List hydrocarbon business, sell non-core in 3 years: L&T's A M Naik

Naik speaks about L&T, the Indian economy, and his post-retirement plans in an interview

After working for five decades at Larsen & Toubro (L&T), Group Executive Chairman A M Naik will finally hang up his boots and will become non-executive chairman. Naik, who joined the firm as an engineer, rose to become L&T’s most aggressive leader and made sure that its employees own a 20 per cent stake in the company as of today from zero. When Naik became CEO in 1999, the company had revenue of Rs 5,000 crore, which stood at Rs 1.2 lakh crore at the group level. The group market capitalisation in the period has gone from Rs 2,000 crore to Rs 2.2 lakh crore. In an interview to Dev Chatterjee, Vishal Chhabria and Niraj Bhatt, Naik talks about his “first love”, L&T, the Indian economy, and his post-retirement plans. Edited excerpts:

The Indian economy has slowed down in the past few quarters. Do you see it improving soon?

The economy is indeed slowing down, with GDP (gross domestic product) growing at only 5.7 per cent in the June quarter. Private sector companies are grappling with their debt problem with bad loans of Rs 6.5 lakh crore, which is preventing fresh investments. At the same time, the government is busy spending on the social sector as it is in election mode. With elections in large states coming up and culminating with the 2019 general elections, I do not see the economy reviving for the next two years. 

The focus of the government is on winning elections rather than on governance, which is affecting the economy. Most of the big projects like the high-speed train, the Trans Harbour Sea Link in Mumbai between Sewri and Navi Mumbai, or the Ganga bridge in Bihar are financed by soft loans from the Japanese government or multilateral agencies. The private infrastructure sector is not in a good health as over 40-50 road projects and power projects of 20,000 Mw of electricity including ours are up for sale. Foreign investors are not necessarily rushing to India, particularly in the infrastructure sector. 

Do you think an economic stimulus package would work to kickstart the economy?

I don’t know what stimulus they will do. The private sector has to repay Rs 6.5 lakh crore of loans. Those who are able to repay have already finished their investment plans. After spending on the social sector, the government will not have much money. 

Have demonetisation and the introduction of the goods and services tax (GST) had an impact? When do you see growth coming back to 7 per cent plus?

It will take another two years for growth to come back to those levels. By then, the private sector would have sorted out its debt problem, oil prices would rebound, and the general elections will be over. Both demonetisation and the GST have impacted growth in the short-term, but this was necessary in the long run. 

When will growth pick up for L&T?

Until a few years ago, we were growing at 20 plus per cent, which has now reduced to 8-10 per cent. While domestic capex and the Middle East have slowed down, we are now focusing on Africa, South East Asia and Central Asia, but they will only bring only 3-4 per cent of revenue. Hopefully, in 2019, things will start improving. I expect Rs 50,000 to Rs 70,000 crore orders from the defence sector over the next two-three years, which is about Rs 20,000 crore annually. From 2019-20 onwards, I expect India to do well, and obviously L&T to do well. 

Is L&T looking at acquisitions?

If at all, we will be interested in defence and infrastructure areas. But, defence is in the hands of the government. So, it will come through the disinvestment route. We have made some investments in information technology, but they are all small at $20-50 million. We have the money and are ready to make investments to the tune of Rs 5,000-Rs 10,000 crore.

What are L&T’s plans to restructure its businesses?
 

Our principle is clear — any business with revenue below Rs 1,000 crore is small and we should exit as long as it is not core business. We will sell eight-nine businesses, and the restructuring could impact revenue by Rs 8,000 crore. 

We have also started new businesses, which are future growth businesses such as Smart World which we started four years back. It is now a Rs 1,500 crore in revenue and we hope it will become $1 billion in revenue. Such businesses along with defence, new technology, etc, will make up for any loss of revenues due to restructuring.

Are you looking at listing of your other businesses?

We have already listed our two IT businesses and also finance. We plan to list our hydrocarbons business after two-three years. Right now, the Middle East situation is bad. Once we know the future of oil prices and therefore the likely development cycle, we will do it. 

What are your plans after retirement this month-end? 

With S N Subrahmanyan (SNS) as CEO and MD, the company is in good hands. I will continue to be the chairman of L&T, though not in an executive capacity, and come to the office two-three days a week for a few hours. I will complete the restructuring of non-core businesses, set up a mega project and remove the pain points in the real estate business. I have begun mentoring the next two generations of leadership — one group in the 45-55 age group and the other in the 35-45 age group. 

Besides that, I will look after the social projects of the three charitable trusts that belong to me and the two L&T employee foundations, along with L&T’s corporate social responsibility. I also plan to take more holidays with my family as they have always complained that I have not given them enough time.