Capital goods major Larsen & Toubro may be facing rough weather as most in India Inc, but Chairman A M Naik is confident about the road ahead. In this interview with Katya B Naidu and Arijit Barman, Naik talks about how he is 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 all depends on how fast the government can move after the state elections I hope things will stabilise after that. In the second half of the next year, things will begin to improve for the capital goods industry. We have challenging times, but we have a plan to come back to the trajectory. All the 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 impact may come one or one-and-a-half years later. A year back, I had predicted that this year's economic growth would be seven per cent. But nobody believed me as the projections then were at 9, 8.5%, etc. Next year too, I have seen people talking about 8-8.5%. I do not know on what basis or on what fundamentals, they are making these projections. I can only say that we have hope.
Did you think things will 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 nature? No. Yet, I say that 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.
Some of your high margin sectors like power and hydrocarbons are the areas where order shrinkage is maximum. Analysts are worried about margins, as high-margin sectors are affected.
Analysts may have that view, but all the margins are between 9 and 12%. But if you look at the ECC (engineering, construction and contracts) division, which is half of L&T, their average margin is 10.5% and we are pushing it further by bringing the 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 are at 12%. If you look at machinery division, it is 11-12%.
When will orders for the energy sector revive?
In the first half of the next year, we will see reasonable prospects for hydrocarbons because gas is now allocated to the urea plants. L&T is very strong in the fertiliser field. We are targeting at least two of those. That's a new chapter which we will tap. ONGC is planning to come up with nearly nine to 10 projects next year like pipelines, platforms and so on. And one of them is a very big order of around Rs 5,000 crore. That might come up towards the end and slip to 2012-13 also. We hope to get a part of these orders. Added to that there are some private sector investment in petrochemicals and gassification. We have good prospects there as well. In the Gulf too, we have been prequalified 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 on it, 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 power plant in Punjab. But after that, 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. We have the 1,400 Mw plant in Punjab under construction. Let us digest it first. There are other state governments 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 now, 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 we 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.
