Engineering major Larsen & Toubro plans to invest more in technology services business to increase its share in the company’s portfolio, while exiting infrastructure assets where it is a developer, Managing Director and Chief Executive Officer SN Subrahmanyan told ET in an interview. While engineering and construction, and IT services will be key growth drivers going ahead, L&T also plans to rollout two digital platforms in 2021 marking L&T’s foray into the business-to-consumer space, he added. Edited excerpts:
L&T’s performance in the third quarter of 2020-21 indicated recovery after the complete disruption due to the coronavirus pandemic. What are the steps you are taking to deal with its overhang going ahead?
As a big and diverse organisation, we had virtual meetings during the lockdown where we went through every part of the organization to cut costs and bring inefficiency. The government put in place a mechanism to ease credit restrictions and therefore companies like us benefited enormously from payments. The government also went high on multilateral funding, and we were lucky that we bagged many of these orders that resulted in record order inflows of Rs 73,000 crore (in 3QFY21). We are efficient, ambitious, and aggressive but we don’t cut prices.
We also realise some of the business may not perform as well as the others because the sector itself may be going down. We will finalise a plan for them soon. We are trying to push our services business to grow faster. We are allocating more resources, spending more time to see that IT businesses grow faster.
What is your strategy on divestment of assets looking like?
In the past, we have been heavily capital intensive; that’s why we invested in L&T IDPL (Infrastructure Development Projects). We have already reduced our stake in IDPL to 51% and we are talking to existing shareholders and a few other interested parties to see how we can move out of it. We would have closed the deal this year but due to pandemic the decisions could not be made but now we are in serious discussions to either reduce our stake to 11% or exit completely.
We want to exit our 1,400 MW coal based power plant at Nabha in Punjab as it does not fit into what we want to do. We are in serious discussions to see how to move it out of the balance sheet and hope to do it this year. Nabha is a difficult case; we invested Rs 9,000 crore. There are plenty of other power projects on the block at ridiculous prices so as long as we get our investment back, we will move out of it. There could be some small premium in IDPL stake sale and we will try to do our best.
The third project, which is more difficult, would be Hyderabad Metro. It was a good investment but the pandemic led to shutdown and traffic was hit after it restarted. We need to rearrange the finance to reduce the interest burden on the project and we need to get the traffic back and make it positive. Then we need to look for investors, which may take a couple of years to do but we are very seriously working on it.
L&T debt is at Rs 1,70,000 crore, but of this around Rs 90,000 crore is with L&T Finance. If these three assets are out, we will move towards being a fairly debt free company. There will be debt on the books on account of L&T Finance but that’s okay as they are in the business of lending and borrowing.
L&T aims to increase the contribution of IT to 50% in the group. How is the company working towards that?
Our EPC, projects and manufacturing businesses are ambitious and will see good growth going ahead. In my view, IT will be 25-30% of our total business in the next 4-5 years and may grow to be 50% in the next five years. It’s a tall order because the other businesses will also grow but the IT business has a wider canvas with its presence in the US, Europe and rest of the world.
Any plan to go back to bidding for new projects under the ‘Public Private Partnership’ (PPP) model?
Absolutely no question of looking at any PPP projects.
What would be the key driver for L&T in 2021-22?
IT and infrastructure would be the key drivers. We have started two platforms –Edutech for engineering e-learning and Sufin that will help small and medium businesses in supply chain and finance management. We hope to launch Eductech by March and Sufin by September. These are going to be new revenue streams as a part of our focus on services business.
L&T’s defense, shipbuilding and power business continue to be laggards; how are you dealing with that?
Defense has done well in whatever they are doing right now, the orders won’t come every quarter. It has not grown in size but that’s the nature of the industry right now but it’s a good business to have.
Public sector used to get nominated for shipbuilding projects and made profits that help them subsidize some of the new bids they put in. They still have a stronghold on defense shipbuilding. We have won some orders, our work is appreciated and now we need some luck to win a big shipbuilding order.
We have applied our mind and realised coal fired power projects do not have a great future. As such we have sufficient orders right now, but we have been seriously thinking what to do because both our units, for turbine generator and boiler, are joint ventures with Mitsubishi.
The government is divesting in many PSUs, including BEML. Would you be interested in acquisitions?
My mind is only on services. Much of our investment will go to the services side. If you ask me specifically, whether I would be interested in BEML, the answer is no.
L&T’s 5-year strategic plan ‘Mission Lakshya’ ends in May; how much did you manage to achieve the set targets? The work on the next strategic plan was suspended last year due to the pandemic. Any update on that?
Last year was challenging but I think we have achieved 80% of what we thought we should do. Some things went very well, some didn’t go well. EPC projects and services did well. The defense, power and buildings businesses didn’t go very well. We are a little worried about our buildings business, which was doing very well earlier, but with more companies going for work from home we will need to re-calibrate the strategy. It’s still a profitable business. Hydrocarbon business has done very well but with crude prices being where they are and India not finding any new oil and gas we need to plan for the future. In the road business we are only present on EPC while projects that are coming up are under BOT and HAM and we are not present there so we will shift resources to other businesses.
We will start working on the next strategic plan in April-May and wrap it up by October so that we can complete it by 2026.
The government took some measures to ease liquidity in the sector. What more are you expecting from the budget?
Employment generation is one of the key issues facing us right now; we need to create employment. Only by creating projects can we create big employment opportunities. Maybe certain norms need to be given a go-by for some time to push projects on the ground irrespective of fiscal deficit to create employment. Financing from multilateral funding agencies will also push projects. All this is on the government’s mind and I think there is intent to do it. Private sector investment is still down but I expect some development in the steel and cement industry and some big ticket investments will be announced.
