Achieving better return on equity is still work-in-progress, says L&T CFO

Ksenia Kondratieva Mumbai | Updated on January 08, 2018

R Shankar Raman, Chief Financial Officer, L&T

Infrastructure and engineering giant Larsen & Toubro (L&T) has embarked on a multi-pronged strategy to improve its return on equity (ROE) from 13 per cent in 2016 fiscal year to 18 per cent in the next three-four years.

In addition to restructuring businesses within the group and monetising non-core activities, L&T is looking at bettering performance by optimising costs, using resources more efficiently, reducing project time and cost overruns, as well as increasing overall competitiveness and productivity.

R Shankar Raman, L&T’s Chief Financial Officer, told BusinessLine that while the work to reach targets set in L&T’s five-year plan ending in 2021 is “still in progress”, some mid-term targets have been achieved.

“We have set ourselves some tasks, it was important to move from as low as 10 per cent in FY15 to 12 per cent — so we moved to 13 per cent in FY16. The difficult paths start now... this year we are trying to see whether 13 per cent can move to 14 per cent,” Raman said.

“I need to walk that path for a few more years, since you cannot move from 10 per cent to 18 per cent in one jump,” he added.

Technology at play

According to Raman, L&T was able to reduce its working capital ratio from 26 per cent in the beginning of the five-year plan to 20 per cent currently and it will work to bring it down to a healthier 15-18 per cent. Reducing waste in production, storing, improving control systems is one side of the coin.

The company opted for technological innovations; for example, it started tracking equipment usage and workforce productivity through sensors and chips.

Another big task, according to Raman, is improving efficiency by automating business processes, redeploying human resource from stressed businesses to those doing better, reducing small-value jobs, and scaling up projects and teams handling them, switching to contractual model for both human resources and equipment.

Last year, L&T made headlines for laying off 14,000 employees. According to Raman, this was a complete misinterpretation of his statement.

“What we told the media in one of our quarterly review was that compared to same time in the previous year, we would have needed 14,000 more resources to work for the kind of throughput we are reporting. In fact we were at pains to clarify that we did had not laid off 14,000 people, instead we are employing 14,000 fewer resources than we would be, and you should rather ask how we are managing to do that,” Raman pointed out.

He insisted that L&T did not lay off more than about a 1,000 people across minerals, metals and power verticals while it kept hiring in other businesses like construction or IT services it keeps hiring.

Turning around businesses and projects that are making losses is another task for L&T.

According to Raman, in hydrocarbon and heavy engineering verticals it could happen, although businesses like power remain at the crossroads.

GST impact

“It is important that we get out of legacy projects that are making losses and add new ones that we can execute better. Till 2016, we reported losses, post 2016 we reported marginal profits and in FY18 we will report much healthier profits and maybe the best of times are to come in FY19,” Raman said.

He added, however, that improving payment cycles that have always been challenging provided the large chunk of orders comes from public segment, may remain tough for at least another year, especially since GST was introduced in a rushed manner and the system will take time to adjust.

Published on October 08, 2017

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