How KEC International dodged the EPC blues

Drass and Kargil are two towns in India's northernmost Union Territory of Jammu and Kashmir (J&K) whose names are etched in the minds of Indians as the site of the 1999 war that India fought with neighbouring Pakistan. Apart from this distinction, Drass is also the second-coolest inhabited place in the world with the mercury dipping to as low as -49° Celsius in the winters. Situated at an altitude of over 11,500 feet, with a heavy snow cover in the winters, the geopolitically sensitive location is one of the most logistically challenging places in the world to do an infrastructure project in.

But KEC International, the infra-structure engineering, procurement, and construction (EPC) arm of the Mumbai-based tyres-to-information technology group RPG Enterprises, was up to the task. Beginning in phases from 2015, Power Grid Corp.of India awarded KEC a project to build four power substations—one each in Drass, Kargil, Khalsti, and Leh (the latter two are now a part of the newly formed Union Territory of Ladakh)—and the Leh-Khalsti power transmission line.

KEC, which was founded in 1945 and acquired by RPG in 1982, had to plan the project meticulously keeping in mind that snowfall cuts offroad connectivity to the region in the winter months. To ensure that power transformers needed for the project reach Jammu by April 2016, it had to ship them out of Hyderabad as early as November 2015. To ensure that the trailers carrying the necessary equipment reach their destination on time and without incident, KEC even took the responsibility of fortifying some of the bridges along the way to Leh and Drass, which were either weak or partially constructed. To insulate the substations from the harsh weather conditions, KEC used material such as hermetically-sealed double glass for the control rooms; and cement was stored in regulated room temperature to prevent it from freezing.

In February 2019, Prime Minister Narendra Modi dedicated the Srinagar-Leh Transmission System—envisaged to bring stable power connectivity to one of India’s farthest regions round the year—to the nation. Vimal Kejriwal, the 59-year-old managing director and chief executive officer of KEC, is particularly proud of his company's ability to execute challenging projects, including the one it did in J&K. So impressive was KEC’s work, Kejriwal says, that when the company decided not to bid for another project being planned by the government inJ&K, the company started getting calls asking why it wasn’t participating.

“We have never left a project incomplete. The reputation that we have builtfor ourselves over the years is that if we take up a project, the client knowsit is as good as done,” Kejriwal says confidently, as he meets Fortune India at the company’s and the RPG group’s headquarters in south Mumbai.

Pratik Agarwal, managing director of Sterlite Power, agrees. The power transmission developer, a part of the Anil Agarwal-led Vedanta Group, tasked KEC with the EPC work for the Gurugram-Palwal transmission line in the National Capital Region in October 2016. Though Gurugram is a residential and commercial hub that houses the headquarters of several startups and multinational companies, large parts of it are still dependent on diesel generator sets that are expensive to run and cause pollution. The project promises to bring surplus power from Uttar Pradesh to Gurugram, and is expected to be completed shortly.

Managing a complex power transmission project that passes through densely populated urban areas is “an art and not a science”, says Agarwal. His company awarded the project toKEC because it is one of the oldest power transmission and distribution(T&D) EPC players in India with a good team and processes in place.“Within these projects, no two 20-km stretches are the same and KEC has done well to groom capable leaders and empower them when it comes to executing these projects,” Agarwal tells Fortune India.

The reputation has seen KEC, the flagship company of the $3.4-billion business group, emerge as one of the few credible EPC players left in the business which focusses mostly on midsized projects in India and more than a 100 other countries around the world. Many EPC companies have burnt their fingers by bidding aggressively for projects and abandoning them midway due to lack of financial viability. The liquidity crunch in the banking system has also stretched the balance sheets of several of these companies, which are grappling with high debt. Many of them, including IVRCL, Jaypee Infratech, Lanco Infratech, and Madhucon Projects are dealing with insolvency proceedings. While larger engineering companies like Larsen and Toubro (L&T) and Afcons (part of the Shapoorji Pallonji Group) typically focus on very large projects, there is a burning need fora smaller player to take up midsized projects, and that’s where KEC has made a mark for itself.

Renu Baid, vice president–research at IIFL Securities, says KEC’s biggest differentiator is that the promoters of the company don’t interfere in its day-to-day operations and strategy, which is entirely entrusted to professional managers. “Most EPC companies, especially those that focus on civil work, are heavily influenced by their promoters who have their own political affiliations. KEC isn’t like that, which makes it a clean business,” she says. In FY19, KEC recorded a turnover of ₹11,001 crore; an Ebitda of ₹1,150 crore; an Ebitda margin of 10.5%; and net profit of ₹496 crore. While its turnover has grown at a compound annual growth rate(CAGR) of close to 7% over the last four years, profitability has risen at a much sharper CAGR of around 64%.

RPG Enterprises chairman Harsh Goenka, 62, says KEC’s objective is to become the best EPC player in the country after L&T, “but much nimbler and a better executor, and that’s a challenging proposition”. “We weren’t doing that well till the mid-2000s, but then the company started turning around due to a three-pronged strategy: better bidding quality, greater globalisation to mitigate the cyclical nature of the India business, and quality execution on time.”

On the execution front, Kejriwal says that when he joined the business in 2001, KEC took 48-52 months to complete a project. Driven by clients’needs, increased competition, and better technology, projects now get done in 6-12 months. “The entire workflow and process flow at our end and that of our vendors has been streamlined to manage projects better,” Kejriwal says.

A diversification into non-T&D EPC business streams and international markets has stood the company in good stead. Apart from the legacy T&D (as a part of which KEC also makes its own transmission towers) and cables manufacturing businesses, the company has entered new verticals such as railways (electrification of railway lines, track laying and signalling, including for metro rail), and EPC work for civil structures (railway overbridges and under bridges, auto and cement factories, and residential projects).

“Though concerns of slowing infra investments and poor balance sheet have plagued most small-to-mid-sized EPC players, the diversified portfolio of projects in India and overseas, and the increasing share of non-T&D EPC projects in rail, metro rail and other infra opportunities have ensured growth visibility for KEC, while maintaining margins,” a recent research report by IIFL Securities noted.

Nearly 35% of the company turnover, which Kejriwal estimates at around ₹12,700 crore for FY20, comes from non-T&D sources. The company order book, as on December 31, 2019, stood at ₹22,011 crore. Along with this, KEC was also the lowest bidder for projects worth another ₹2,500 crore (which are yet to be awarded), which could potentially take the order book up to over ₹24,500 crore. While T&D accounts for 54.6% of this order book, railways and civil account for another 31.1% and 11.3%, respectively. Though order inflows were slow to come by in the first half of FY20, they have picked up pace in the third quarter of FY20and the momentum is expected to continue in the fourth quarter as well.

This diversification is aiding the company at a time when power transmission projects in India have slowed down due to subdued power demand and challenges in growing thermal power capacity in the country. In FY20(till December 31, 2019), KEC’s order intake was ₹9,820 crore, out of whichT&D only accounted for 35.4% of the fresh orders, while civil and railways collectively accounted for 56.4%. Kejriwal, however, is hopeful that with the government's mission to give electricity to all citizens, the focus on electric mobility and green energy corridors should help revive orders for power transmission projects in the country.

Till then, KEC’s international bets are helping offset domestic weakness. In 2010, KEC acquired Brazilian transmission towers company, SAE Towers, for around $95 million. The company gave KEC a foothold in the lucrative North- and South American markets and its business accounted for around 19% of KEC’s T&D turnover in the first nine months of FY20. After a lull in growth over the last couple of years due to increased competition and general weakness in the American markets, SAE will report a year-on-year growth of 40% in its business inFY20, expects Kejriwal. This is due to the fact that in addition to SAE’s products business, KEC has also turned it into an EPC services business, leveraging the parent company’s strengths in this area. In turn, SAE’s technical expertise has helped KEC’s operations with higher automation levels.

Of late, the company has also been bullish on countries in the MENA (Middle East and North Africa) region and India’s neighbouring countries like Bangladesh and Nepal, which are investing meaningfully in infrastructure creation. In February, KEC acquired an automated transmission tower manufacturing facility in Dubai for ₹100 crore to bolster its T&D EPC business in West Asia, where it is executing six power transmission projects worth $325 million. KEC’s transmission towers manufacturing business feeds its T&D EPC business as 95% of its requirements for transmission towers is met from its seven manufacturing units. This helps the company control costs and supply, Kejriwal says.

Baid of IIFL Securities says that despite being one of the largest power transmission EPC firms in India, KEC “doesn’t live in its own prophecy”. The management is willing to listen to the advice of external experts and improve on its processes, she says. These external experts included consulting firm McKinsey, which advised the company on how to optimise process flows and also helped identify new areas of growth.

Interestingly, while other T&D EPC firms have faced considerable delays in securing payments from the various state government agencies that they work with, KEC hasn’t faced much hassle. Kejriwal says that KEC has realised that in any state, the transmission company is usually profitable and pays its dues on time; while the majority of the stress lies on the balance sheets of the generation companies, given the political sensitivities around power tariffs. Consequently, KEC mostly works with power transmission companies.

Having operated in the domestic market for decades, KEC has also developed an in-depth understanding of the dynamics of working in various states and the potential operational challenges. “Wherever there is a chance of a state power company delaying payments, they factor it into their project economics and bid accordingly. For KEC, the qualitative aspects of a project like return on capital employed is as important as the size of the tender,” says Baid. KEC also does a lot of work for projects that are funded by multilateral funding agencies like the JapanInternational Cooperation Agency or Germany’s KfW, as these projects are better in terms of their cash flows.

One of its newer businesses in which it faces relatively less operational risk than T&D is railways. Since railways fall under the central government and right of way for projects is easier to acquire as the land is already with the railways, these projects have better project economics. With the railways ministry aggressively looking to electrify railway lines and very few organised EPC players available to take on large projects, KEC has found itself in a sweet spot. Excluding the dedicated freight corridors, KEC accounts for 40% of the government’s programme for electrification of overhead lines. Of the 65,000 km of railway trunk routes in the country, overhead lines over around 32,000km of tracks have been electrified and the government wants to finish the remaining work by 2023-24.

It has also branched out into tracklaying, signalling, and civil work for rail bridges and stations. To future-proof this business even after the entire railway network in the country is electrified, KEC has started picking up metro and Regional Rapid Transit System (RRTS) projects. It has bagged EPC contracts for portions of Delhi Metro, Kochi Metro, and the Delhi-Meerut RRTS.

KEC’s unique selling point is its project management expertise, Kejriwal says and he adds that this can be extended to any branch of infrastructure EPC. While KEC may have begun constructing civil structures for the railways, it has decided to meaningfully grow the business under a new business head, NageshVeeturi, who came from L&T and under whose watch the order book has grown manifold with projects like civil construction on Kia Motors’ new plant in Anantpur, Andhra Pradesh; and on cement plants of companies including JK Cement, ACC, BirlaCorp., and Nuvoco Vistas Corp.

KEC, quite like the business group it is a part of, appears to believe in the merits of growing with conservatism and shying away from risky bets, which have taken a toll on several of its peers. “We don’t want to diversify outside the EPC business. We want to use our inherent strength in T&D to expand the gamut of EPC services we offer,” Goenka says.

The strategy makes eminent sense as the new mantra for India Inc. appears to be: Top line is vanity and bottom line is sanity.

(This story was originally published in the April 2020 issue of the magazine.)