L&T restructuring plan to be implemented next year

McKinsey, Bain appointed as consultants.

Engineering and construction giant Larsen and Toubro (L&T) will initiate its third round of major business restructuring in 2010 and has appointed consultants McKinsey and Bain to guide it, as also in the succession plan, with chairman A M Naik retiring in September 2012.

Since 2000, L&T has implemented two five-year plans to reposition the company, which was heavily into engineering, procurement and construction segments, with a large exposure to commodity businesses such as cement and ready-mix concrete, to a more focussed, value-added engineering company.

“We hired McKinsey and Bain for preparing the blueprint of restructuring. The third five-year plan of the company will be executed from 2010 to 2015. The consultants are working with 50-60 people from each of our 15 businesses to draw the blueprint on where we want to be. Not only in terms of volume but also on the character of the company,” A M Naik told Business Standard.

On his retirement plan, Naik said: “I will retire in September 2012. I badly need to take physical rest. The board will decide the successor. Till my death, I will involve with L&T, because I am so emotionally attached to it. In my every breath, there will be L&T, even if I am physically in or out.”

Before retirement, Naik aims to groom the leadership team, with a priority on a clear transition. “We will have a short-term problem, as the old timers are retiring together. The new generation will take some time to adjust. In the next three-four years, the interim team will lead the company,” Naik explained.

The engineering major, which has 12 operating companies and three subsidiaries, will revise the status of each of the companies, depending on the financial performance. It has fixed about Rs 5,000 crore as the threshold for identifying size. A company needs to have a certain size and strength for being called a “L&T-promoted company”, said Naik.

The company is still keen on listing L&T Finance and L&T Infotech, which got delayed because of the market slump. Naik said these companies will be listed first, in two to three years. Further listings will be decided on the financial health of the operating companies. We don’t want the premium conglomerate to degenerate into several companies and struggles, said Naik. “Whether 12 operating companies will remain in future or shrink to eight will be decided on the performance. We will also consider exiting from non-performing businesses. After the third round of restructuring, some may lose the operating company status and some may gain it,” said Naik.

The operating companies are currently run by executive vice presidents and their positions will be upgraded to senior VPs during the third five-year plan period, depending on the performance. At present, former ABB India chief Ravi Utpal is the only chief executive and MD in the group companies.

Boston Consulting Group had devised the first plan. As per the plan, L&T divested its cement business in favour of the Aditya Birla Group. Recently, L&T also divested its ready-mix concrete business in favour of Lafarge SA. “The second five-year plan gets over by March 31, 2010. As per the plan, our target was to reach a business volume of Rs 35,000 crore annually. We have already completed Rs 38,000 crore last year and expected to cross Rs 42,000 crore this year. Thus, we achieved 15-20 per cent more than the target,” said Naik.

L&T could have crossed Rs 45,000 last year itself if there was no downturn and the elections, which delayed the government’s project awarding for six months, said Naik.