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Fourcee Infra’s Rajesh Lihala on providing an exit to General Atlantic, acquisition plans and future milestones

The firm now expects to hit over Rs 500 crore in revenues for the year ending March 2013.

Fourcee Infrastructure’s chairman and co-founder Rajesh Lihala moved beyond the import-export family business in 2002 to start a logistics firm dealing in non-petroleum liquids. The new venture, called Prelude Exports Ltd, saw limited success, but he stuck to it and five years later, rechristened the company as Fourcee Infrastructure to carve a pie of the highly fragmented but multi-billion-dollar market for moving liquid products – both across the country and beyond the border. Taking advantage of the Indian Railways opening up to public-private partnerships (PPP) and Special Freight Train Operators’ (SFTO) licences, Lihala built the firm, which is now expecting to hit over Rs 500 crore in revenues for the year ending March 2013. Investors smelt money in the business and SIDBI & Mayfield Fund invested in the company back in 2010. Early last year, they were bought out by private equity major General Atlantic who put in $104 million for a minority stake.

VCCircle caught up with Lihala in an interview where he discusses the dynamics of the business, acquisition plans, future milestones and how he would prefer providing an exit to General Atlantic through a buyback, rather than an IPO. Edited excerpts:

Fourcee got first round of funding in 2010 when many other logistics players received funding. What was happening in the cargo & logistics space in FY10-11 and what made Fourcee click?

FY10-11 were years just after the recession of 2008, where everyone was cost cutting. Hence, there was space for many players to come in to give more economical options. However we stood out because we were able to give a 30 per cent discount on services using the rail network rather than sticking to the typical road transportation. Via rail, you are generally more protected for variable fuel prices and moreover cargo is shipped a lot faster. In addition, we have a road transportation arm as well which does first mile and last mile transportation too. Hence we are drastically able to pull down costs.

What is special about the business model of Fourcee?

It’s very simple. In the cargo space there are many materials that are transported in many ways. Liquid cargo was always transported by road rather than rail. It’s only fuel-oil products that are transported by rail and not road. Hence there is already a monopoly by the government and the Indian Railways in the oils and petroleum space because it is the main source of income for the Railways, hence we do not want to enter that space. Yet if you look at the total import-export market and total movement of liquid cargo, it is almost 35 per cent of the entire volume of India’s total cargo in a year.

The biggest problems in our industry today are adulteration, pilferages and time of delivery. So by offering this unorganised and fragmented market an organised sector player, ensuring no adulteration with ISO certified tank containers using the rail network offered customers a lot of benefits. Thus we were able to grow quickly.

How has been the growth like and what’s next in terms of scaling up of operations?

Today we are in our fifth year of operations. From 70 containers we now have 4,500 containers today. As tank cargo operator (not as a leasing company) we are the third largest in the world. There is a big gap between first and second. Stolt is the largest company with 30,000 containers globally and we are at a distant third. Today rail makes up 88 per cent of our revenues. So now we need to start spending on building terminals across our rail network. By the end of this financial year we should be able to complete three terminals. By 2015 we should have 10-12 terminals constructed.
We do not want to buy real estate. We tie up with the consumer, who provides us the land, and we build the terminal. In places where terminals already exist, we partner with those terminal players, in which they allow us to use the terminals while we make improvements to their existing infrastructure. So there is mutual benefit.

What were your revenues at the end of FY 12 and what are the targets for the future?

In FY12 we completed Rs 335 crore and by end of FY 13 we should hit Rs 530 crore.

While the revenues are shooting up the net margins are in single digits for Fourcee. Is the cargo space a volume game and not margin game? Or is there room to improve margins?

The industry is making margins of 10 per cent at best so we aren’t doing so bad. More importantly our model is different. Our model is cost plus basis. We don’t charge our customers on the market term basis. That means it doesn’t matter if freight charges increase or fuel charges increase we pass the increases to our customers. So since we provide better services, we pass on any increase in charges to our customers and luckily for us bear the charges. Thus if you look at our EBITDA margins we are doing 22 to 23 per cent, which is really good.

We should be focusing on the value game now. We want to have customers who can be long term customers for us. And so building containers, more rake transportation by rail and terminals will only increase value. So volume game is not the criteria for us at the moment.

How is the client base spread from a risk management perspective and what about competition?

We have broken up our entire cargo into sectors, Carbon Black and FMCG sectors are 18 per cent each. Chemicals we are 20 per cent while Molasses & Agro are 30 per cent. So our risk is spread and hence we are very comfortable.

There will always be competition in this space. Yet, what happens is the big players think this is too small a business to get into and the small players see this as too big a business to enter. Moreover, rail owning companies are bleeding because of the market and railway conditions. Yet competition will always be there. But Fourcee has the first mover advantage.

You raised a large sum from General Atlantic last year in which some previous investors hit multi-bagger exits. IFC is also coming in with debt. How is the capex charted out and what kind of timelines do we see for an IPO in the future?

IFC should be able to give us the money by March 2013. The capex plan is to invest in building terminals and drive margins. It was very hard to convince investors that we need to build terminals and build tank farms. It’s not that we are not cautious about it, because we don’t want to get pulled into this game of land (purchase).

I am not very keen on taking the company to an IPO. A company like Fourcee thrives on a lot of capex and I do not think a onetime cash generation like an IPO will be a long term solution for Fourcee. I am more interested in building up a strong foundation so that Fourcee can generate cash for itself. By the seventh or eighth year of operations Fourcee will be in a position to generate cash for its own capex. And as far as General Atlantic is concerned, we will give them a better exit (than an IPO).

(Edited by Prem Udayabhanu)