Fired Up

Written by MG Arun | Updated: Jan 31 2008, 07:15am hrs
Anil Manubhai Naik had his finger on the pulse of his companys stock even as he began reminiscing about his companys past and spelling out his future plans in his baritone voice. The markets were at their volatile best, throwing investors in frenzy, but Naik was as bullish as ever. The 66-year-old CMD of engineering and construction (E&C) giant Larsen & Toubro (L&T), who has spent 43 years with the company, read out from a chit. The stock is now at Rs 3,748 (Bombay Stock Exchange, as on Jan 23). We have moved up 30 times in the last four years, while the index (Sensex) has gone up six times. Is there any other company operating in a segment as ours that has done this he thunders, and continues without waiting for an answer.

The defining moment for Naiks company came in 1999, when he took over as the CEO and MD. He charted out a vision plan for the company, and the creation of six divisions, including cement. But the transition from a sleeping giant to a nimble footed, agile E&C major happened in 2000-2005, when the company hired McKinsey and BCG to help it restructure its portfolio. We had already prepared the Project Blue Chip, as we call it, a strategic plan upto 2005, and had a core group to work on it, reminisces Naik.

The company had a vision plan ready by then, which had three core elements. One, we wanted to be an Indian MNC. Two, we wanted to create shareholder value for the company, since it had lost sight of the market (its share prices were loitering around Rs 140-160), says Naik. The third feature was that employees would be prime movers of the company.

The company was in for turbulent times, with Kumar Mangalam Birlas Grasim Industries making an open offer for the company in 2002. L&T withstood this, but subsequently, sold off its cement business to Grasim.

Following the demerger, Naik got down to serious business. A favourable policy atmosphere, massive capex programmes and huge investment in domestic infrastructure, began to offer a significant opportunity for E&C companies. The company, which had a -350 economic value add (EVA), posted a +50 EVA in two years after the demerger. Its credit rating came back to AAA from AA+. For 20 years, L&T could not give a bonus due to the huge investments needed in cement. But that too changed, says Naik. In 2006, the company announced a 1:1 bonus issue.

Ask JP Nayak, another L&T veteran, who heads the companys machinery and industrial products division, on the demerger, Cement is a commodity and we did not want to be in the commodity business. Once we demerged cement, our entire business operations became asset light. This was a watershed event in our history. The demerger also enabled L&T to direct its managerial talent to its core business of engineering and construction, he says.

The present environment in India could not be more conducive for the company, with huge capex plans in the domestic arena. Says a Lehman Brothers research report, Over the next five years, we expect industrial capex to be 2.6x the investment seen in the past five years. Similarly, in the infrastructure space, investment in the Indian governments XI plan period (FY08-12) is expected to be around 2.45x of the investment in the X plan (FY03-07).... L&T, which is a leading E&C firm in India, is a strong player in our view.

The report goes on to add that L&T has a dominant position in the oil and gas and metal segments, with market shares in excess of 30%. Both these segments are expected to witness strong growth in capex. Similarly, in the infrastructure segment, L&T holds leadership positions in airports and power.

Even as the external environment was getting more conducive, Naik was grappling with certain internal issues in the early years of the present decade. The human resources management in the company had degenerated in a socialistic manner, he says. There were no schemes that give that extra opportunity and incentive to those employees who were brighter and smarter. It was then that Naik spelt out his vision. I said L&T is a vehicle on four wheels. The front two are development and training and HR management. In the rear, there is technology independence, so that I am not subservient to foreigners, and improving operational effectiveness and productivity with IT as a backbone. Naik is also quick to clarify that IT here referred to the internal use of IT systems for efficiency, and not IT as a business. Naik has no qualms accepting that he launched the IT business, L&T Infotech, to hold on to skilled engineers who were leaving the company in search of lucrative careers elsewhere. We lost 9,000 people in nineties and so we launched the IT company to stem the flow. We are happy that it is a $400-million company today, he says.

According to JP Nayak, L&T has also put in place some clear systems and procedures and a measurable performance monitor. People work best, when they try to work for something larger. Here, we believe we are working to build the nation. Second, we try to work on the cutting edge of technology. Third, a lot of freedom is given to employees to take decisions, even at the lowest levels. They are encouraged to take initiatives, as far as they are accountable for the decisions they take, says he.

Retaining talent is a top priority. Says MV Kotwal, who heads the heavy engineering division, We look at our compensation structure to the extent we can. The other is training to enable people to do things more effectively. There is also the employee engagement initiative. RN Mukhija, president of the electrical and electronics division, adds, We have no issues in attracting talent. But to maintain that we are working on close interactions with the employees, giving the necessary freedom and facilitating movement across different departments. This is also important because the company is working in high technology space.

At another plane, it also ensures that the company trims down competition. However, Chinese have even bagged some orders here, competing with L&T. According to Kotwal, Chinese have an unfair advantage both in their suppressed currency as well as in their low capital costs. But we are not worried. International process houses do not accept Chinese raw material due to quality issues.

With its entry into new markets like the Middle East and China, L&T is now planning an all out initiative to build its brand image, improve technology skills and create a highly trained and skilled workforce to take on competition.

Says K Venkataramanan, the company's president, engineering & construction projects, We are positioning ourselves to compete not only in India, but also in the Middle and the Far East. We are giving importance to capability development programmes as part of our internationalisation plans. We are developing global expats through GLOPAT.

L&T has embarked on major restructuring now, which will see its six divisions transformed into around 12 verticals over the next 18 months. Says Nayak, We understood that with the present structure, we may not get all the synergies that are required. We needed to present a unified front, and decided to take a fresh look at the business composition. The idea is to have focussed entities.

Shipbuilding represents a major new strategic initiative for the company, and it is planning to set up two large shipyards on the west and east coasts of India. It has decided to focus on the niche, high-end technology segment in commercial shipbuilding where competition is low, says Kotwal. The company is planning a total investment of Rs 2,000 crore in the shipbuilding project. In segments including fertilisers, the company makes only the absolutely high-end equipment. Adds he, We are the only company now in the private sector to have capabilities from concept to commissioning. We can design and build our own systems and commission them.

L&T is also betting big on defence. In 2006, the private sector had marked its first major foray into defence production in India, when L&T and advanced material division of Tata Power bagged orders worth Rs 200 crore for producing the indigenously developed multi-barrel rocket launcher Pinaka for the Indian army. But the government has been delaying the announcement of the Raksha Udyog Ratnas. Till then, the private sector cannot build complete platforms, Kotwal adds.

With a boom in infrastructure and its foray into new markets and new businesses, the company is poised for a compounded growth of minimum 30%, says Naik. According to Lehman Brothers, L&T's order book has shown robust growth even off a large base. We expect the order book to continue to record a CAGR of 40% over FY07-10. We project a revenue CAGR of 36% over FY07-10.

Naik is already planning for the next ten years. Our target was to reach Rs 25,000 crore in revenues. We have crossed it. Our new target, by March end, is to cross Rs 30,000 crore ($6.5 billion). We have also started on our plans for 2010-2015, he adds.

Asked about grooming leaders to take on the challenges ahead, Naik says, During divisional board meetings, I now insist that only people below 50 should make the presentations. The company wants to encourage new leaders, but worldwide, all large companies are now in the process of increasing their retirement age due to talent shortage. These things will remain a challenge, but well have to face it, says a confident Naik, as he leaves the room for yet another of his presentations.