People wanted to diversify away from China. But we messed up our chances due to political paralysis.
It’s 11 a.m. on a Saturday morning and Larsen & Toubro’s (L&T) Chairman & Managing Director, 70-year-old A.M. Naik, has just finished a review meeting with the senior management of the construction group at its headquarters in a sprawling campus on the outskirts of Chennai.
In an over two-hour interview to Business Line, Naik spoke on a wide range of issues, from the slow decision-making in government to the China impact on projects and on the shortage of engineering talent for the manufacturing sector.
L&T is a barometer of the Indian economy, Naik says proudly, adding that a senior Union Minister even coined a phrase, a ‘national sector’ company, to describe the conglomerate. Excerpts:
There is talk that no file in the government moves, whether it’s for environmental clearance for coal mining or thermal power plants. So how do you see the outlook for capital expenditure projects of the entire corporate sector? Where will you get your business from, if companies are not going to invest?
Two years ago I had predicted this. It was very surprising to everyone when I said the economy’s growth will come down to 7 per cent. That was the time the government and majority of industrialists said it will be 9 per cent.
Why do people consider L&T as a barometer of economic growth?
Because, when capital formation slows down, we get that indication two years prior. Auto companies and others feel it one-and-a-half years later. Till then they have capacity (to utilise).
In today’s environment, nobody is spending money. We spent Rs 4,000 crore to build turbines, boilers and auxiliaries, all of that is at a standstill because of coal and other issues.
And when they were moving, everything got imported from China.
L&T entered into manufacturing power equipment because of the intervention of the PMO that there was only BHEL (to produce) and all projects were getting delayed.
I had asked for a licence in 1981, 25 years before that call, that I want to make boilers, but it was shot down. We had signed a collaboration agreement. The licence was not given.
We applied again in 1984 and 1989, both were rejected. Then I said we have better things to do.
But wouldn’t 1991 onwards have been an opportunity for you? You didn’t have to get the government’s licence.
No, that was 1994 onwards. By that time, BHEL had expanded two times. The second thing, by that time, the first few Chinese boilers and turbines had already come in.
Also, by then my hands were more than full. I was creating the vertical of hydrocarbon and many other initiatives I had taken up.
And if you ask me, should we not have done things earlier (in the power sector)? Today if I look back, maybe we should have started in 1999. But by then, we had lost 11,000 engineers in that decade to the IT industry.
I was also busy blueprinting a five-year strategic plan called Project Blue Chip, with BCG, which we launched in 2000, and suddenly I found that we lost another 900 people.
So I said I have to start with nothing else (but the aim) to retain my talent in an IT company.
So with a clean table, which I have done in most of the businesses of L&T, I started IT. That bound me virtually for two-and-a-half months in a year.
So do you think you’ll be able to catch up with Infosys and TCS?
No, we cannot. That’s not our mandate. But, yes. It will be one of the important verticals of L&T growth. Can Infosys today catch up with me in construction or hydrocarbon or in my remaining 20 verticals?
They will not be able to do one-hundredth of what we do. So it is the same way.
You said you got into IT basically as a means to retain engineering talent.
To retain them I have to give them growth.
But they wouldn’t be useful in your other projects, would they?
No. The point is, if the talent is within your campus, and if one day they said, ‘we want to go back’ (to engineering projects), it is possible. For a few, it happened.
But more importantly, what I did is, I handed over the entire management of IT outsourcing to L&T Infotech (for the L&T group).
So one could say he’s the CIO of the ‘heavy engineering vertical’ etc. And, once they have been there for four years, they have a right to ask ‘can I now do other jobs, other than L&T?’
And we are obliged to give him, otherwise he can leave. And that’s how we brought all experienced people into Infotech through this route.
And that’s why today, though we are small, every customer is damn happy with us. My objective is not to have 5,000 customers. I want 250 customers, but really important ones and those who are happy, where their CEOs can issue us a good certificate.
Have salaries in your core industries also gone up to match what IT offers today?
IT gross margins are 30-35 per cent and the construction industry margins are less than 7 per cent. However, just to attract them into this industry, we have increased, whether we can bear it or not.
Is your industry as labour-intensive as software? Their profit margins may be 30 per cent, but their wage costs are also 30 per cent.
No. But at the end of the day, you must remember, what is the bottomline? Their bottomline is three times more than the whole industry, whatever may be the component.
Do you see any improvement now compared with the situation three months ago?
This was an opportunity for India. The world had no investment opportunity. And people wanted to diversify away from China because of their recent postures of aggression all over the place.
Many countries are somewhat nervous. And therefore they want an alternate place to invest and create a manufacturing base.
Until one year ago, India was at a high point in their mind. During this time, when the rest of the world was not doing well, had we kept up our momentum, in fact more investment would have come into India.
But we messed up due to political paralysis, irresponsible political parties, including the Opposition, which don’t allow anything to function.
If the BJP had said, ‘first two days I don’t want to come in the way of all the rest of the Bills, where all the political parties are aligned, let them be passed’.
That’s what I would have done so that the country moves on. And that doesn’t take more than two days. And not obstruct Parliament from minute one.
If these Bills had been passed, but the files were not getting cleared in the Secretariat, would investments still be taking place?
But, it’s policies which were supposed to come. I know quite a few Bills are stuck now for a year. For example, there is a Bill pending on whether new banks should get a licence.
Almost no one would have objected to it because it helps only poor people. More banks, deeper the penetration. Because, today, you don’t get a banking licence to open a branch in a Metro unless you open four branches in rural. No one can oppose that, but that is stuck for two years.
L&T has taken L&T Financial Services to the market, to position it to become a bank one day and I transferred my senior man, the CFO of the group, to become the Chairman there. Now we are waiting. We thought it would come this Parliament session. Is this the way to work?
Is the Chinese threat no longer a serious one for you? (in reference to orders on Chinese power plant equipment suppliers)
No. Everything is serious. But previously people did it blindly. Today they do because they give money for 10 and 15 years at 2 per cent. So people who are stretched already, Chinese are ready to give them. It’s not going to come for other reasons.
So their ability to bank-roll these projects would still give them an advantage.
You had always been saying that you are financially very strong and therefore you will be able to handle this slowdown far better. So can’t you match them in terms of buyers?
I am not a bank. That is not China’s supplier giving the loan. It is Chinese banks that are giving. I will finish my money in one plant if I do it.
You have, of late, stopped bidding for these highway projects. What is the reason?
No. We just won two big projects.
But, you are not as visible in these projects?
We are very selective.
What about Metro projects, you don’t want to bid …?
At my price and at BOO (build, own and operate), I won’t. Because I have Rs 20,000 crore worth projects in Hyderabad. The reason why L&T is reliable is we don’t overdo everything so that we fail.
Hyderabad Metro is the world’s largest single-phase project at 72 km. Delhi has gone through six phases. Finally, I am not a bank.
Let’s be clear. I have already engaged Rs 60,000 crore worth of projects on BOO. In the BOO or BOOT (build, own, operate and transfer) projects, profits are back-ended. So, meanwhile, I have to worry about serving my customers, my shareholders.
Today L&T’s loan is Rs 75,000 crore for its balance sheet. It is still not alarming. But it can become alarming. How many groups have money, three or four max; all are stretched.
Financially, today people are in a mood, with an exception of three-four companies, to sell their assets to repay the loans. Otherwise they will have bigger problems.
Projects such as the Hyderabad Metro inherently require tremendous State support without which they can’t be profitable. In that kind of a situation do you think you will make money on the Metro?
Well, in the case of Hyderabad, they had given us (parcels) land, where the depot is only on the ground level, it’s a big area. The whole thing is built over it. That’s property development.
Six other spots along the lines of the railways where they had given us land for property development. It was justified based on that.
But that’s not the reality now, is it? Because there is opposition to real-estate development along the railway line and …
No. They cannot take away the land … otherwise they will have to give us some other parcel, it’s a contract now. In fact, in Mumbai, they are encouraging construction all along the lines.
Have you concerns about these commitments?
We are cautious, yes. But our project is for 35 years with a renewal possible for 35 more years. Obviously the project is not going to make money for 10 years.
But then I have a chance to make up for 60 more years. So if your balance sheet is strong on a quarterly and yearly basis, you can have one or two such projects which in the initial stage you can digest within the other prosperity that the company has.
But if you don’t manage that within the limits, you will end up like many other companies. So, if you don’t see us recklessly bidding for many projects, it’s a part of managing the overall company’s financing structure and also the complexity.
On the Amravati to Surat route, both the road projects we have won are Rs 4,000 crore or more. But if you ask me, are we going to bid for some 200 km where there are 20 bidders, I am not going to bid and waste time.
The moment projects are Rs 4,000 crore and Rs 5,000 crore, the bidders become 4 or 5, that is something we may look at, provided it is viable obviously.
What is the position of all the companies who had 20 and 25 projects lined up… many of these Andhra companies want to sell today.
Are you open to the idea of picking up these assets?
No. We are not going to pick them up. Because we believe we must construct, maintain our own roads. If we have not constructed that, what they have put below I don’t know, because finally everything on the surface level looks good.
But what wear and tear will come on those roads, we don’t know. Our roads don’t need maintenance for 10 years. Because we go by the specification laid down and more.
What kind of skills are you trying to build within the community of engineers in India?
I think training is our backbone. Not only are we training 20,000 people which we will take to one lakh. For workmen we have domain training, for example, in hydrocarbon.
But after five years they come into the first management development programme at our centre at Lonavala, which is now like a university and it is conducted by IIM-A. (These levels go on till level 5, which is the global CEO programme for senior management of L&T).
With IT soaking up most of the engineering talent, will manufacturing get enough people to work?
I am the Chairman of IIM, Ahmedabad. The Director used to very proudly say, ‘37 per cent of our students have been placed abroad this year’. I used to tell him, ‘Is it? What’s to be proud about when it is a highly subsidised education system?’
Then the second announcement — ‘highest that our student got was $225,000’. I then showed previous five years of graduation records.
Not one had gone into manufacturing, forget construction or projects or infrastructure. They all went into financial services, IT, consumer packaged goods, retail and none in our type of industry. Those who don’t become an MBA want to quit their job after engineering.
If you see, nine out of ten graduates go into IT or IT-related jobs. So for all the rest of the industry one person is available. That one has a choice of chemical projects, petrochemical projects, refineries, oil and gas, power projects, utilities, auto manufacturing, steel plants and so on.
So you are now talking statistically about one in hundred. Because they are civil engineers and they find this (L&T) a Mecca of civil engineering. Those are few.