AM Naik, group executive chairman,of Larsen & Toubro (Photographer: Scott Eells/Bloomberg News)

Expect Economy To Remain Stagnant For 9 Months, Says L&T’s AM Naik

The Indian economy would’ve advanced at a much faster pace of 7 percent had it not been for demonetisation and rollout of the Goods and Services Tax, according to AM Naik, the group executive chairman of Larsen & Toubro Ltd.

Naik added, however, that these “major” changes were necessary in the long run. “Somebody has to take the bull by the horns and look at the long term,” he told BloombergQuint in an interview. He expects demonetisation to throw up positive results in a year.

Naik said that the country’s flailing economy, which slowed to a 5.6 percent growth in the June quarter, is not going to get better but may remain stagnant for up to nine more months. Private sector investments, which have slowed as well, may not return for at least two years, he added. Meanwhile, the economy will rely on government spending and foreign direct investments.

Here are edited excerpts from the conversation.

What is your assessment of the Indian economy?

Whenever a major change is made in the configuration of how the economy is built, like demonetisation and GST - both of these are major changes and led to stoppage of activities. Even now, we are finally still not out of GST. There are still customers who are not taking equipment because they say a lot of inventory has piled up and sales are not happening.

If these two were not there, I think economic growth could have been 7 percent instead of 5.7 percent. But at the same time somebody has to take the bull by the horns and look at the long term.

We all expected that GST will take some time to settle in. The jury is still out on whether demonetisation was a good thing or a bad thing. You believe it was the right thing for the economy?

If demonetisation is implemented properly and the amount of cash purchase which was taking place is cut off, I think in the long term it will produce more tax because all the transactions are above board. I’d give one year for the impact of demonetisation to become more positive.

Return Of Private Sector

You believe that things will slow down even further from here on, and things will get worse before they get better? Is that your assessment of the economy right now?

I am assessing that things are not going to be better. May remain stagnant or steady for a maximum of nine months.

In February, you told me that private sector investment will take 2-3 years to return to infrastructure. Do you now think, given the impact of demonetisation and GST, that the private sector will take even longer to return to infrastructure?

It will not return in two years.

You don’t expect any large infrastructure projects to be undertaken by the private sector in the next two years?

Except for one or two industrial houses. Maybe they have gone through the investment cycle for now and the new cycle may have to start after a year.

Are you seeing any pick-up in investment activity on the corporate side?

In the private sector, not much. I can’t call it nothing but it’s not significant. Not much to talk about.

So, we are entirely reliant on government spending now?

You can say so. Or direct foreign investment.

Fiscal Push

Are you of the view that the government should consider some sort of fiscal stimulus? In your assessment, will a fiscal stimulus and/or lower interest rates help resolve the problem that is plaguing infrastructure in India?

I think to a very limited extent, because interest rates have come down already to 6 percent. And bringing them down another half percent or one percent is not going to be a great stimulus. The reason is that those who went into infrastructure development and many other mega projects in 2004-05 had tremendous amount of debt – Rs 40,000 or Rs 50,000 or Rs 80,000 or Rs 100,000. They have not been able to pay the debt back. Consequently, there are many non-performing assets and there may be more NPAs if this outstanding amount is not paid.

For private sector to come out of these difficulties itself is going to take two years. There is Rs 6-6.5 lakh crore which is not being used for any productive purposes and the private sector has no capacity to pay back. I think, before the private sector can take on [new projects] they have to clean their past which will take at least two years.

In that period of time where do you hope to get your growth from?

We had said 10-12 percent increase in the order book and we maintain that.

Your guidance for order book growth in FY18 was 12-15 percent.

Okay, let’s say 12 percent. We’ll achieve that.

Defence Opportunity

And where will it come from?

While we have come out of many businesses, I said five, we have created one major vertical [defence] and we have appointed an executive director in charge of that 4-5 months ago. That’s the major organisational structural change. Mr. Patil is now made an executive director in charge. Seeing what the defence prospects are all about, in the next 6-8 months we see the prospect of Rs 20,000-25,000 crore from defence.

In FY18, you expect Rs 20,000-25,000 crore worth of orders from the defence sector?

Yes, that’s the potential for L&T.

What is the quantum of orders right now from defence?

It’s about Rs 7,000-8,000 crore.

So, you hope to be able to treble this?

It’s not a question of trebling. You win one tender and that tender is of Rs 25,000 crore. Either you will win or you will become zero.

Are you happy with the way things have proceeded in defence?

During the time there was no defence minister, and things have not gone as fast as they should. Now that there is a defence minister appointed and possibly she will catch up with a lot of things which have stagnated. Two tenders opened recently that we were not trying for. But at least, they opened. A third one will open within the next one week for 16 survey vessels and then there will be a another for 4 LPDs which are carriers for helicopters. These are the two which we are focusing on. Both are of Rs 20,000 crore each. But for the second one, only half could be given to one company. So, they might break it between two companies. But the first, either you get it or it’s zero. It will take 2-3 months.

So, you are upbeat on it?

It depends a lot on one or two tenders. If it goes our way, then we are done.

Infrastructure Projects On Anvil

Is defence a big reason why you think you can maintain your good guidance?

Defence is one. The second is that some of the mega infrastructure projects have started moving. Trans-harbour link tenders have opened, and we are L1 (lowest bidder) for Rs 7,600 crore. Tender 1 and 2 have opened first, and tender 3 has also opened where we are L1 in Rs 1,100 crore. If we get these two, then it will add Rs 8,700 crore, something which I have been talking about for 3 years.

Navi Mumbai airport is not going to happen so easily. According to me, even now, it will not happen for the next two years.

What are the big mega projects which are you hoping for?

I am still hoping the Shivaji statue may come. Then there is the coastal road and hopefully that could come up in the fourth quarter, I hope, which is about Rs 12,000-15,000 crore. Then there are metros where tenders have opened, and we are L1 in two.

I thought you said after Hyderabad Metro you don’t want to do any other metros?

The Hyderabad Metro is not owned by us, it’s only construction work. Last year we won two and again this year we are winning two. But it is much beyond the estimate. I don’t know who did the estimate. But that’s why they are thinking whether to go ahead or re-tender.

How has the hydro-carbon business been doing? Are you seeing much recovery there? What’s the outlook on the international market front and on the hydrocarbons front?

For hydrocarbons, we have come out of all the problems that we had before. We think that there is a sea change now as we came out of all the old projects and we have gotten into new projects. Our target is Rs 16,000 crore of order book this year, and I think we can meet that. We are L1 in two projects in the Middle East. We will get both of them. They are worth about Rs 3,500 crore. And we think, again it’s an estimate, that from minus few hundred crores per year, we are going to come this year to plus few hundred crores. I can’t tell you exact numbers but it will be a sea change in the performance of hydrocarbons. That is moving for the better.

As far as the Middle East is concerned, obviously it is down. While it is down, there are some very important infrastructure projects. One is in Qatar, there is a major one in Abu-Dhabi which is of Rs 12,000 crore. We have bid with a local company and I am told that we are well placed. But finally, there is politics as well. We don’t have that deep contacts there, as many people who can fly and meet the Sheikh there. But if we win one or two such jobs, then it could be okay.

What is the scope for further improvement in working capital requirements?

At the moment I think we should keep ourselves at the current level because the markets is tough. Our cost-cutting program continues, and we are hoping that we will improve our margin by half a percent more by end of the year. But it is not easy. There is very less work being chased by too many work contractors. A lot of international contractors are coming. We combined with IHI [Infrastructure Systems] and 80 percent work will be done by us, of Rs 7,600 crore, and 20 percent will be done by them. But we are the main contractors for trans-harbour.

Similarly, in Bihar there was a very big bridge about 8-9 months back across the Ganges. Who was our competitor? It was World Bank who was financing, not our own. So you cannot stop anybody from quoting if they are technically qualified. So, two Chinese companies quoted, and we were worried because they are normally 15-20 percent cheaper. But we won and right now we are doing that bridge. So, each of these tender is Rs 2,000 crore, Rs 3,000 crore or Rs 5,000 crore and Abu Dhabi project is Rs 10,000 crore. If we win one, we are on this side. If we lose, you will say that you forecast 12 percent but that did not happened.

Do you see a slowdown in the states’ infrastructure spending?

Because there is a Power Grid Corporation who funds only electrical projects, the money comes from there, and not from states. States cannot spend that money. Therefore, those projects are happening. The common people, the poor people need water. So, some of the water projects are happening. Our order intake for water projects was Rs 2,700 crore,four years back. Today it is Rs 15,000 crore.

So in your estimate, have several states slowed down spending on infrastructure?

What you say is right. The development money is much less than what it ought to be.

Of what it was last year, comparable to last year?

I would say last year and this year it was about the same. There was no growth.

Where is the business headed?

It’s going good. I am not pessimistic.