The Hindu Business Line : `We have learnt much from BOT projects' — Mr K. V. Rangaswami, Sr V-P and Board member, Larsen & Toubro

Mr K. V. Rangaswami, Board member and Senior Vice-President, Larsen & Toubro Ltd, also heads L&T's Engineering, Construction and Contracts (ECC) division, which is looking to increase its overseas presence. A B.Tech (Civil) from the Indian Institute of Technology, Madras, Mr Rangaswami has been with L&T since he joined the company's construction division as a junior engineer in 1965.

He spoke to Business Line about ECC's business strategy, the challenges it faces and the prospects of build-operate-transfer projects in India. Mr K. Venkatesh, Vice-President — Developmental Projects Business, answered some questions on BOT projects.

Excerpts from the interview:

How does the year look for ECC?

Last year was a reasonably good one. We improved our sales by more than 30 per cent. We finished the year with nearly Rs 6,900 crore of sales and order booking of Rs 9,000 crore. In the first quarter of this year, we did reasonably well. We expect to finish the year with 25-30 per cent growth in sales and book orders worth Rs 10,000-11,000 crore.

Profitability...

Profitability was good last year, about 7.5-8 per cent profit before interest and tax, which is good for a construction company. World over, construction companies make 3-4 per cent profit. Our aim is to increase it by another 2 percentage points in the next five years.

What about international operations?

We are upbeat about West Asia. We believe we can do good business there because the construction sector is booming. Last year, our international business was 7 per cent and order booking Rs 450 crore.

This year, we expect it to jump to 15 per cent as also the order booking in the Gulf to pick up considerably. We hope to maintain our international sales within the 10-12 per cent band. We expect to form joint ventures with local companies to enable us get "local company" status to participate in bids for a number of projects reserved for such companies. These joint venture companies should give us a substantial jump in overseas income. We will form joint ventures in Abu Dhabi, Dubai, Kuwait and Doha. Our joint venture in Oman, L&T Oman, in which we increased our stake to 66 per cent from 49 per cent, is doing well and growing at 30 per cent. Last year, it had sales of Rs 300 crore.

We acquired a company in Oman and renamed it L&T Electromechanical Co. It has made a breakthrough by securing a Rs 170-crore electromechanical job. We expect West Asiaoperations to grow substantially.

We are also doing some industrial projects in Kenya and Dar-e-Salaam. Based on this experience, we hope to organise ourselves better in Africa to secure more jobs in the industrial projects and utilities sector. We hope to be present in Tanzania, Kenya, Uganda, Sudan and Botswana.

Are you confining yourself to West Asia and Africa? What about South and South-East Asia, China, or even Russia?

China, we cannot enter. We do not want to waste our energy. There are any number of Chinese companies and their performance has been satisfactory. I do not think we have understood how to optimise costs the way they do. We have no intention of competing in the Chinese market. There are not too many projects coming up in Singapore, except caverns for the gas sector.

With our experience in a similar project in India, maybe next year or so, we can take a shot at a few cavern jobs in Singapore. We have attempted a couple of high-rise buildings in Malaysia, but with little success. We are also interested in the oil and gas sector in Malaysia. We are executing projects in Sri Lanka, Bangladesh and a hydro-power project in Bhutan.

We do not intend taking equity risks in a foreign project. We have an office in Kazakhstan. We are not getting the right kind of projects... They want us to fund the projects. To fund an overseas project is that much more risky. We are looking at what safeguards the local government will give us. Sooner or later, something will click in Kazakhstan.

What about the domestic market? The industrial sector and other construction projects...

There is growth in the steel sector. We have bagged the contract for Tata Steel's expansion in Jamshedpur. Many others like Posco (of Korea) are putting up steel plants...

L&T is supposed to have been short-listed for Posco's plant...

Yes. They have sent enquiries to which we have responded. A couple of meetings have taken place... In the buildings sector too, we have some advantages although there are more players.

Our power transmission business is doing well and so are our factories in Pondicherry, and at Pithampur in Madhya Pradesh. We are thinking of expanding capacity.

What will be the company's strategy for growth?

While we increase our own business in the regular route, we are also open to acquiring some medium-size companies that can supplement our strengths. These could be engineering or even construction companies specialising in piling or diaphragm walls.

You had earlier talked of human resource being a major challenge...

It is still a constraint because smaller companies find it easy to poach our people. This year, we have doubled our recruitment of graduate engineer trainees to 150. If you include those recruited for accounts and administrative work, the number will be 350. We have increased our intake at various levels. Next year, we will recruit 500 people. There has also been a 15 per cent across-the-board increase in salaries.

This is not the only talent you need. You need front-line charge hands, supervisors as they are called. They are not produced in colleges or polytechnics. They have to come from the ranks.

We are going to pick about 500 people from our various job sites all over India and give them three or six months classroom programmes in our skill training institute. We have a training school in Chennai, which we are going to replicate in other centres. This is a major initiative to address our human resource problem.

We require some specialists because we have our developmental projects where financial engineering skills are required. We are opening offices abroad and increasing our business development efforts. We need lateral recruitment at those specialised positions, which we are also looking into.

What about attrition?

Our attrition rate used to be about 2-3 per cent earlier. Last year, it jumped to 6 per cent; we lost about 500-600 people last year. Smaller companies can raise salaries for just a few, but for us with a total staff strength of 8,600, we cannot take any ad hoc decisions. I have to be conscious of the overall impact it will create.

You had talked of BOT projects and said you would be willing to take a higher stake in these projects...

We are doing that. The government is also offering more projects on the BOT route. Today, governments spend a good part of their budget on welfare activities. And as far as possible, they would like to take these projects in public-private partnership.

But what of the problem of user-charges?

It is still there. But it is becoming much better. Today, more jobs are being offered. The Government has a definite intention to offer more BOT projects. In the next two months, 17 road projects are going to be on bid, each approximately 50-60 km and about 900 km in all. The average cost would be Rs 4 crore a km.

What about your own experience with BOT projects, especially the Coimbatore bypass project, where you faced problems?

Today, it is much better. We were the first to embark on such a project. Of course, we said this bypass was not viable in the beginning. At that time, this concept of annuity was not there. They added a sweetener in the form of the Athupalam bridge. But what happened was that, one fine morning, people used to plying on the bridge for long were asked to pay a toll and, quite naturally, they resisted.

In this case, the compliance level was low to start with. And bypass traffic was also slightly less than what was estimated or at the same level. We were worried because the project started that way. But, as we went along, compliance as well as traffic on the by-pass improved. We also recognised the needs of some of those people and tried to come to terms with that. We are meeting both ends with marginal profit. We are asking them to compensate us for the loss incurred in the initial stages. That is a long process.

Another positive factor was that the interest rate came down, reducing our interest burden considerably, though the compliance was low. We rescheduled some of our loans so that our loss was minimal. The important learning from that project is that wherever we have to bid for a BOT project, we watch out for the angle of local users carefully.

What is inherent in all BOT projects is that supposing somebody violates, you have no authority to take any action; it has to be taken by the police. That is the biggest problem.

Unless the State government is totally with you, no matter what concession you have, it is a day-to-day problem. It is something which has to be solved then and there; even if somebody has to slap a notice or fine on him , it has to be done by those people (the local administration).

What are the lessons as far as BOT projects are concerned?

Take the Coimbatore bypass. There are number of tolling booths, but we always found that from some village somebody can sneak through the road without paying. That was unknown when we bid for it.

Today, if we are bidding for a project, we do a survey, locate the places where we should collect toll, where somebody can sneak an entry and go without paying toll.

Second, the survey itself has to be conducted periodically, checked for authenticity and extrapolated carefully. We have also learnt a lot on project financing. Initially, we put our own equity and sourced the debts. Today, probably, there are better ways of doing that.

There are people willing to invest; lenders ready to look at longer periods of repayment and others at lower rates of interest. Some lenders are agreeable to structuring the repayment according to the pattern of the cash flow and profit. Earlier, the loan repayment was structured and rigid. We have been considerably enriched by that experience.

If we do not learn and be involved in this segment, it will impact our business in the long term. In that context, all this learning has been a positive step in our own business interest.

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