Rupen Patel shifts focus to assets ownership

Patel Engineering managing director shares with Construction Week how he wants to transform his company into a billion dollar sustainable one

Patel Engineering’s name is today synonymous with dams and underground works in India. The company has been at the forefront of introducing some of the advanced technologies in India such as RCC (Roller Compacted Concrete) in hydro power projects, micro tunnelling and double lake taps. Almost 90% of micro tunnelling projects in India are done by Patel Engineering or its subsidiaries.
When Rupen Patel took charge of the company in 1993, it had a turnover of `60 million. But within a span of 18 years, he transformed Patel Engineering into one of the fastest growing construction companies in India with an annual turnover of around Rs35,000 million, registering a growth of 600 times amounting to a staggering 33% increase every year.
After successfully executing some of the critical projects as an EPC contractor, Patel now has a different goal to accomplish. He wants to shift his focus to developing his own portfolio of assets, mainly in the power sector. The company has drawn up a plan to invest about Rs7000 crore in the power asset development through IPP (Independent Power Producer) in the next three years. With its current market cap of about Rs11,028 million, Patel Engineering wants to become a billion dollar company with sustainable profits.

You are primarily an EPC company, with special focus on dams and hydropower. Why have you decided to shift your focus towards ownership of projects?
The infrastructure model in India is changing from pure construction to ownership. If you look at Indian infrastructure companies, they have been looking to get into project ownership. However, different companies have different strategies as some are getting into ownership of roads, whereas others are looking for water assets or power or real estate or manufacturing. So each company has its own strategy.
For Patel Engineering, what we have started off with is power, so we know power best. We have been associated with the construction of almost 22% of India’s hydropower in the civil work portion since independence. Since we know power best, we decided to get into hydropower and thermal power. We should start constructing our first thermal project this year in India, which is about 1050MW in Nagapattinam in Tamil Nadu. We will also start constructing our first IPP hydro project of 140MW and then six months thereafter we will add another 40MW hydro power. So in the span of a year and a half, we should have 180MW of hydro and 1050MW of thermal power projects commissioned. We will own these projects and sell the power.
Another area of ownership that we are looking at is real estate. We have a sizable land bank which is in excess of 1200 acres in Bangalore, Hyderabad, Chennai, Mumbai and other parts of India. That is one of the reasons we have got into real estate. We think lots of liquidity will come out of real estate projects, which will help us finance some of our infrastructure projects.
Eventually, Patel Engineering will evolve into a company that will have three arms—power production through IPP (asset ownership), real estate development and contracting.

What do you think is the potential of real estate in India? Which segments would you be looking to cater to?
We think, as India grows, there will be a substantial demand for affordable housing, both in mid level and low level housing. India is evolving very fast and people’s salaries have doubled in the last five years. The impact will be seen in the consumer market. The first thing people would like to buy is a house. So there is going to be a boom in certain segment of housing, primarily in affordable and low cost housing. I think that the market [real estate] is here to stay, along with the consumer market. That’s why most of the real estate projects that we are doing are in the affordable housing segment.
We launched our Bangalore township project a year ago and we have sold about 2.5 million ft2 as of now. We have also started a project in Mumbai, which is a commercial building coming up in the western suburb.

After withdrawing from the Dhankuni-Kharagpur project, you had bid for two more NHAI projects (Krishnagiri-Tindivanam and Bhanwara-Panagarh). Are the results out? Have you been successful in any of them?
No, we have not been successful in winning those projects, but we will keep bidding for new ones. We have earlier been selective about projects we did. We already have a portfolio of roads projects. We have finished two annuity projects right now and the income has started coming from them.

Would you like to get into the ownership of roads as well?
We are doing roads since NHAI started giving out projects. As the industry changes, yes, we will get into ownership of roads, but currently we will be more focused towards having ownership of power and real estate.

What is the current size of your order book? Would you like to shift your focus towards any particular sector?
We have over US$2 billion worth of orders to be executed in the next three and half years. We have always maintained that 40% to 60% of our order book should be dam and underground works. So our focus will remain the same. There are tremendous amounts of hydro projects coming up in the country and internationally.
I think we will continue our E&C as scheduled, as well as regularly expansion in other areas such as real estate and asset ownership. We will continue focusing on power projects, which has been our forte and we will also diversify other areas as government spending comes along.

How much revenue comes from your overseas projects?
It varies from year to year. At one point it was 40%, but right now it’s 15%. Our revenue from overseas projects was about 40% ten years ago, but now the Indian market is growing much faster so the foreign market has reduced to 15%. However, as a company we have decided that we will grow much faster in overseas, primarily in Africa besides our existing presence in US, Australia and Europe.

Patel Engineering has reported a fall in net profits in 2010-11. Also the order flow has been slow compared to last year. What are the reasons for this?
That’s because our BOT projects would go into construction in the next 18 months. The internal order book should be close to Rs6000 crore. Secondly, the industry itself has become sluggish. The government’s spending has substantially been reduced, both in terms of cash contracts and BOT projects. That’s why you see the growth of most construction companies’ order books, has been slow. Even the turnover growth of the industry has been lower than the last year. The order book conversion rate and conversion rate of order intakes have been slow because the government’s spending has substantially been reduced.
I think the sluggishness will remain for some more time and the government will start spending and give orders only after six months or so. India needs infrastructure and there is no choice. If the economy has to grow at 8%, then infrastructure spending has to take place. The challenge only is that if the Indian economy slows down, then the infrastructure spending will also slowdown.
I think, right now, the government is facing many challenges in terms of land acquisition, environmental clearances and the process of tendering, which actually slows down government spending. It’s not a private party who can go out and spend. But I think the infrastructure spending is here to stay. It’s just a vicious slowdown of a year and half.

How have you been able to keep up with the latest technological advancements in the construction field?
Technology is something which separates us from the rest. We have invested in technologies in the 1980s which are reaping benefits today. We keep on scouting for small technology companies who are specialised and leaders in certain technologies and we acquire them. That’s what we have done for micro tunnelling and compactor concrete dams. And we are still in the look out for certain technology companies, whom we can acquire and can bring that technology into India.
We have constructed the first RCC dam in India, which is located at Ghatghar in Maharashtra. We have completed the project in 18 months. It is ranked amongst the top ten dams in the world to be completed the quickest.
After acquiring the US firm ASI RCC, we have brought that technology into India and have done lots of compactor concrete dams.
We have commissioned more than 30 projects in the US itself through our subsidiary ASI RCC. We have completed projects in Africa, Eritrea, in the past US, Greece, now we are going to other countries.

What initiatives would you like to see from the government and the industry?
If the government gives single window clearances for infrastructure projects, especially for project, which are above a certain size, it will speed up the execution process. Issues such as environment clearances, approval, financing, etc should be brought under a single window. Dispute resolution mechanisms in construction contracts are another point that the government should address. If there is a standardised bidding document, which I think the government is already working on, it will help the industry a lot.
These are the elements which have been done internationally to execute project at a rapid scale. I truly feel that the government is changing the scenario of infrastructure.

How different has it been working in the western world compared to India?
The systems are well defined and the problems are rapidly addressed in western countries. For example, clearances and legislations are well defined and very rapid. So what happens is the decision in terms of execution and legality is much faster than in India. As a result, speed of development happens much faster.

With lots of foreign companies working in India, do you think the work culture is changing here?
I think the culture is definitely changing, the work ethic is changing. The skill sets and efficiencies of the people are also changing. Ten years ago corporates did not talk about training so much. Today, growth is taking place in such a rapid space that now corporates have begun spending on training.

What is your target for next fiscal?
In the next two years, Patel Engineering is going to focus more on developing its own portfolio of assets. Currently, the net worth of the company is close to about Rs1400 crore. We have over US$2 billion worth order book to be executed in next three and half years.
We aim to become a billion dollar company which is not going to be very difficult, but the question is how do you sustain that growth. We are confident that we will reach a billion dollar in terms of revenues, because the initiatives that we are taking in terms of power and real estate will ensure that we sustain and continue to be a billion dollar company.
The current growth rate for the company has been 25% year-on-year basis. We will be getting into power associated segments like transmission. Since our forte has been water and power, we will get into associated lines. If privatisation of power takes place, we will take part in that. We will be getting into transmission as and when it is privatised. We have already forayed into privatisation of transmission under BOT with a joint venture with Simplex Infrastructure.
The ownership of assets will provide top line, E&C will continue with its growth and real estate will provide the bottom line. So we will continue to be among the most profitable companies in the infrastructure space.
We have been one of the most profitable companies in the infrastructure space in terms of net profit, if you look at it historically.

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