MNREGA jobs are short-term, only lasting solution is projects: L&T chief

In a Q&A, S N Subrahmanyan, MD and CEO of the engineering group says he expects govt and public sector capex to be lower by Rs 3-4 trillion this year

Engineering congolomerate Larsen & Tourbo (L&T) expects the current financial year to be very tough as the country gets set to rebuild its economy. S N Subrahmanyan, managing director and chief executiver officer (CEO), L&T, expects government and public sector capital expenditure to be lower by Rs 3-4 trillion this year. In an interview with Amritha Pillay, he expects more orders in the later part of the year as the government needs to announce projects to create long-term employment. Excerpts:

1. When do you see economic activity stabilising for your company and at the macroeconomic level? 

Of our current order backlog in India, 20 per cent is from the private sector and the remaining 80 per cent is divided between public sector, state and central government. Of this 35-40 per cent is multilateral funded. One can always ask with the pandemic and the strain on state and central government budgets, how will it go forward? The various measures, specifically taken by the central government are phenomenal. They have put in various forms of allocation to ease out the liquidity in the market. For instance, the Rs 90,000 crore of funding to discoms and allowing states to borrow 2 per cent more are two big steps. 

2. Are you expecting a change in capital expenditure spends from the states, centre and public sector?

Based on our internal calculation, the capex spending of various state and central governments is expected to come down this year by Rs 3-4 trillion. For 2019-20, public sector, central and state government spends towards capital expenditure was Rs 15.1 trillion, for 1920-21, internally, we expect that to come down to Rs 11.3 trillion, which will in turn have an impact on ordering. We will need to get more aggressive to keep up with last year’s levels or we look for other opportunities in Africa and the Far East to slightly compensate.  

3. You have refrained from giving guidance so far but what is the estimate of size and nature of orders we may see this year? 

We expect to book orders and convert certain bids (where company is eligible but contracts not yet placed) to contracts in verticals like heavy engineering, heavy civil, water, power transmission. In other segments, like building, transportation, hydrocarbon, prospects are not similar to what they were in January-February when we were budgeting.

Both the central and state governments are clear they wish to kick start the economy. The only way to do so is to announce projects, tender it out, and ask contractors to create jobs. Employment created through MNREGA is a short-term solution. The only way to create long-term employment is to announce projects and employ people. Therefore, we will see more projects coming out and we should be a beneficiary of it. At the moment, it will be a little lukewarm.

4. Will private capital expenditure take longer?

We will not see significant private capital expenditure for the next one or two years. The private sector’s balance sheets are stretched. Two months of operations are lost and there is a revenue loss. It will take time.

5. You have said the company has lost billing in the range of Rs 15,000-17,000 crore so far due to Covid-19 and the lockdown. Is the worst behind you?

For us, we cannot get too much work done unless we are on the site. Even during April and May, we have billed but it is nowhere near what we used to bill. However, what we need to bill is still available in the order backlog. 

Assuming by June-July, we are able to get back 230,000 labourers to our site, we may need to put in double shifts in place, we will have to find out ways to do more work with less people. Our teams at various verticals are working to see how we could get back what we have lost. I am no where making a statement that we will get back the entire billing we lost, but it is a sincere attempt to progress faster. The situation is still hazy and we do not know the final effect of the pandemic yet. 

6. How do you see the current clamour for localisation with a strong sentiment against Chinese imports in the capital goods sector? 

We are one of the few organisations that decides the selling price first and then tries to keep its cost below that and make money. Once we have a selling price, we are stuck with it for two and half years. We are not going to get single paise more from the client. Therefore, we go to the best and most efficient supply chain and at the moment it is from China. If the Make in India campaign catches up and if there are Indian manufacturers who are efficient both in terms of pricing and technology, we will look at those sources. 

7. In March you said 2019 was a tough year. Is 2020 going to be tougher yet? 

This is going to be a very tough year no doubt. Capital allocation is going to be tough and we need to rebuild an economy which was earlier chugging along in a fairly decent manner.

There is also the psychic fear around the pandemic. I hope there is a vaccine soon, until that time we will need to live with the virus; we need to get back to economic activity and be positive. 

8. What are your view on the sitmulus package announced in May under which domestic defence manufacturing is expected to get a fillip?

Defence is a permanent start-up. We have two very heavy armed nuclear power neighbours. The situation around is volatile. India should take up defence manufacturing in a more serious manner and should encourage more private participation.  I am not for opening up foreign direct investment. No foreign company is going to put an FDI of 74 per cent and give you the latest in technology, at best they are going to assemble or provide a second hand product. 

 9. With Covid-19, do you hold in to your earlier view that your service basket which is comprised of information technology (IT), real estate and finance will grow faster, as both real estate and finance may be under pressure?

I expect it to. These businesses are spread across the world and that is an advantage.  Some of the countries have flattened the (Covid-19) curve and opening up the economy. Some of the industries to which our businesses provide services, are in a bit of a trouble, for instance, transportation, hospitality, oil and gas and to some extent automobiles. I am hopeful between the second and third quarter these industry will get back. There will be a setback in the first quarter, however, by the fourth quarter things will get better and hopefully the pandemic will also subside. 

10. Does the plan to reward shareholders from Rs 14,000 crore that is expected to come from the Schneider deal on completion still hold? 

We are at an advanced stage and the deal should be completed in another two or three months. Once the cheque is in hand, we will decide what to do. Obviously, shareholders will have to be benefited, but as an organisation we will also have to think about the future and we will decide appropriately what we have to do with that money.