AM Naik, executive chairman of Larsen & Toubro Ltd. at a news conference in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

The Prospects For L&T In A Year Without AM Naik

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  • L&T without AM Naik is as tough to imagine as AM Naik without L&T.

    In October 2017, Naik, the executive chairman of Indian engineering giant Larsen & Toubro Ltd. will retire after 14 years in the job and 52 years at the company.

    Naik joined L&T as a junior engineer in 1965, says the company’s website. He rose to general manager, then managing director and chief executive officer and added chairman to the clutch of titles in December 2003. In April 2012 he was also appointed group executive chairman. Under his chairmanship the company’s revenue has grown from Rs 10,000 crore to over Rs 1 lakh crore. Also to his credit is L&T’s diversification into information technology and financial services.

    Naik has been grooming his successor, SN Subrahmanyan, for almost two years now. Currently Subrahmanyan serves as deputy managing director and president and will take over as chief executive officer later in the year.

    It’s not yet known who will be the next chairman, executive or otherwise. Before the interview to BloombergQuint, Naik, when asked if he would consider staying on as non-executive chairman, said he “couldn’t be non-executive anything”, insisting he prefers a clean break. But he’s open to the idea of running the L&T Employees Welfare Foundation, a trust which owns a little over 12 percent of the company’s shares. The Foundation serves as somewhat of a defense against hostile takeovers, L&T has seen three in just the past three decades. But the only real safeguard according to Naik is “an expensive share price” - a maxim he often repeats.

    At 26 times one year forward earnings, the L&T stock is priced at a substantial premium to Asian peer group companies (7 - 17 times), according to data compiled by Bloomberg.

    That should serve as some comfort to Naik, at a time when the Indian economy isn’t doing much for his company’s growth prospects. In this interview Naik discusses expanding to new geographies, the outlook for power, hydrocarbon and defense businesses and how financial year 2017-18 will shape up. The first in half a century sans AM Naik.


Finance Minister Arun Jaitley and other members of the  ministry outside North Block before leaving to table the budget in parliament on Wednesday, Feb. 1, 2017. (Photographer: Udit Kulshrestha/Bloomberg)
    Finance Minister Arun Jaitley and other members of the ministry outside North Block before leaving to table the budget in parliament on Wednesday, Feb. 1, 2017. (Photographer: Udit Kulshrestha/Bloomberg)
    Finance Minister Arun Jaitley allocated Rs 3. 96 lakh crore for infrastructure development, up 10.5 percent year on year.

    Will Budget 2017 Benefit L&T?

    Do you think the Budget 2017 proposals were the best way the government could’ve gone about for boosting this beleaguered sector in the country?

    Considering all other commitments they had made and that elections in the biggest state and four other states were on. You know what happens at the time of elections, you really have to make people happy. Therefore, a good amount of measures, which cost money, have also gone in the pre-election announcements that has to be spent over the next year. Considering all these events, possibly they could not have spent more than this.

    Do you believe it sets up an environment where there might be an increase in the order book, projects over the next fiscal?

    I am cautiously optimistic. While it is short of what we possibly wanted, and mega projects are something what L&T really does, so the huge amount of push that has been put in affordable housing is not something which L&T does. In a way our exposure to infrastructure of all kinds put together will be limited to almost the same things. Maybe slightly, if at all, better.

    Does Budget 2017 move the needle at all as far as L&T is concerned?

    You can say slightly moved.

    10% Revenue Growth In FY18

    You had just a one percent improvement in revenue in your Q3 FY17 earnings. Do you think FY18 will be equally tough, or tougher?

    The order book is very good. It is over Rs 2.5 lakh crore. If the slowed down projects in the private sector, due primarily to the non-availability of funding, do move, and demonetisation has caused quite a lot of slowdown in the real estate; so if that starts moving then we should be alright. Next year we should grow at over 10 percent. People may say that how can one go to 10? But for your information our fourth quarter is always very, very large.

    The company reduced its revenue growth guidance from 12-15 percent earlier to 10 percent. However, this implies a strong Q4 FY17 performance (19 percent year-on-year) which largely needs to be driven by the infrastructure segment; whilst Q4 will be good, we fear this degree of growth could be difficult to achieve.
    Ambit Capital report

    What about the fourth quarter gives you that optimism?

    Because there are a lot of projects which have advanced and which will come for reckoning of our profit. More than half our projects our government projects and in the fourth quarter their budgets are always higher. Consequently, we don’t have to slowdown, we accelerate our execution always in the fourth quarter.

    You are confident that the fourth quarter will lift you enough to hit that 10 percent guidance number for FY17 and then you will do about 10 percent revenue growth in FY18?

    Yes, because we might do little better. I think you should know it is not just L&T’s performance. Last four years in row, the Indian economy was not doing well. You know it was growing at 5-5.5 percent, and at times 6 at best. We made up with more than 30 percent orders coming from abroad and a lot from the Middle East. Now that the oil prices have gone down for the last 18 months, the spend has come down in the Middle East. Consequently, a lot of projects have slowed down, a lot of projects have halted. Therefore, our ability to make up 30 percent from the Middle East to really target 12 or 15 percent growth has become difficult. So we are looking at different geographies. We are looking at North Africa, East Africa, Far East Asia such as Indonesia, Malaysia, Myanmar and Central Asia and even in electrical transmission. The efforts in this direction started about 18-24 months ago. Its benefit will begin to come in 2017-18.

    Could you elaborate how you expect to maintain that over-30 percent share from international projects and hope to expand it further to counter the lack of big growth in India?

    On the contrary 30 percent may look more like 22-25 percent in FY18

    And that’s because you expect smaller orders as you move to newer geographies?

    One thing is that new geographies are not the ones which come up with mega projects. They are all $50-70 million. If I go to Qatar because of preparing for the football game, every one order is half a billion dollars. So, one thing is that the order size is smaller. Secondly, we are also learning these geographies. It is only 18-24 months ago we selected these geographies and decided to go ahead with it. It is going to take some time before it reaches a level of maturity.

    So all this means your international business will contribute about 22-25 percent to your revenue in FY18?

    It will be five to seven percent less. And that we’ll have to make up for in our domestic business.

    Geographies, Margins And Operational Efficiencies

    What is your outlook on margins and profitability in the next fiscal?

    I think we’ve done very well. While we may not have done well in terms of revenue, we’ll try and make up as much as possible in the fourth quarter. Up to the third quarter you can see we have improved our profitability by 39 percent. That is perhaps one of the best you can get in the industry, not only infrastructure but all industries put together. Therefore, we are putting more emphasis, while the prospects are a little less, on operation excellence and many other improvement programs operationally, and improve the margin. That is something which will continue even for the next year. I think therefore next year will not be as bad as people think it will be.

    From a margins perspective, what are the average margins in say the Middle East versus India?

    Normally gross margin is 10-11 percent for India and the comparable margin for the Middle East is 7-8 percent, but there is no tax. North Africa will be around 8-9 percent, a little better than the Middle East because the competition is a little less. But we don’t get the same tax benefit and therefore I would say net level Africa will give me 4-5 percent, Middle East will give me 6-7 percent volume-wise, but percentage of revenue wise 4-5 percent. The volume is higher because for the same effort I get 2.5 times the volume.

    Can you elaborate on how you’ll improve operational excellence as you said?

    If you look at hydrocarbons, we’ve changed our tactics for the entire group. We’ve moved almost 200 people out from the Middle East to a back office in India. We were doing it in front of everyone, now we don’t have to do it as we’ve understood the Middle East. That has brought the cost down considerably. The operation excellence and the material cost savings and the consumer savings and moving back the office and controlling travel etc. we were able to bring down the cost of the hydrocarbon group alone by Rs 300 crore to improve our competitiveness. That will continue. We think we have reduced almost 75 percent of the potential; we still have 25-30 percent to go.

    Further Downsizing?

    In the July - September 2016 quarter L&T cut 14,000 jobs across business divisions, especially financial services.

    “We have reduced the number of people by 14,000. But 14,000 is peanuts because we have 3,75,000 people.”

    Is there further need for downsizing if the environment stays as difficult as we have just discussed?

    Yes. But I think we have not recruited that many to be able to downsize.

    Shivaji Maharaj To The Rescue?

    Let’s talk about individual business segments if we can, infrastructure, because that is your biggest business. What’s going to help look things better there?

    Well, Mumbai metros are still going to expand. We have got about Rs 5,000 crore order for Mumbai metros. We are looking forward to build the Shivaji Maharaj statue (off the mumbai coast) because that itself is a Rs 4,000 crore project. So there are some mega projects.

    Do you see any signs of work on that project starting?

    The tender is out. Hopefully by June the order will be placed.

    It’s a very tough project. By normal L&T standards it is very tough and not more than 6-8 companies in the world can do this project.


Prime Minister Modi visited the Shiv Smarak site in the Arabian Sea, off the Mumbai coast, where a mega memorial for Chhatrapati Shivaji Maharaj is to be built.(Photograph:
    Prime Minister Modi visited the Shiv Smarak site in the Arabian Sea, off the Mumbai coast, where a mega memorial for Chhatrapati Shivaji Maharaj is to be built.(Photograph:

    So we are hopeful that Shivaji Maharaj will come to your rescue at L&T besides Mumbai Metro. But that doesn’t really amnswer my larger question on infrastructure because Mumbai is not the only place you are looking at?

    Not only that. The coastal road of Mumbai, the harbour bridge of Mumbai, they are all Rs 5,000, Rs 10,000 crore projects each.

    Navi Mumbai airport, harbour link...what has moved?

    Navi Mumbai airport I have never been bullish.

    Even if you go back to my earlier interviews you would not find a lot of positive talking about the airport because this airport (the current Mumbai International Airport) the promoter has spent more than Rs 12,000 -15,000 crore. How can they (infrastructure companies) within a matter of one year or two years spend another Rs 30,000 crore?

    I think they are struggling to get bids for that new airport. But two years ago in 2015, approximately this time of the year, we discussed the same big projects - nothing’s moved.

    The fact that we are more actively talking now is moved. Harbour bridge was planned more than 15 years ago. Over time people have been hearing about the harbour bridge. Now the financing is already settled and tender is already out. Every party who wants to bid have fixed their partnerships to build this because it is coming in three sections and everyone will get one section. We are trying to make sure that we bid for two. This bridge is going to be more than Rs 12,000 crore (all three parts).

    When will you know about these bid outcomes?

    End of this year. It may be decided by September.

    Private Sector Investment Will Not Return For 3 Years

    But it still doesn’t do anything to substantially change the outlook on infrastructure in this country. Where is the problem, what is the hurdle? We have spent years discussing PPP, various concession models, financing models.

    All four airports - Hyderabad, Bangalore, Delhi, Mumbai - were built up by L&T. Collectively, Rs 30,000 crore was done by L&T in these four airports. The private sector who came on PPP including L&T and IDPL, their experience was not good enough in terms of being able to make money. Lots of debt was taken and liberal debt-equity ratio was there. Like people have financed some projects at 28 times. Now, they are not able to repay the loan. So there is no more loan that can be given so they cannot promote any more projects. So PPP is now at a much reduced level.

    We have decided not to go for PPP for the time being till we resolve all our old problems. And for last two years we have not bid for any project - we do construct but we have not put any money in it.

    The government recognises that so they have been considering various other financing concession models etc. outside of PPP. But that’s not yet helped move that logjam in any way.

    You need a lot of money to take over the private sector work - in hybrid models or with the government.

    So what will help unlock this jam?

    The government has to put up some money.

    Why would the government spend money bailing out the private sector?

    It’s not about the private sector. Infrastructure all over the world is set up by the public sector.

    But that’s for new projects. What about the existing projects that are stuck, for them to come unstuck, so that the private sector can return to investment? One of the key things we have been talking about in this economy is the absolute slowdown in private sector.

    I don’t see the private sector coming back to infrastructure investment for the next three years.

    So it will entirely be dependent on PSU investments?

    Correct. And hybrid and annuity, where you are guaranteed there is no risk. Provided they have an ability to finance the project. Even if you guarantee, the bank should be willing to pay to the same groups who have defaulted.

    Are you seeing any movement on that front?

    Yes. There are 14 tenders likely to come out in the next two months in the roads and highways sector. It can be hybrid, it can be annuity...

    “Bloodshed In Power

    Power business, another one which is proving to be a tough nut to crack - over capacity, not enough discom reform... When do you think you will be able to see some recovery in the power business?

    A very dismal picture from the power growth perspective. Nearly 50,000 MW was ordered out in China 8-10 years ago, with Chinese credit. Of that 25,000-30,000 MW has been completed as also some of the other domestic projects have been completed. Some non-conventional energy has come in. With a result - nearly 50,000-60,000 MW got added in the last 4-5 years. And Chinese, another 15,000-20,000 MW are half done; they will be completed over the next 2-3 years. And new projects in the private sector have completely come down to zero.

    Therefore no private sector is going ahead with new power plants. Power has become surplus in many places and that is because the payability for lots of people doesn’t exist and that’s why it has become surplus. Second, the industrial growth which should have been much faster is somewhat moderate and that’s why power consumption hasn’t gone up yet.
    You take for example our Nabha power project in Punjab. We have two 700MW units and invariably one runs and one we get a fixed charge. With the arrival of two 700 MW units, from a deficit state it has become surplus. And at the same time, there are two other developers, their condition is even worse.
    To my mind, in the next 3 years even if you don’t put a single megawatt the country is not going to suffer. We have to take steps now beyond three years. And beyond three years 25,000-30,000 MW are already work in progress - including the 15,000MW Indian projects which have been ordered and 15,000-20,000MW of old Chinese plants are yet not been commissioned. So, altogether, these old orders will take care of the next 5 years.

    The capacity of BHEL, L&T, Bhushan and Alstom put together is 22,000 MW. And number of power plants which have been ordered, in terms of coal plants, is hardly 5,000-6,000 MW. So, capacity utilisation is 20-25 percent; the net result is that the competition is so severe that people are virtually taking jobs without recovering depreciation, fixed charge, interest and only variable cost and sometimes not even that.

    So, the power business is not going to improve in the next 5 years at least?

    I don’t see it happening and we will have to export in the meantime. The L&T boiler shop is busy for the next 2.5 years but largely for exports to mainly Indonesia and other countries. In the turbine business we still have to gain confidence to export.  Depending only on India and thinking we will be able to fill our capacity is sometime away.

    What about renewable power Mr Naik?

    We did put up Rs 800-1000 crore worth of capacity. It’s more talked about than what really happens.

    There are big bets on capacity that is going to come in?

    About 1,000 MW a year. You tell me in the last 3 years how much has come?

    Execution on ground has not been keeping pace?

    No signs that it is coming up. Finally it is not a competitive power.

    Infact to quote you, you said that there will be bloodshed here?

    Renewable, I said is so highly priced, that the implementation will not be as much as is being spoken about. Bloodshed, I said is where 5,000 MW of power orders have been placed and there’s 22,000 MW capacity available (in coal based power)- where people are quoting at cost and below cost and therefore L&T stays away. We don’t get any order because we don’t want to bear huge losses in coal plants and we are depending more and more on exports.

    Defence Business Has Exceeded Expectations

    As for the defence business - you are a cautious optimist?

    Yes I am. I’ll tell you, 10 years during the previous government nothing happened. Zero. At least here something has started happening now. They are very, very clear that defence has to be largely participated by private sector, they will declare the policy within this month or next month - the strategic participation in defence by private sector policy. We know that major companies, which have already built facilities will be okay, and we have built seven facilities ahead of time. We are losing money, but now the orders have started to come, one we are expecting next month of Rs 4,600 crore of the Bofors type guns, field guns.
    There is a collaboration with a Korean company, but it’ll be Made In India, more than 50 percent.

    Can you talk me through your defence order book for this year?

    This year it’ll be around Rs 7,000-8,000 crore. Including this 4600 crore which will come before the end of March. We have slightly exceeded our expectation.

    You were hoping that more defence projects will be put out to bid, right?

    But we didn’t put it in our budget. We are realists. I did not say that look the four ships which are right now on tender will get decided, although there were indications that it’ll get decided, it’ll not get decided now. May be August or September, so it’ll come in the next year.

    A Leaner L&T

    in an interview in 2015 you said that the 21 companies structure will become a 14 companies structure, where have you reached on that?

    I would say 20. Because the market has been so bad world over, there have been no takers. It’ll take 3 more years to bring it down to 14.

    What all is left yet for you to divest or to go from 21 to 14?

    IDPL (Infrastructure Development Projects Ltd.) is left, power development is left, nine small businesses are left - they are individual companies, small companies, machinery companies and so on.

    So you intend to sell these?

    We intend to sell or close. Now we’ve decided that if we can’t sell because the market is bad, we’ll close. So that our diversion is not there.

    I am also telling you that by end of September we’ll sell three. They are small units so it is not going to make a big impact from the profitability perspective.

    So IDPL is definitely not getting sold in the next…

    It will get restructured to a point where our loss, which is Rs 600 - 700 crore a year, may come done to Rs 100 crore.

    How long will the restructuring take?

    Latest by June 2017.

    You don’t intend to sell IDPL?

    No. we don’t intend to sell IDL. We need to see that our partner takes more equity and we come down in our equity.

    Because the equity participation is less the percentage of loss comes less, and therefore the Rs 500 crore is saved.

    The October Exit And Hostile Takeovers

    You intend to retire in October Mr. Naik?

    That’s what everybody is saying and I am also saying.

    Are you sure you want to leave?

    Of course! I am not saying ‘of course’ out of disgust. I am saying ‘of course’ because everybody’s time comes to an end and my time has come now.

    So who will be the chairman of the L&T board then Mr Naik, because right now you are the executive chairman?

    It is up to the board to decide.

    Would you consider staying on as non-executive chairman?

    At the moment I am telling you I have no intention to really get involved in L&T anymore.

    I believe you said in an interview that you would be running the L&T Employees Welfare Foundation (owns 12.56 percent stake in L&T)


    The L&T stock is lying with the government and it is part of what is called SUUTI

    They sold 3 percent.

    L&T has battled two hostile takeovers. Do you feel that your distributed shareholding and the fact that a large chunk continues to be with the government, which they are under considerable pressure to divest, creates vulnerability for you?

    Well, the company will have to perform better and make it so expensive in market capitalisation terms that nobody is interested in buying. It is too expensive to buy

    Do you think that if you were to be chairman of the employee trust you would play a critical role in being able to defend the company if it were to face a hostile takeover of any sort?

    My entire life has been L&T, 52 years, 105 years in real life. It’s like for me a temple. It’s for me my life and will remain so till the end of my life. So you can be rest assured that if L&T is in trouble I am also in trouble.

    These are edited excerpts of the interview.