Will take up to a year before pvt sector opens purse to capex: L&T chief

The firm's MD & CEO, S N Subrahmanyan, says L&T has reached pre-covid levels and aims to become debt free

Despite a slowing economy due to the coronavirus pandemic, Larsen & Toubro, India’s biggest construction company, met analysts’ expectations with its December quarter results. In an interview with Dev Chatterjee and Aditi Divekar, L&T’s MD & CEO, S N Subrahmanyan said the company has already reached pre-Covid level in December quarter and will show a positive growth in the March quarter. Excerpts:

Q) The Indian economy is on the recovery mode after the Corona lockdown. Was L&T impacted by the slowing economy in the December quarter?

A)  L&T has, in fact, done quite well despite the Corona lockdown. Our strong revenue for the quarter indicates return to pre-Covid levels and we are expecting a sharp pick-up in the ongoing quarter in project finalisations due to pent-up project proposals which are pending in the power transmission & distribution, water, metro rail, roads & elevated corridors. Though we don't give any guidance, we certainly expect to finish the current quarter with positive growth in sales.

Our order book – mainly from the government sector -- is at record high with the infrastructure segment contributing to order book signifying higher project finalisation by the clients in that segment. The private sector investment in new projects, however, is still some time away.  

Q) When, according to you, is private capex expected to pick up and why?

A) So I do see the private sector coming back strongly. There could be offshoots in cement and steel capacities and may be retail and certain electronic segments. But being cautious out here, I think it will take another six months to one year before the private sector purse opening will take place. So, to a large extent we (L&T) will continue to depend on India, Middle East, Africa and predominantly the public sector, government sector for the time being. 

Q) What is your consolidated net debt as on Dec 31 and your debt reduction strategy?

A) The majority of our consolidated debt of about Rs 1.70 trillion is with L&T Finance (about Rs 90,000 crore) and after taking that debt out, the actual debt on L&T's books is about Rs 70,000 crore. Within this, our developmental projects—L&T IDPL and Hyderabad Metro—have about Rs 35,000 crore debt. We are planning to sell our entire stake in L&T IDPL and move out of the road construction business completely. We have already sold a large stake in IDPL.  

A large part of our debt is also due to the Hyderabad metro project. The project was commissioned  just before the pandemic and was getting around 4 lakh riders a day. The project was shut for 5 months due to Corona and has now restarted at around a lakh riders a day. Once the project becomes EBITDA (earnings before interest, taxes, depreciation, and amortization)  positive, we will sell our entire stake. It will take another two years as we need at least 5 lakh a day ridership to become EBITDA positive. Once we sell these projects, we are targeting to become a debt free company.So, the actual debt of L&T is just about Rs 30,000-35,000 crore and some of the debt that we have on our books is for reasons of security, cautiousness because in case if there are further stoppages etc due to bout of Carona, we need to have cash in hand. 

Q) The Cement and steel prices have been spiraling. Do you see it impact L&T’s infrastructure order flow. Will it not lead to project cost escalation for the company? 

A) I don’t think that the increase in steel and cement prices will cause projects to go down. The intensity of projects will continue, as there is a conscious feeling that we need to have them to create jobs. So what will happen, in pre-qualification meetings, there will be a trend to take care of price increases, either we can go for better escalation clauses or hedging on prices and some other options. So there will be more emphasis on risk management and price increases thereon but I do not see intensity of projects coming down. We will take adequate measures within the organization by raising such issues in pre qualification meetings and other forums to protect ourselves. At the same time, we strongly feel there is no reason for prices of steel and cement to have gone up. Take for example, the steel price has gone up to Rs 65 per kg from Rs 36 per kg a month ago, similarly cement has gone to Rs 400 per bag from Rs 265 per bag, and there is no reason for it. There has to be moderation in that because escalation clauses alone cannot solve this problem. The Indian government is aware of this problem.

Q) What is the progress of your three marquee projects in Mumbai – the Navi Mumbai sea link, coastal road and metro project. Were they impacted by the pandemic? 

A) The work on all the three projects are going on full swing. Though our work slowed down due to the Corona lockdown by 2-3 months, as we mobilise our people and material to the full strength, we are expecting to make up for lost time. The tunneling work in the coastal road project from the Marine Drive side has already begun. The tunneling work for the Metro is over and now we are working on the stations. The girders on Navi Mumbai sea link project have already been placed from Mumbai side and from Navi Mumbai side too. I do not see any delay in these three projects.