L&T’s Subrahmanyan Sees Green Shoots As Economy Reopens

Let’s understand when we were doing well till March, we had a very good year last year, we got good results. The company has a very strong footing; we have a backlog as of date of nearly three lakh five thousand-odd crores but what happened was something which was unknown, totally unknown to humankind happened—a pandemic spread. I think the country’s leadership for the country took the right decision in closing out to the country in an unprecedented measure for nearly two and a half months. Beyond that, some of the state governments, because of the rise in the pandemic and spread of the disease, one had to take local measures in various parts depending on the situation, which is what has happened during the last month and is continuing to happen. Beyond that at various districts, villages and taluk levels many other decisions have been taken depending on the local factors of what’s happening because of the spread of the disease due to various reasons. Let’s not get into all that, all of us know that. Having said that, whatever we were doing, the momentum that we had, especially on the EPC projects on the manufacturing side, which forms nearly 85% of the company, came to a total halt. So like I said, whatever work that we are doing in these last three months had their hands, legs and eyes tied. What we could work was with our fingers and with our mouth. So we did that and what I mean by that is, L&T has got three parts, the EPC projects, the manufacturing and the services part. The services which are predominantly the IT services, have done reasonably well during this quarter in the sense that they were the best to adapt to work from home because much of the people there had laptops and were used to working from home in the hours beyond the office. Therefore, they could adapt to that variable.

Of course, even in that industry, certain businesses like travel, hospitality, automobiles, oil and gas did see some setback. But these companies adapted to work from home very well with the client relationship and they could manage their performance. The client had nearly the same levels and there’ll be huge appreciation from the clients and the efforts that have gone in there. You can see, projects and manufacturing just would not work because staff could not be present in the offices or at the sites. The labour was under lockdown situations. Much of them also had to migrate back to the towns and villages to take care of the families so obviously, there has been no work. In spite of that, we booked nearly Rs 23-24,000 crore worth of orders and produced nearly Rs 22,000 crore worth of sales. So all I can say is it’s a deep gratitude my colleagues and to all of our staff at work that in spite of this, we have produced work in this quarter when we are supposed to show zero orders and zero sales let me put it that way, and obviously zero profit.

Now how this has happened is that though it was not easy on the company to adapt to work from home from an EPC projects manufacturing point of view, we took unprecedented measures of equipping staff with laptops, computers and such. We took it to their houses, to the extent possible reconnected them with the Wi-Fis and systems and we did most of our engineering procurement. Many of the materials which had been inspected across the globe in many parts were done virtually using technology platforms. Hundreds and thousands of meetings have been done over various technology platforms. Projects have been reviewed; many of the things that I never used to review were reviewed during the three months’ period.

Many of the technologies and future ideas and strategic thought processes were done because we had some time and one could concentrate and go on for 12-14 hours at a stretch. So, that has been done. I think we have become more agile, we have become leaner and meaner. We have understood ourselves much better; there’s been extensive communication with all the staff and their ecosystem of stakeholders, clients and such. So, we are learning to manage it. What has not happened to the physical work, and to anticipate your next question, I think, we will slowly be getting back to it-- nearly 70% of the staff and 65% of the labour are back which are huge numbers, and I think by another 45-60 days, we should be near normal if there is no other incidence of this pandemic becoming from V to W (referring to recovery curve shape) etc. We should get back to what were sometime in the later part of February or March.

There’s no question of underestimation overestimation or any estimation at all. We just couldn’t understand what this was and I don’t think anybody across the globe understood what it is. We have been fed as an overdose of the pandemic news across television shows, internet, across experts that we get to listen to etc. So one has to assimilate the information, see what’s best and see what could be done. At the end of the day one has to be realistic and practical so as to what should be possible. Today, in Maharashtra only 10% of the staff are allowed to come to office—that is the regulation here. In Tamil Nadu for instance, only 33% of the staff and such are allowed to come to offices. That is a regulation. So, these are regulations that come in and one has to overcome it as one sees it and take actions from that point of view. So, we also understand it every day, what we try to do within the company is to try to normalise the situation to what was existent in our normal operations; say before February to get the company back to it. So, I think we are heading towards that and are pushing ourselves towards that.

But if there are local administrative rules and regulations that we need to follow, we aren’t an exception and we have to obey the rules of the land as they exist in that particular place. Subject to that, I think we will try to get back to what is normalcy, as I call it. Now, whether this pandemic will get over in 45-60 days, 90 days, one quarter, two quarters, I have no idea. I’m as much on the boat as you. I also have the psychological pressures and fears in me as much as anybody else. One needs to see what it is as we go forward. So I don’t have a straightforward answer to it because I don’t think a straightforward answer is available anywhere. One hopes to God that some genius or some great organisation across the world finds a vaccine or a solution to tackle this pandemic or in some way see how the pandemic mutates itself and such. Thereby, we get over it by finding a permanent solution. That will happen at some point of time, maybe sooner than later. There have already been TV shows of solutions that are emerging in the U.K., U.S. and India. Let us hope the solution comes and we’re able to get over it. Till that time, we have to be cautious and we have to be careful. But at the same time, we cannot give up. We have seen many such situations before, we have overcome many such situations before but this is something which is unprecedented, getting locked like this and getting into a fear situation like this. I hope we come out of this, sooner the better.

There are basically three economies which you look at from a growth point of view, I’m leaving out the services part because that’s dependent on U.S. and Europe and you know what it is. From EPC projects and manufacturing point of view, there are three economies that we look in a typical manner. One is India of course, which is a big source of projects for us, second is Middle East and third to an extent now, is Africa. Now, when you look at India, there are basically four buckets in which the spending takes place; the central government, state governments, the public sector units and the private sector. Now, only the governmental sector that is the central government, state government and public sector used to have a capex of around eight to nine lakh crore every year. I guess due to the pandemic and various social and much other physical measures that the government has taken, there would be a reduction in capex spends for the year. So what will happen is to revive the economy, to get back people to work, to get back people to self-respecting jobs, the government I believe we’ll get into capital spending. What happens is that the projects will need to be done in one or one and a half years, two years and it may go to two and a half years, three years as one sees it.

So, they have split the spending for a little longer period and are then concentrating and trying to finish it much earlier than what they used to. This is normal in such circumstances; one tends to bet on being a little more cautious and careful. So, the government will also do that. As we review the central and public sector units, we find that there are a lot of green shoots which are available. We see projects in many sectors especially in heavy civil, in power transmission distribution and in water areas. I guess these projects will come to fruition during the course of the year. Some of them what is Q2 may go to Q3, what is Q3 may go to Q4 and such and maybe some of which is due this year would maybe go to next year. But I do see projects coming back and we will try to make our bets for the better market share and try to get as much as possible as we go forward. The businesses are on it, they are sharp about it and they guess they will get their market share or more.

Now from there, there is also a possibility that there will be a step up of efforts to get multilateral funding for much of these projects because the government is not able to spend, you tend to take on multilateral funding, which are soft loans spread over a period of time. So, you will find projects of World Bank, Asian Development Bank projects in the country, we see quite a bit of it. We are good in such projects. We have built excellent relationships and we have managed such projects extremely well. So, I guess we’ll have a good chance of securing much of those projects as we go forward. I don’t see private capex coming back this year in India, like we are trying to cut down capital expenditure, revenue expenditure and such. I guess most companies across the country will continue to do that. Maybe in some sectors, it could be different but broadly, in the sectors where we are there, I guess there will be a shortage of spending. Whatever it is, it is due to the nature of the balance sheet, leverages that are there in the balance sheet. I guess the leverages in India is a debatable point from a capex point of view. Maybe it will take one and half to two years to come back. This is not to say that there will be no private sector spending. I am talking on a broader base that there may not be the kind of spending that you would test some time back. So, it will come back but after one and half to two years.

From a Middle East point of view, the most critical thing to watch out is the stabilisation of the oil prices. It went down drastically to $10 etc. and has come back now to $43-$44. Most of the studies indicate that they will get back to $50-$55 by the later part of the year, the early part of next year. If that happens, Middle East will revive. Again, the strategic projects in Middle East are being looked at, there are many power projects, solar projects, water projects etc. visible across the Middle East, but a big spend on hydrocarbon and huge infrastructure projects may not see the light of the day as we saw it earlier. Maybe during the latter part of the year, it may come back. Africa is a huge continent; we have to go country by country. We are present, mainly in the north and eastern part of Africa. As we do see, the World Bank, African Development Bank and multilateral funded projects visible across Africa, we are predominantly in hydrocarbon power transmission distribution and water. Some of our other businesses are also looking at it as an alternative geography. we will keep you informed of the developments. So overall, I am cautiously optimistic and positive that things will happen, may not be at the speed at which it was happening prior to the pandemic but, naturally when things stop for some time, the acceleration takes some time. So, it will be an incremental push; maybe a faster incremental push, because the need to create jobs, need to employ people, need to get the economy back on track is also a priority for not only for our government but also for the governments in Middle East and Africa. That I guess that will be on.

The government spending will also come back because at the moment, the priority of the government as it should be and naturally it is, towards social sector spending and getting the people to be safe and give them the basic requirements which is done through the direct benefit transfers and NREGA scheme and the various other social spending that is taking place. At the same time, the government is conscious of the fact that the spending cannot go on endlessly they need to create jobs and give people self-respecting jobs because you earn your money and you live your own life. That has to come back and that can only be done by reviving capex spending on basic needs and for major capex projects because they are a big employer. 50-60 million people are employed in construction projects and that’s a huge source and because 60 million people must be supporting with another different people behind. So, we are talking about 300 million people being dependent on the construction sector. So, let’s not forget that every family has got six or seven people and the person who earns the remits the money back to the villages and towns. That’s what happens.

So, what all of us do right? We have families behind us maybe we are the only breadwinners with the family behind. There are 300-400 million people depending on this sector, so unless the spending happens, the sector won’t get revived. So it will be that and I’m sure it is the endeavour of the government to spend and they see it because I’m privy to data where I go through various projects and tenders that are visible across sectors and the company and they see. I do see multilateral and other funding agencies also looking into projects in India or projects with multilateral and other funding being visible across the country. Therefore, we are positive that these projects will happen as I said they could be some deferment from one quarter to another but it gives me reason to believe these projects will happen. The very fact that we have booked nearly 23,600 crore of orders and about 60-70% of it is in EPC projects and manufacturing orders is an indication towards the point. This is extraordinary because the government system does not adapt to technology we are functioning with so easily because they have a certain way of functioning. They need to have papers they need to have files; they need to have various people sign it, etc. In spite of the fact that virtually through the board’s meeting and the departmental meetings, etc., they’ve gone through the offerings that were done, they’ve gone through the technical bid, the commercial bid and the fact that they’re taking decisions to gives us a letter of intent is to a point for me extraordinary because the government and its people are adopting to a technology way of functioning and that they are moving forward to decisions on such a basis is simply astounding. It’s a great credit to all of them that they are moving away from the typical bureaucratic systems to let me say, a techno-bureaucratic way of functioning.

Manpower is divided into two; one is the staff and other is labour. The staff makes up for nearly 65-70% of back to work and balance I guess 30% are also working from home. All of them are not able to come back to work because some of them have gone to their villages and towns. The transport is still not available and the methods of travel are not easy. Second, there are also restrictions on how many people can come to offices etc. Therefore they have to work within the boundary limits but we have frequent meetings at various levels across the company and horizontally and vertically to ensure that everybody is assigned work and people are going about the work to the extent that they can in this virtuality or in actuality.

On the labour side, as I said we employ roughly about 2.6-2.7 lakh labourers as Larsen & Toubro across all the sites. Now, there’s word that migration has come into vogue right now but in a way it’s something which is a norm in the construction and projects business. Every year during the Holi season, during the Kharif season and during the festival season in October-November, labour do go back to the villages and towns and then come back. We don’t use the word migration for it, we use the word remobilisation, but yes I’m willing to use the word migration for it though I don’t like it. There’s not really a migration, this is people tending to go back and come back. What happens is that if we employ say 70,000 people and 30-40% go back, we tend to mobilise them back. This time it has been unprecedented in the sense that maybe 80% have gone back which is the difference because the pandemic has created a psychological effect on human beings. Well, once it is over and they are at site, it’s fine but a three-months lockdown is a bit too much for any human being; we aren’t used to getting locked down like that. Therefore one had to release themselves to get back to their families to look for their welfare and happiness and so on and so forth and be with their families in these unprecedented times. So, I think people have gone back. But at the end of the day the reality strikes in the sense that much of the people who have gone back are coming back are the real breadwinners of the family. So, they have to get back to work.

We have backlog on our books- three lakh five thousand crore of a backlog and that’s a huge backlog by any means. That’s nearly a two and a half, three year of backlog. So the work is pending at site. At the moment, nearly 1,90,000 new workers are back on the rolls. Now, we need to get back another maybe 70 to 80,000 and we are on the job. Every day, as much I see, they report 500-1,000 people are joining us.

To answer the next part of your question whether they’ll be wage increase incentives, those are again normal for us. Every year, four times we do give these incentives and bonuses to attract people back because we need the best of people working for us. This year it could be slightly less but understand that labour costs as part of the overall cost is about 6 to 7% of a project cost. Much of it is material and other costs. So 6-7% even if we assume with a 10% increase, we are talking of about 0.5-0.6% increase. It is also possible because the company has got highly digitalised and is adapting to better work methods which we as an organisation set up for doing two or three years back. Much of this increase can also be brought back by better productivity and better work methods and such. Many of us including many of my product managers realise that we cannot now work with the same amount of labour that we had yesterday and therefore we are trying to do work with less amount of labour and less amount of stuff. When I joined Larsen & Toubro the staff to labour was nearly 1:30. It had become 1:20 and even 1:15. We were trying to tell people listen, the older guys with some white hair on their head to keep it 1:30. We do understand projects are more complex and difficult right now but you don’t need to go to 1:15 or even 1:10. Please get it back to 1:20. When that happens, the numbers of labourers reduce at site and better productivity and work methods and digital tools etc.; allow us to do work in a more operationally efficient manner to achieve the same objective. I think it’s a complex situation. One has to understand it in its total entirety to go about it. I think we will succeed on the same as we succeed in many other places.

China is now classified an enemy country that killed soldiers on the border. It’s an emotional thing within all of us; none of us have liked it. So, we were to a certain extent dependent on Chinese products and imports but I think very serious and conscious decision has been taken across verticals to see how to diversify these purchases from other sources. We are on it. I think we’ve taken the Make In India and the Prime Minister’s call for an Aatmanirbhar Bharat extremely seriously. We are an engineering company, there’s nothing that we cannot do. Therefore, some of these fabricated products or other imports that we’re doing had to be made in India or were to be got from other sources are made by ourselves. Rest assured; L&T will go all out to see that we can do this on our own. Many projects are being done like that, many aspects of the projects are being done like that and we will adapt to it very fast and our guys are quite capable of innovating and coming out with solutions to make us totally selfless or self-reliant. I’m very confident about it.