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Updated: March 4, 2012 22:25 IST

Investment climate is not good, says A. M. Naik

Ramnath Subbu
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A M Naik, Chairman and Managing Director, Larsen & Toubro Ltd. Photo: Vivek Bendre
The Hindu A M Naik, Chairman and Managing Director, Larsen & Toubro Ltd. Photo: Vivek Bendre

Engineering, manufacturing and construction conglomerate Larsen & Toubro (L&T) has been continuously evolving over its 74-year history and has truly earned its stripes as being one of the largest and most respected companies in the private sector.

With presence across diverse sectors, over the last decade under the stewardship of A. M. Naik, Chairman and Managing Director, L&T has gone through significant changes. Mr. Naik is credited with re-focussing the company on its core strengths as also of venturing overseas and steering it towards becoming a multinational. In an interview with Ramnath Subbu, he spoke on the impact of domestic economic slowdown, besides issues and challenges the company faced in retaining talent.

What is the current scenario and investment climate in India for infrastructure projects?

The investment climate is not good and the pipeline of new projects has come down. Over a year, I have been saying that economic growth will not cross 7 per cent this year although everyone insisted it would be 9.

I said this on Day One because capital goods and project industry sectors know the investment patterns a year to 18 months ahead. The effect tells on other industries after a lag. There is little new capacity coming in and so growth is slowing down.

Even if things move fast post-elections, there are unlikely to be any priority decisions immediately. So the economy will move between 7 per cent and 7.5 per cent in the first-half of the year and taper off to 7 per cent in the second-half. And, if this does happen, I believe it will be a great achievement.

While we are all optimists, I am also a realist. We must think optimistically, invest realistically and promise conservatively. With that in mind, I feel the economy will grow by 6.5-7 per cent this year.

The situation in the power sector has been described as dire given the project delays and lack of sufficient orders. How bad is the scenario?

This is often asked of me and I am hopeful that, after elections, the steps initiated on power related issues will start yielding results. One hopes that the consultations and intentions convert into executive orders and within three or four months, the power industry comes back on track.

Otherwise, India will revisit the situation of half-completed projects, wasted capital, banks getting nervous about non-performing assets (NPAs) — just a chain of problems.

What is the fallout of the economic slowdown on L&T given its pre-eminent position in infrastructure?

For L&T, on the domestic project front, like last year, this year too will be extremely challenging. Except that we have invested in the Gulf region, Africa and elsewhere.

We are bidding for overseas oil and gas projects and if we get even two in the year, it would bring in Rs.7,000-8,000 crore.

We have started looking at CIS (Commonwealth of Independent States) countries and are bidding for a fertilizer project there through our new office in Istanbul. For upstream offshore platforms, we are opening an office in Perth and in Brazil.

But that action will not help this year. We need to be well established and accepted in those markets to reap benefits.

We are investing more and more for 2013-14 and 2014-15 in order to neutralise the impact of a continuing slowdown in India.

If we can bring 25-30 per cent of our order intake from overseas, we would have somewhat neutralised the internal Indian challenges for the time being, till the infrastructure story once again gets moving.

What then is the genesis of this ‘internationalisation' of L&T and the road ahead?

The aspiration to become a multinational corporation (MNC) was there in my mission statement in 1999. Today, all MNCs are here. You, therefore, have to become a multinational. That itself will teach you about international quality standards, globally acceptable norms.

Even if initially the value of overseas orders is 5-10 per cent, it gives you inputs on how to become differently minded, thinking internationally and taking on competition. From nothing, we reached 5-7 per cent international orders in 2003-04 and now it is 17 per cent.

Knowing that we have a serious problem in India we accelerated that and upped the target to 25 per cent of total orders by 2014.

In all our overseas ventures, we start with one independent company (IC) that has a significant opportunity in a particular country and later other ICs can piggy-back on it. The Australian office is to explore offshore platforms, Brazil is for hydrocarbon equipment and heavy equipment while the Russian office is for defence equipment.

We targeted the Middle East and today are present in every Gulf country, from having a presence in only two nations five years ago. We will go to Iraq and then Libya, Syria and Egypt when they stabilise. These are countries where we understand the cultural factors and local mindset.

We are evaluating entry into African countries and may start offices in a few oil and gas-rich ones which have earmarked funds for infrastructure spends.

What about the challenges posed by cheaper Chinese power equipment imports?

I have been talking about it for the last five years. Every year, India imports equipment worth $30 billion, half of it being power equipment. L&T got the licence to make power equipment in 2006 and created 5,000 MW of capacity and with BHEL, now have a total capacity of 17,000 MW.

Demand today is at 12,000 MW due to lack of coal. But simultaneously, Chinese imports have increased unabated and several players have descended here. The Chinese have garnered 80 per cent of the market. When you look at all the benefits, China has more than 50 per cent advantage — 30 per cent on currency and 10 per cent each on subsidy and low interest rates.

To top it all, Indian manufacturers have to pay 14 per cent sales tax in addition to octroi. Now, even Indian power equipment manufacturers are importing equipment and the ancillary manufacturers have not grown as envisaged. It is a very difficult situation.

Often the issue of retaining talent at L&T has been raised. Has the situation changed?

It is still a major issue because new international companies are coming in everyday. As we are in multiple businesses, one or the other have some similarity to L&T's businesses and they can pay two to three times higher salaries. We are obviously the biggest manpower hunting ground.

We have an attrition of 11-12 per cent at junior levels and can cope with that. The point is there are multiple opportunities now. We hiked salaries four times but unlike consumer goods companies, we operate on 9-10 per cent margins and 5-6 per cent at the net level. So, it is important for us to strike the right balance. We have a strong talent acquisition and development programme and I personally spend a substantial portion of my time on nurturing top talent.

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L&T deserves all the credit for being a company it is today. From investing in West Asia and Africa which were not so greener pastures once, L&T has proved that able management can yield profits irrespective of country's profile. Mr. Naik also highlights the need for lowering of taxes by governments so that native companies do not lose out to the MNCs. It is high time that other India based companies also look out to investments abroad to survive in this cut-throat competition.

from:  Ashwini Kumar
Posted on: Mar 5, 2012 at 23:34 IST
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