Naik sees L&T sales at R1 lakh cr in 5 yrs

Written by MG Arun | Baiju Kalesh | Mumbai | Updated: Feb 6 2012, 05:56am hrs
Indias largest engineering and construction company Larsen & Toubro (L&T) is planning to double its sales to R1 lakh crore by 2017 by raising the share of its overseas revenue to a fourth, consolidating its Indian businesses, benchmarking its larger business to international peers and exiting businesses under R500 crore, AM Naik, its chairman and managing director said. However, succession planning and heavy dependence on outside talent remain the companys biggest challenge, Naik told FE in an interview on Friday.

In the past five years under Naik, 69, L&Ts sales have more than doubled to R52,000 crore from R26,000 crore. It has entered new business in ship-building, set up factories to make turbines and boilers for power producers and made L&T Finance an independent company (IC).

The chairman, who took over reins in 1999, has a two-fold strategy to achieve his fresh target for the next five years. One, it needs to simplify L&T into larger businesses, make ICs aim two billion dollar sales and strategic business units, a billion in sales to get an IC status.

L&T Infotech, with revenue of $825 million and growing at roughly 25%, will come under the IC bracket after it reaches the billion-dollar revenue mark next year. Engineering Services is another candidate which comes in this bracket. The thumb rule within L&T is that businesses with less than R500 crore will be unacceptable. They go out for sale, says Naik.

The second strategy is to raise overseas revenues to 25% from 17%, a Herculean task as it needs to orient its talent in the next five years to become multinational leaders. We need to tap new territories, newer ways of doing business, find the appropriate leadership and get more local people, since Indians from here will take much longer to understand how business is done in another country, says Naik.

Naik, after a decade and a half, now takes 12 days holiday a year for his grandchildren.

The new push to overseas projects arises out of a slowing Indian economy, high interest rates and Indian companies inability to raise cash to complete projects. Nearly four-fifth of orders came from India and half of them are to build infrastructure projects.

A global slowdown might present a risk to order inflow for L&T, wrote Saion Mukherjee, an analyst at Nomura Equity Research in a report released on October 24, 2011. In the fiscal first half between April and September, exports accounted for 19% of the order intake. On the other hand, a global slowdown might result in a fall in interest rates and commodity prices, which would positively impact earnings, Mukherjee said.

The push to power, unfortunately, is dogged by policy issues and fuel linkages, coupled with cheaper imports from China.

Total dependence on Indian economy is detrimental. We need to have diversity in geographies, but in a focused manner to counter the slowdown, says Naik. We did come up with a plan in 2010, which has gone haywire because of the environment now, says Naik. So, we are doing a mid-term review now what we need to do, what are the counter-measures, and whether we should go more aggressively on international growth. Two global consultants, McKinsey and Bain & Company are helping the engineering giant to review the businesses.

L&T is not new to such rejigs. Soon after he took over in 1999, Naik, with help from consultant Boston Consulting Group, restructured its different business, gave ownership to his employees after it hived off cement and sold it off to the Aditya Birla Group.

In one shot, L&T could pare down its debt to build cement plants and could arrest attrition levels by giving stock option to employees. Now, L&T Employees Trust owns roughly 17% of the company, a dream Naik fulfilled. Naik joined the company in 1965 as a junior engineer to rise within the ranks.

The chairman, who is slated to retire this year, is driving the initiative by opening overseas offices, forming joint ventures with local companies or alliances to jointly bid for projects. Doing business overseas is tough and challenging now as host countries prefer local companies.

Every other country has put a ring protecting their domestic companies, says Naik. Saudi Arabia has declared that it will give projects up to $1 billion only to local companies. So, L&T has tied up with a local company there to qualify.

L&T has created a new division christened International Marketing Network focused on overseas business. It has now opened offices in Moscow, Kuala Lumpur, Indonesia, Milan, Paris, London, Houston, Turkey and will soon open in Perth and Brazil.

Exposure to multiple end markets should enable L&T to capture changing ordering trends, wrote Venugopal Garre, an analyst at Barclays Capital Equity Research in a report released on December 7, 2011.

In Perth, the IMN will explore opportunities in upstream, platforms and LNG, while Brazil office would look for avenues in heavy engineering equipment and upstream.

In some countries, the company has sewed up joint ventures for different business. In Oman, L&T have four joint ventures two for heavy engineering, one for construction, and the other for offshore.

In the United Arab Emirates, the company runs three ventures with locals, Saudi Arabia four, and two each in Kuwait and Qatar. Some ventures have started to click. In Abu Dhabi, L&T had won $6-billion project to build an airport partnering with local and international companies.

Challenges ahead: The biggest challenge for the company is succession planning and heavy dependence on outside talent. Naik, according to company retirement policy, will have to retire this year. L&T, majority owned by government-owned financial institutions, needs to find a successor soon.

The biggest difficulty is succession planning, and huge dependence on outside talent, says Naik. There are very few overseas Indians who are into our line of manufacturing and projects. They are settled there or do not have Indian experience.

Naik had overcome many challenges in the past. L&T started software business to ring-fence engineers poached by rival software companies. That company will bring revenues of Rs 5,000 crore this year.

With challenges both in India and overseas, the board may have to look to Naik to steer the ship for few more years.