The Hindu Business Line : Construction will continue to contribute bulk of revenues

The ECC division, which contributes about 50 per cent to revenues, will continue to remain a high priority for us. However, construction is a tough business and there are problems of execution, talent and skilled manpower.

A. M. NAIK, CMD, LARSEN & TOUBRO

N. Ramakrishnan

As one enters the hotel room, the first question Mr A. M. Naik, Chairman and Managing Director, Larsen & Toubro Ltd, asks is about the latest developments in Tamil Nadu. One wonders what his interest is in political developments in the State. Later, when asked about the status of three recently announced projects — manufacturing of power turbines and boilers, and ship-building — Mr Naik responds that the company hopes to decide by early November the location for these projects. Tamil Nadu and Gujarat are the two States the company is considering and it is waiting for a response (for its request for land) from the Tamil Nadu Government before it finalises its decision. Mr Naik, who started his career in L&T as a junior engineer in 1965 and took over as chairman and managing director in December 2003, took time off from a hectic schedule in Chennai this week to talk about the outlook, the opportunities and the challenges ahead.

Excerpts from the interview:

Could you give us an update on the second quarter? How does the order-book look?

The pipeline is good. It is as per our targets. We had anticipated Rs 35,000 crore order-book in the whole year, and half-year we may have crossed Rs 15,000 crore. This Rs 35,000-crore order-book will be executed in 18 months. I am not too worried about this year and next year.

I have to look ahead two years from now — about the rupee appreciation and the Chinese currency. We have several units that are affected by Chinese imports. They are small units, so overall it does not have much of an impact on L&T. It has an impact on employment. They employ more than 2,000 people.

The rupee is floating. It was Rs 48 (to a dollar) at the weakest and Rs 39.50 at its strongest — a 20 per cent appreciation. That has a major impact on our ability to export in comparison to China. Our competition within India and abroad is Chinese.

China has artificially locked its currency at a low level. If it is floating, like the rupee, it will appreciate by 30 per cent.

Tomorrow, if they float their currency, it will appreciate, and the moment that happens all my units become competitive. I have taken it up with all the authorities, including the Finance Minister.

I mentioned to some officials in the government that they should influence the WTO to straighten out this issue.

The US has also put a lot of pressure. The Congress and Senate have discussed the imposition of a 27.5 per cent anti-dumping duty.

I have been talking to the Government that Indian industry will be wiped out by the Chinese, or at least badly affected. If the businesses I mentioned don’t do well, I will have to close them or sell them.

If the Number One machinery company of India has this problem, imagine what must be happening. The appreciation of the rupee and the artificial price fixation of the Chinese currency together give Chinese industry a 35 per cent advantage.

We can be productive, but not to the extent of 35 per cent. My appeal to the government is to impose a 30 per cent anti-dumping duty on China until such time it floats its currency. The day the yuan is floated, withdraw it. Then, it is a fair game.

You mentioned that you are not worried about this year and next? After that, do you think the present level of construction activity will continue?

I always say that infrastructure is a $1-trillion issue. We need $150 billion every year. In five-six years, you need $1 trillion. We have never spent more than $30 billion every year.

China spends $200 billion every year, has spent that much for 24 years in a row. Infrastructure is the backbone. Whatever L&T does is basic. The day L&T’s growth gets affected, it is a barometer for Indian industry.

From that point of view, our pipeline for this year looks okay. But with a stronger rupee and rising interest rates, the overall economic growth may have an impact. Have I it seen already? We haven’t seen it. If somebody takes action today to defer his investment, it will impact L&T one year from then.

We have the order-book full for next year. Our sales won’t get impacted. But, if fresh orders don’t come for next year, then the following year gets affected.

What is the idea behind restructuring L&T? When will it be completed?

By March 2010. A few verticals have been formed. We will create them at the beginning of each financial year and by April 1, 2010 the last one will get done. The idea is to make management simpler. L&T is too complex. No one man can run this company, the way it is structured now.

There will be 12 CEOs, 12 boards. It will be a company virtually within a company. We have formed divisional boards now, which will become industry vertical boards. Now we have six boards, which will become 12 vertical boards.

Any idea of listing them?

Everything is dynamic. We have to constantly worry about creation of shareholder value. I have said IT will be the first one. It is a 100 per cent separate company; then we will go for an IPO. It is going to be a constant process of looking at what fits best at any given time. The new companies have to perform for two-three years before we can consider anything.

As far as the power sector is concerned, would you confine yourself to making turbines and boilers, or would you take equity stake?

We already do turnkey projects. If the opportunity comes, yes. We are not averse to it. We have invested in Haldia Power, we have invested in the IPCL power plant. We are looking at what further to do.

Will the ECC division continue to contribute the bulk of revenue?

It contributes 50 per cent now. There are problems of execution, talent and skilled manpower. People do not want to join construction. They don’t want to go to sites.

Are salaries on a par with IT?

They can never be, because the IT business is 20 per cent profit after tax, and ECC is 7-8 per cent after tax, which is the best globally.

There is no company that makes 8-10 per cent. None. Even Bechtel and Fluor Daniel are at 3 per cent, and Jacobs, which does cost-plus, is at 6 per cent. It is a tough business. ECC will swing between 45 per cent and 52 per cent (of L&T’s total revenues).

It will be some time before the Chinese companies and others will come to India for construction, though they have started taking up projects. Reliance’s pipeline project is being executed by the Chinese. The company has brought in 1,800 Chinese.

Others are trying to do the same thing because skilled manpower is not available.

I think there is enough work for all companies and L&T will still be at the forefront of infrastructure projects. ECC will continue to remain a high priority for us.

Overseas, we are confining ourselves to the Gulf for turnkey projects and construction. We are not moving beyond the Gulf because we don’t have talent.

Working in each country is different. How you do business in Saudi is different from what you do in Kuwait, although it is next door. And very different from what you do in Qatar.

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