There are unmistakable signs of a cozy family business written all over the Rs. 2,838 crore Patel Engineering (PEL) headquarters in Goregaon, a Mumbai suburb. Rupen Patel, the managing director, saunters along in crumpled denims; executives drop in unannounced at his office. For lunch, he and his sister Sonal Patel, an executive director, order food from the local restaurant. Sonal has soup from a cheap-looking bowl and polishes off what looks like a more presentable version of the sandwiches you get in Mumbai roadside kiosks.
There’s nothing that gives away the serious nature of the business that PEL does. More so, there is no evidence of the dilemma it has faced in recent times. PEL makes most of its money from building dams and hydroelectric power plants and boring several kilometres of small tunnels through densely populated cities. A growing incidence of problems associated with environmental clearances and public outcry against large dams in general is making life difficult for the company. After six decades in business, the family is grappling with some fundamental questions.
This far, the Patel family largely stuck to a conservative approach of being contractors for projects funded by governments and institutions like the World Bank. Rupen Patel’s father and the current chairman Pravin Patel — who still comes to work every day — thought diversifications were unnecessary when the contract business was so good. Rupen Patel, the third generation member of the enterprise, too thought he would largely stick to the knitting. He bought some small businesses including a micro-tunneling company in the US some years ago, but never strayed far from the company’s core competence. He, in fact, still nurtures big ambitions in dam construction. “I want to be the finest dam builder around.”
So when the younger Patel suggested to the board about 18 months ago that the company start new lines of businesses such as power and real estate, there were quite a few questions. India is just now beginning to build infrastructure in a serious way and is expected to spend billions over the next decade. Wouldn’t it be a good idea to aim at being a large player in this business? Why should capital be employed in new businesses, particularly when the elder Patel abhors paying any kind of interest?
Rupen Patel’s plan was to run large hydroelectric power plants and start selling apartments and office space. He argued his case saying that the company had the expertise of building both power plants and civil constructions for others and could easily do it for itself. Says K. Kannan, ex-chairman of Bank of Baroda and an independent director on the PEL’s board: “Rupen clearly was the next generation and wanted to grow a little faster.”
Despite being one of the most profitable exchange-listed infrastructure companies, PEL has been a laggard in growing big. Companies like Hyderabad-based Nagarjuna Construction and IVRCL and Delhi-based Jaiprakash Industries have grown much larger building projects that PEL was also skilled at (though not dams). They have also created much more shareholder value by leveraging the same set of engineering skills.
“Going beyond just infrastructure contracts is the next phase of evolution,” says Patel. He had better be right. Kannan says the senior Patel is still very careful about how much each of his family members makes from the company. Though directors can get up to 10 percent of the disbursable profits as bonus, Rupen Patel at best gets 4 percent, thanks to his father’s philosophy. Says Kannan: “Pravinbhai monitors performance very closely.”
Still it is with the help of the likes of Kannan and the other independent directors that Patel got his way to put money in the new businesses. But, before that he had to make an elaborate presentation to the board members about his case.
There were several things that worked in Patel’s favour. Five years ago, when scouting around for new growth avenues within its areas of expertise, the company acquired two companies in the US. Both the firms gave it access to new technologies in areas of reinforced cement concrete (RCC) structure and in micro-tunnelling. At that time, Sonal Patel argued that the US companies will give them access to the local market as Indian firms would never be allowed to build dams there. “We were looking for ways of moving away from run-of-the-mill jobs,” she says.
The Patel siblings pulled it off. They won a series of dam orders abroad. They have completed a reconstruction project for one of the largest RCC reservoir dams in the US and are finalising contracts for two dam projects in Australia. The micro-tunnelling business has also grown. In Mumbai, for instance, PEL helped the municipal corporation build water and sewage pipelines beneath roads without having to cut them. Today, PEL has cornered all such projects of the municipality worth more that Rs. 300 crore. These successes have made their father bet on their instinct for a larger play in entirely new areas.
There was another reason for diversification. While infrastructure is a big money game, it is also bound to be delayed at every stage from tendering to environmental clearance to construction. For instance, a PEL irrigation project in Andhra Pradesh has now been stuck of over 18 months, without any resolution in sight. The senior Patel was getting a bit tired of such delays. He began to think that the business was becoming unpredictable and there was a need to deploy cash in more predictable businesses.
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(This story appears in the 24 September, 2010 issue of Forbes India. To visit our Archives, click here.)