Capital goods major Larsen & Toubro (L&T) may face rough weather, as most in India Inc, but Chairman A M Naik is confident about the road ahead. In an interview with Katya B Naidu and Arijit Barman, he talks about revisiting the strategic plan to ride out the storm. Edited excerpts:
How does the order book position look like in 2012?
Currently, the pipeline is not very good. It depends on how fast the government can move after the state elections. I hope things would stabilise after that. In the second half of the next year, things would begin to improve for the capital goods industry. We have challenging times ahead, but have a plan to come back to the trajectory. All groups are working on alternatives, and we are brainstorming internally. Things might not be as bad as people think.
What gives you this hope?
It’s true no new assets are being created and that effect may be seen a year and a-half later. A year before, I had predicted this year's economic growth would be seven per cent. But nobody believed since the projections then were at 9, 8.5 per cent, etc. Next year, too, I have seen people talking about 8-8.5 per cent growth. I do not know on what basis or on what fundamentals they are making these projections. I can only say, we have hope.
Did you think things would be as bad as it is now?
I am not a person who over-promises, and yet I have gone wrong for the first time in many years. Did we expect this unprecedented global meltdown and European crisis? No, we did not. Did we see a political crisis of this nature? No.
Yet, I say the market should see the positive side. Is the order book of L&T dropping? Yes, it is. But it’s not that bad. Growth is still happening albeit at a slower pace. It is not as if the Rs 1,30,000 crore order book will come down to Rs 1,20,000 crore. It will go up to Rs 1,45,000 crore.
In some high-margin sectors like power and hydrocarbons, order shrinkage is maximum. Analysts are worried about margins.
Analysts may have that view, but all the margins are between nine and 12 per cent. But if you look at the ECC (engineering, construction and contracts) division, which is half of L&T, their average margin was 10.5 per cent and we are pushing it further by bringing costs down and taking it to 11 per cent. It’s a mindset that other businesses of L&T do not have margin. If you look at switchgear, even in the worst of times, margins were at 12 per cent. If you look at the machinery division, it was 11-12 per cent.
When will orders for the energy sector revive?
In the first half of next year, we will see reasonable prospects for hydrocarbons since gas is now allocated to urea plants. L&T is very strong in the fertiliser field. We are targeting at least two of those. That's a new chapter we would tap. ONGC is planning to come up with nearly nine to 10 projects next year like pipelines, platforms and so on. One of these is a very big order of Rs 5,000 crore. That might come up towards the end and slip to 2012-13. We hope to get a part of these orders. Added to these are some private sector investment in petrochemicals and gassification. We have good prospects there as well. In the Gulf, too, we have pre-qualified for some projects, but they will happen in the second half.
What about orders from the power sector?
Power is in a very bad situation and I have absolutely no comments to make, till all the government policies on fuel, land and power purchase agreements, are known. There are no international prospects for coal-based power plants. Nobody uses coal except India and China. We are working on how to utilise that capacity. We have established a centre in every business unit to make sure all emergency and urgent actions are taken to handle situations, and see what we can do. Someone can come up with more innovative ideas and we are always open.
Are you still bothered by the inflow of Chinese equipment into India?
There are no orders as such, neither for us nor the Chinese. I have been talking about this for a long time. Each power plant creates 25,000 jobs and we have given away more than 10 million jobs by giving orders to the Chinese companies. And, then there is talk about supporting them with subsidies!
What about your plans to set up power projects (as a developer)? You have bagged the 1,400 Mw Rajoura plant in Punjab. But we have not seen any additions to the portfolio.
Our own plans are in as good or bad a shape as others. I do have a desire to do more. The Punjab plant is under construction. Let us digest it first. Other states are talking to us, but there are worries about coal, land or water.
There are a lot of unviable bids for public private partnership projects, especially in the highways sector. Will your portfolio building be slow because of that?
We bid for 15 road projects. We won one because we did not bid too aggressively. But banks are becoming cautious, and we think this aggressive bidding cannot last long. When that happens, which may start happening next year or in 2013-14, there will still be roads to be built. So, why should I bid so aggressively? I am waiting in the line, and when I get a chance, will bid.
When L&T bid for the Hyderabad metro, many felt it was a hugely aggressive bid.
That's a two-and-a-half year old story. We bid aggressively for Hyderabad metro for sure, and are de-risking it. Over time, you will see how Hyderabad metro will begin to show improved performance than what many people think it is. None of our recent bids have been that aggressive.
