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No private project will take off at such high interest rates: A M Naik

Interview with Chairman, Larsen & Toubro

Shyamal Majumdar & Malini Bhupta  |  Mumbai 

A M Naik
A.M. Naik

This article has been modified. Please see the clarification at the end.

In the middle of this month, Anil Manibhai Naik, chairman of Larsen & Toubro (L&T), will complete 50 years at the company, a feat only a few in India Inc can boast of. Naik says he is determined to retire in 2017, following which he will write his memoirs, tentatively named V to W (Village to World). He talks about the structural changes he is bringing about at the company, as well as his succession plan. Calling for an overhaul of the public-private partnership model, Naik says while the government has articulated its vision well, the time has come for every ministry to have a monitoring cell with participation from industry so that work on the ground takes off. Edited excerpts from an interview with Shyamal Majumdar and Malini Bhupta:

The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points. Are you happy?

It’s too little, too late. For the economy to bounce back, against crawl back, you need a cut of another 50 basis points. Not only that, banks have to pass it on. If that isn’t the case, consumer demand will not return. Our infrastructure is high-cost because interest rates are as much as 12 per cent for some groups, which make projects unviable. Even L&T’s interest rate is 9.2 per cent; that has to come down to 7-7.5 per cent. Only then will other groups see their rates fall to nine per cent levels. No private sector project will take off at such high interest rates. The rate should not be more than 10 per cent.

Much was expected from this year’s Budget. Has the government done enough to revive the economy?

The steps are not adequate. Implementation will be our biggest challenge. For the past 10 years, we have talked about $1 trillion for infrastructure through five years. We need $20-25-trillion infrastructure to come in line with China. The government has articulated its macro policies and vision for the next five years; it’s time for implementation on the ground. For that, you need a very sound monitoring system. Every ministry should have a monitoring cell, with a member from two apex industry chambers. These people can give feedback to the government on what is happening on the ground.

What does the government need to do to make the public-private partnership (PPP) model a success?

Our qualifying process needs to be reassessed, as tenders do not specify what the net worth of the bidder should be for a certain project. Also, projects under the PPP model are under stress, as various parameters are not in place before a project is started. When a company with a net worth of Rs 500 crore bids for a Rs 5,000-crore project, that’s when the problem starts. To kick-start the investment cycle, the government needs to start with public sector projects because very few can invest in big projects. The rest is restructuring debt. I don’t see new projects under PPP for the next year. Let the government not announce any new tenders till all the parameters are in place. For example, land acquisition is a huge problem. Though the government is trying to address it, the Opposition thinks otherwise. The issue of high interest rates is also there.

You’ve been talking about restructuring L&T for some time. What is the progress on that?

I have restructured the company several times so that it becomes transparent and manageable. I will complete 50 years at the company on March 15 and I can say I have built it from the ground. We have sold many businesses and whatever is created is not what I inherited. The bulk of the businesses today have been created from 1999, when I took over. We have 21 verticals. We see 14 out of these in the future; seven will either be listed, go, or be merged into other verticals. This has to be done in less than two years, which is when I leave.

Your managing director retires this year. Have you found a successor?

We are already looking for a chief executive officer (CEO); it could be an insider or an outsider. We are also looking for CEOs for L&T Hydrocarbon, L&T Infotech and L&T Shipyard. We need at least a dozen CEOs. We have eight CEOs in place and we’ll have three more by September, as two from the current eight will retire.

Is your succession plan in place?

It is almost in place. My successor will have a tough task, as people will want to see a stronger person than me. I had 50 years and I was very entrepreneurial. There will be one holding company and under that structure, there will be 14 verticals, while some will be independent companies, with their own CEOs.

Are you certain you will not consider an extension?

No, I have decided. Unfortunately, I don’t have the energy.

But you could stay on at L&T in other avatars.

At this point, I am not thinking about it.

Would it make sense to split the company into separate units and list those?

That is what we will do. We have plans for L&T Infotech. In time, L&T will be 55 per cent of its size, as the holding company and the rest will be part of the overall group. All I am saying is seven will either be merged or listed, and that it is significant.

What does L&T plan to retain and what does it plan to let go?

That thinking has changed through the years. We need to identify the absolute core. We have sold 14 businesses in the past few years. What is there in L&T now is almost the core. The core keeps getting redefined every few years.

Is your plan to list L&T Infotech on track?

It will be listed in July 2016. If certain things work the way I think they will, it could happen earlier. We are looking for a top-notch CEO for the business.

What about defence? What do you expect will come to L&T?

We have built capabilities in weapon systems, defence communications and shipbuilding. I think by FY16-end, we will start getting orders. In time, we are looking at Rs 10,000 crore of orders.

Will L&T continue looking for growth outside India?

We went out when India wasn’t growing and we managed to grow 15-20 per cent. Our target is to maintain exports at 20-30 per cent. As long as there are big projects, we will participate. For instance, we are participating in the Delhi-Mumbai Freight Corridor. But the order size has to be really big.

In the December quarter, the margin in your core business declined. Is there stress building in the India business?

No. If you see our segment reporting, there was stress in the foreign business, which was our learning. The segment reporting includes the foreign business. Two verticals — shipbuilding and hydrocarbon – booked losses. But we have learnt from our experience. With the Indian economy picking up, we don’t have to rely on international business.

How much stress is there in the international business?

There is stress in the hydrocarbon business. If you ask me, there is no stress in other projects and we will make money in those. The stress in the hydrocarbon business will start seeing a trend reversal from FY16. In FY17, we will return to the growth trajectory we had two years ago. We have learnt and now, we know how to do things.

Are lower oil prices likely to affect projects negatively?

New hydrocarbon projects might be scaled back internationally. But those for which 25 per cent money has been spent will go through. We expect hydrocarbon orders worth Rs 10,000 crore coming our way in FY16.

Anil Manibhai Naik was wrongly mentioned as Anil Manubhai Naik in an earlier version of this interview. The article has been corrected and the error is regretted.

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First Published: Thu, March 05 2015. 00:58 IST