So India is where L&T believes its biggest opportunity still lies. For the quarter ending March 31, the company witnessed a 90% growth in order inflow and 28% growth in sales, driven by its power and construction businesses. L&T?s order book has crossed the Rs 1 lakh crore-mark.
?I would not take last quarter?s increase in order intake as a trend of what is going to happen in the future as most projects gets bunched up, especially in the last quarter of the (financial) year. We expect next year to end with order book around Rs 1.25 lakh crore,? says AM Naik, chairman & managing director, L&T.
Incidentally, outside of the public sector like Indian Oil and owner-managed companies like Reliance Industries, Naik leads the country?s biggest firm run by professional managers.
With India punching at over 8% GDP this fiscal, and its concomitant need for huge infrastructure development, growth is robust across the company?s key businesses in constructing roads, ports, airports, factories, power plants, bridges, turbines, rigs et al. But surely, even for India?s biggest engineering & construction company, five dozen odd businesses across 18 different companies must be one too many?
?Every third year, we review what?s core. We have 65 businesses and we can?t remain in all these, and we have to sell the small ones.? As an illustration, Naik says that 7-8 years ago, L&T?s bread-and-butter construction business had a PBIT of just 3.5-4%. ?(Back then) I increased the minimum (project size) threshold to Rs 25-crore, which shocked them (the division) initially. In the second year, I increased it to Rs 50 crore and Rs 100 crore in the third year. Then suddenly, I jacked it to Rs 250 crore and now it?s Rs 500 crore,? he says. Naik?s message to his rank and file is simple: anything small has no value, and if its identified as peripheral during its three-yearly appraisals, the company will either ?grow (the business) to sell? or ?shrink to grow (in other core areas).? That explains why the company sold off cement, ready-made concrete, food processing, tractors, petrol pump machinery et al in the last decade or so.
Though Naik says ?there is not much non-core left now,? there is still some that the company may look at selling, but ?just what I cannot tell because this will have implications on employees? morale.?
Naik says the company is now in the midst of unlocking value of businesses it had seeded a decade or so back, like L&T Finance which he says will be spun-off by the end of this fiscal. “We will still own 80-90%, but my philosophy is to throw them (into competitive waters) and let them swim and excel. If they shrink in the process, which I doubt will happen, too bad, but I will not to over protective.?
Naik is more circumspect when its comes to L&T Infotech, which last year in the midst of Satyam Computers buyout race, which it eventually lost to Mahindra & Mahindra, looked like breaking into the big boys club of Indian IT led by TCS, Infosys, Wipro and HCL.
?I started it (L&T Infotech) because we were losing engineers to IT companies in late 1980s right till 2000. IT still has unlimited opportunities and I still have lot of reasons to keep it, (one) because I still keep losing people. This year, our IT company will grow 20-25% after a period of flat growth.? Be that as it may, but how does Infotech fit into Naik either ?grow to sell? or ?shrink to grow? business philosophy? Is he still looking at big-bang acquisitions to scale the IT business? What for instance on market rumours that L&T may be looking at buying Patni Computers? Though Naik refuses to get drawn into any specifics here, he says that the big boys (IT) game starts at $3 billion, so anything below that doesn’t really help it break into that elite club. ?We will continue to look for a Satyam kind of opportunity. Some day, we will unlock the value of the IT company too, maybe later part of 2011-12.”
Power, which currently contributes a little over a fourth of L&T’s sales currently, is clearly a big driver for growth. So much so that its subsidiary here, L&T Power, is even getting into power generation and has announced setting up around 7,000 mw between thermal and hydro in the next five years or so. It is building a 1,320-mw thermal plant at Rajpura, Punjab, and one more of 1,600 MW in Chattisgarh?is in the offing.
But generation is a different business altogether, and how does it fit into L&T?s core? Naik says he believes that there is a value creation potential for L&T in this space. For one, it dramatically increases L&T?s capability to build turnkey power plants, and also takes care of over Rs 7,000-8,000 crore order intake for the turbines and boilers it builds. ?Some day, India will merge and consolidate into no more than 6-8 power companies, and if L&T is not one of those eight companies I will (still) get lot of value out of it. This is a decision to be taken as we progress. For now, we have a modest target. It is also possible that I might sell a minority stake, get lot of value and reinvest.?
Though Naik still has two more years to superannuation, there is huge interest on just who ?insider or outsider ? will succeed him. Will the position of CMD be split to CEO and chairman? Naik refuses to even discuss it, only saying that the leadership development programme by McKinsey and Bain is on.
Though there are concerns on the leadership deficit at L&T, something that made the company break tradition and hire two key lieutenants from outside (Ravi Uppal for L&T Power and Sudip Banerjee for L&T Infotech), given Naik’s can-do, dogged approach to life and business?something that has helped him bear personal tragedies and equally, ward off takeover attempts on L&T by none less than Reliance Industries and Aditya Birla Group in the past?he would be able to pull even this one smoothly, though at the moment he is keeping all the cards close to his chest. It is learnt that the company’s board will announce a successor from the three-four odd shortlisted candidates only in March 2012, just six months before Naik demits office.
Naik has been vocal in his opposition to Chinese power equipment imports, citing non-level playing field. ?With the Chinese currency becoming (more) flexible, I hope people (Indian businessmen and policymakers alike) will see light of the day and that will benefit Indian companies.? There goes Naik again on the need, for the country’s sake, for businesses to get just a little more patriotic.
