Homegrown conglomerate Larson and Toubro has done well to keep the growth momentum intact despite the economic uncertainty. Notwithstanding the over-dependence on government infrastructure projects, the rising input cost and mobilising skilled labour remain the immediate challenge for the infrastructure behemoth. R Shankar Raman, Chief Financial Officer, Larsen & Toubro, spoke to BusinessLine on the way forward for the company. Excerpts:
Has the impact of Covid eased?
Yes. It is behind us physically and mentally but it still plays in the back of people’s minds. The impact caused by both the first and the second wave of Covid is quite telling on people at the individual level. It is yet to get out of the mindset. In a way, it is good that we do not drop the safety protocol. We persist with our thrust on vaccination. About 87 per cent of our workforce and 97 per cent of our staff are vaccinated. We still continue with safety precautions followed at the peak of Covid. We think the effect is waning but we cannot just forget it and move on in life. Many of our offices are seeing people returning back as unlocking happens progressively. Even many of our clients’ offices are opening. There was a natural delay as most of our clients were also working from home. We expect businesses to be back in a normal mode in next six months. I suppose the Delta variant of Covid spotted in Russia and China is isolated. The entire logistics industry has got into difficulty and there is congestion at ports and delays in Customs. The government is keen to ease things so that jobs come back. It wants to ensure the economic momentum and investment level are kept alive. This will improve tendering of government projects and awards.
Has mobilising workforce eased?
The second wave of Covid had a telling effect on workforce mobilisation. From June people started assembling back. Today, we have 2.70 lakh people working at our site though on full capacity we employ about 3 lakh. Though they have returned, they go to their native places at least three to four times a year. To get 3 lakh people working we need to have database of 9 lakh. The churn happens and that is the way we execute the projects. Now, we have to get the productivity and get all the imported equipment delivered at the site. Workforce deployment is back at the pre-Covid level.
Are there delays in getting equipment?
Some of the equipment are airlifted but yes, some of the bulk imports are getting delayed due to country-specific lockdown restrictions. Loading and unloading are delayed at ports due to labour shortages. Even the shipping lines are struggling as they are not reloaded after the discharge of cargo. Part of the rise in logistics cost is due to the one-way pricing as they have to go to another nearest port to pick up cargo leading to idle time. It is critical that delta variant stays confined so that logistics issues are sorted. Air traffic has started bouncing back and goods movement will follow.
How are you managing the rise in steel and cement prices?
The spike in input costs is undesirable as far as the EPC contractor is concerned. We have managed to deal with this contractually. About two-thirds of our contracts have some kind of pass-through clause in them. To that level, we have managed to link transparent indices to the contract pricing. It gets readjusted with a time lag as we incur the cost and trigger the price variation cost. In contracts that are open on price variations, we try to hedge it on exchanges with forward contracts. In all, there will be about 10-13 per cent of the contracts with open exposures. We are also having arrangements with suppliers for ‘hold to firm schedules’ (in-time delivery) with a price protection facility.
Are sponsors willing to absorb such a consistent hike in steel and cement prices?
It depends on how the sponsors look at the project. In a broader economy, the sponsor would complete the project even at a higher cost if the product provides the pricing power. We have not seen costs doubling in a short span of time. It is more to do with pandemic disruption and shipping-related issues due to shifting in geopolitical equations. Fortunately, the demand revival has been slow and steady. Otherwise, it would have been a heady cocktail with a spike in input cost and a sharp jump in demand.
Are there delays in payments?
After the first Covid wave there was a lot of government disbursal as they wanted to infuse liquidity. Unlike the US, India did not announce any large fiscal stimulus. They provided indirect support by telling contractors to submit lower bank guarantee and bond requirement was removed besides clearing pending bills on time. However, the impact of the second Covid wave was more crippling with many lives lost. There was a delay in payments. As State governments are going for election, they are starting social spending and I believe some distribution policy will be followed. The pace at which disbursement was happening in the first wave of the pandemic has slowed down but it is not that alarming.