks focused on enhancing the cash flow and operating profits, rather than just focusing on asset creation.