AM Naik: Passing the baton at L&T
As Anil Manibhai Naik prepares to hand over the helm of Larsen and Toubro Ltd (L&T) to his chosen successor in the home stretch of a remarkable career, it’s clear that his legacy extends beyond the group’s rapid growth.
At 74, Naik has been there, done that at L&T, where he has been a constant over the last 51 years. Naik joined the company in 1965, became its managing director (MD) and chief executive officer (CEO) in 1999 and chairman in 2003.
L&T was founded in 1938 as an importer of machinery from Europe and, along the way, transformed itself into a conglomerate with interests in engineering and construction, financial services, information technology, infrastructure and defence, and a presence in seven countries besides India.
Most of that growth came with Naik at the helm. From 1999-2000 till March 2016, L&T’s gross revenue has increased from Rs.7,666 crore to Rs.102,226 crore (Rs.1.02 trillion).
In recent years, there has been much speculation about who would succeed Naik, who is as close as one can get to a corporate legend in India.
On 26 August, at the company’s annual general meeting, Naik put the speculation at rest by anointing S.N. Subrahmanyan, deputy managing director and president of L&T, as his successor.
In response to shareholders’ request to stay on beyond his planned retirement at the end of September 2017, Naik patted Subrahmanyan on the back and said: “This is a very strong man here, you know.”
He added that he was confident the company will prosper under Subrahmanyan’s leadership. That finally set the stage for the passing of the baton at L&T.
Looks can deceive
At first glance, Naik looks easy-going and mild-mannered, almost avuncular. In reality, he’s anything but. A lifetime of beating the odds points to a razor-sharp brain and a pugnacious spirit, while the sheer weight of his achievements at L&T put to rest any thoughts of that aging uncle.
“He is very passionately involved in whatever he does. His strength is while he does macro strategy, he also has the rare skill of getting into micros when required. He doesn’t shun detail, and he is one of the few people I know who works 365 days a year,” said Ravi Uppal, former chief of L&T’s power business, who was once known to be a contender for Naik’s role of CEO and MD and is currently the MD and group CEO of Jindal Steel and Power Ltd (JSPL).
There’s very little about L&T Naik doesn’t know, mostly because he’s been involved with it for the past half a century in his capacity as an engineer or a supervisor or a manager or a vice-president or as CEO or, for the past 13 years, as chairman.
So, when he named Subrahmanyan as his successor, there was almost a collective sigh of relief that the lion in winter was finally deciding to get some rest. “I’m tired now,” Naik told reporters. But, of course, even that decision hasn’t come without drama.
He has always been feisty; in fact, dubbed “over confident” by his first British boss at L&T half a century ago. Confident he has always been, of his manifest destiny, though he leaves little to chance. Six months before he took over as CEO in 1999, he had already put together an action plan for the first 100 days of when (not if) he would take over.
And he’s always been a fighter, though of late the fight seemed a bit pointless. In 2007, he turned 65, the normal age of superannuation at L&T. The company, now vast and complex beyond imagination, needed him; so he just dropped anchor and decided to stay on.
The board had little option but to accept his decision since there didn’t seem to be an obvious successor in place (some said he had made sure of that), with a number of senior people having just retired. So, in a quiet acceptance of his continuing role in building the engineering giant, he was given a five-year extension. Again, in 2012, when he was to retire and a new leadership announcement was expected, it was decided the company could not do without him. The post of chairman and managing director was split up, Naik retained as chairman with an extended tenure of another five years and K. Venkataramanan was appointed CEO and MD. Venkataramanan’s term ended in September 2015.
That’s Naik for you, one of India’s finest professional CEOs who has run L&T pretty much like a family business for the past 17 years. Indeed, so closely is he associated with the company that it is easy to forget its unique antecedents.
Beginning and middle
L&T was founded in Mumbai (then Bombay) by two Danish engineers—Henning Holck-Larsen and Soren Kristian Toubro—who had come to India for a completely different purpose, as representatives of the Danish engineering firm F.L. Smidth and Co. (FLS) in connection with the merger of cement companies that were later grouped into Associated Cement Companies (ACC) Ltd.
Together, Holck-Larsen and Toubro founded the partnership firm of L&T in 1938, which was converted into a public limited company in 1950, and took on engineering and construction assignments of increasing sophistication.
As the 1970s arrived, it was a rarity in India’s corporate world—a well-run company in the forefront of industrial activity and with the mindset of the best engineering companies elsewhere in the world. In the mid-1970s, as Indian management took over the running of the company, a hierarchy-based culture drove several talented people out. Naik, as a young engineer, had been a keen observer of this growing malaise and its ruinous impact. Not that he could do much but watch and record.
His turn came finally in 1999 when he became CEO and one of the first things he did on taking over was to restore the meritocracy of the past and add to it a generous stock option plan for senior managers. Naik also restructured the various businesses the group had got into over the years, weeding out those he thought were non-core and driving fresh investments into those he believed were the future. Despite setbacks in the late 1990s following a slowdown in the economy, L&T under him has clearly prospered.
Often referred to as a corporate proxy for the broader economy, L&T is a complex structure running across numerous verticals and over 150 subsidiaries and special purpose vehicles.
Over the years, there has been speculation that Naik tracks every new business very closely and doesn’t leave much room for independent decisions, which has meant that a number of senior business heads quit. He’s unfazed by the criticism, claiming that those who left the company at critical moments did so because they couldn’t take the heat.
It is after all something he has been particularly good at: taking on tough situations. Indeed, that may well be his biggest legacy.
Over the years, it isn’t just business setbacks that have tested him. In its long history, L&T has had to ward off multiple corporate raiders ranging from Manu Chhabria in 1987, to Dhirubhai Ambani and Kumar Mangalam Birla through the 1990s and 2000s. The white knight who helped keep Chhabria away, eventually turned into a raider himself. Ambani, who came to the aid of L&T at the request of its then chairman N.M. Desai (whose father contributed some of the seed funding for setting up the company) started buying its stock, eventually ending up with nearly 18% of the company. Armed with that, Ambani senior then staked a claim to seats on the company’s board for his two sons Mukesh and Anil as well as for himself. Desai found himself ousted by the very saviour he had sought help from.
But a series of decisions the Ambanis forced on the company led to a silent revolt, while the political backing of the Congress party was also undone when it lost the elections in 1989. New prime minister V.P. Singh, no great friend of the Ambanis, led a high-decibel campaign against their takeover of the engineering giant, aided in no small part by Arun Shourie’s exposes in the Indian Express. The state-owned Life Insurance Corporation became the government’s agent to oust the Ambanis from L&T.
But there was to be one more twist in this ongoing scrimmage, one that would bring to the fore the man in question—A.M. Naik.
Becoming too big to prey on
The return of the Congress under P.V. Narasimha Rao in 1991 brought the Ambanis back to a position of strength in the company. However, by now, the Ambanis, perhaps overwhelmed by all the opposition to their moves in L&T, turned into passive investors in the company.
Eventually, in November 2001, the Ambanis abruptly sold their remaining 10.05% stake in L&T to Kumar Mangalam Birla’s Grasim Industries Ltd, which was competing directly with L&T in the cement business and, therefore, was keen to take over the company.
Naik, who had taken charge just two years prior to this, showed the steel he was made of, resisting the entry of the Birlas into the company on the grounds that the company should be allowed to retain its professional status. Like most shrewd business leaders of the time, he knew he had to get the government behind his moves and so he met senior political as well as institutional leaders to canvass their support. Simultaneously, he kept a line open to Birla and, eventually, after months of negotiations, the latter sold its stake to a trust run by L&T’s employees in June 2003. As part of the settlement, Birla took over L&T’s cement division, which was renamed UltraTech Cement Ltd.
This was to be Naik’s biggest contribution, turning the attentions of a hitherto pure engineering company oblivious to market realities, towards ways and means of protecting its independent status. As Naik told Moneylife’s Sucheta Dalal in an interview: “If you want an independent professional company, you have got to make it valuable; you have to make it so expensive that people stay away from you.”
Till 1999, L&T’s share price had largely stagnated. Naik turned the attention of its senior managers to the implications of that. L&T’s low market cap would forever make it vulnerable to acquisitive moves. Not content with warding off the ongoing threats, he worked to bullet-proof the company against future marauders as well. The result has been an ownership structure in which public sector insurance companies and banks hold 30.5%, while 12.5% is held by L&T Employees Welfare Foundation, the employees’ trust, which Naik created to ring-fence L&T from hostile takeovers. Its market cap of Rs.1.40 trillion ensures that buying a controlling stake in the company isn’t going to be cheap, though Naik still worries about that and were there to be a raid, he is likely to step out of his retirement to take on the newest enemy at its door.
“A.M. Naik is one of the extremely iconic leaders that Indian industry has seen, fending off many takeover battles, building great investments. Most important, he is a unique combination of an entrepreneur and a professional, who treats the company as his own life,” says Vinayak Chatterjee, chairman of Feedback Infrastructure Services Pvt. Ltd.
Yet, for all his crustiness and tough-guy image, Naik’s heart is in the right place. He contributes generously to his Naik Charitable Trust, which runs several philanthropy projects, including the Nirali Memorial Medical Trust in Surat, named after his grand-daughter, who died of cancer at a very young age.
And he has pledged to give away 75% of his lifetime income to charity after his retirement. That’s not a small amount, considering that he was the highest-paid CEO in India in 2015-16, taking home Rs.66.14 crore for his labours.
While he added financial heft to the company’s professional achievements, Naik also ensured its core values remained undiluted. After all these years, L&T remains a quintessential engineers’ firm.
The man Naik handpicked to succeed him, Subrahmanyan, is a civil engineer whom he first spotted 12 years ago while supervising the construction of the Bangalore airport. Subrahmanyan heads the company’s largest vertical of infrastructure and construction (I&C), which contributes 47% to its revenue.
In his 30 years at L&T, he has handled many of the company’s major infrastructure and construction projects, including the construction of the airports in Bengaluru, Hyderabad, Delhi and Mumbai, besides major international projects, including the metro systems in Qatar and Saudi Arabia.
But as he prepares to take over next year, he faces a series of challenges, many emanating from the changes that Naik has initiated over the years. “My sense is that it is very difficult for anybody else to lead such a complex organization like L&T. Naik, with all the experience, had seen many of the group businesses growing in a way he could understand them. For somebody new, it could be very difficult to do justice to each and every unit. So with that context, restructuring is the perhaps the only and extremely logical way forward,” said Pankaj Sharma, head of equities at Equirus Securities (P) Ltd.
Over the past two years, Naik has been divesting non-core businesses, or those he believes don’t fit into the new L&T as he envisages it. Last month, he said his top priority is to complete the group’s ongoing restructuring and make L&T an asset-light company before his term at the company comes to an end in September 2017.
At the same time, new verticals such as Smart World and Communication will join existing ones such as water, electrical transmission and distribution, infrastructure, heavy infrastructure and transportation infrastructure. This is part of a five-year plan.
The idea is to simplify the structure and bring more accountability to business units and convert them into subsidiaries for public listing. L&T will continue to hold majority share in all subsidiaries and will be a kind of holding company.
Naik also hopes to settle the legal issues and pending claims with the government related to the company’s Nabha Power Ltd plant over the next year, following which the business could be sold as well. L&T has already sold its Kattupalli port located at Ennore near Chennai to Adani Ports and Special Economic Zone Ltd (APSEZ).
In January, it agreed to sell its general life insurance business to HDFC ERGO General Insurance Co. Ltd, and last year sold a realty project in Chandigarh to the Carnival Group.
“My sense is, the vision laid out by A.M. Naik will be carried out by Subrahmanyan—to sell the non-core assets and keep it an asset-light business. That is the dire need of the hour for L&T to keep shareholders happy and to create value. The challenges faced by Naik were external in nature and would continue to be there for Subrahmanyan,” said Santosh Yellapu, analyst at Angel Broking.
Indeed, Naik’s extreme focus on growth and winning several large orders has hurt L&T, say some analysts.
Between 2000 and 2005, when the market was expanding into new areas and when infrastructure was becoming important, Naik focused on developing a large breadth of end-market expertise. Four years after investing in the Bengaluru airport, L&T in 2009 sold the 17% stake to GVK Power and Infrastructure Ltd for Rs.686 crore. In 2009, the company also sold its UltraTech cement business stake for over Rs.1,000 crore.
Don’t force an upturn
In the following years, Naik gave a huge impetus to manufacturing, venturing into shipbuilding while hiring consultants to chart out a five-year growth plan. L&T also built capacity ahead of demand, and experimented with international markets. When the downturn hit the Indian markets in 2008, L&T continued to chase orders aggressively. “Don’t force an upturn for yourself when the market is not in an upturn,” said an analyst covering L&T, asking not to be identified as he is not authorized to speak to media.
“L&T should have been more careful in certain years when growth was not available in the end-market. It should have moved to a no-order inflow growth, but instead it continued to bid aggressively, especially in BOT (so-called build, operate, transfer agreements, where the company builds public assets such as roads and ports, operates and earns revenue from them for a certain period, and then transfers them to the state). Maybe they didn’t realize they are heading into a six-seven year downturn. They thought they will make the asset and sell it to somebody. That asset sale cycle hasn’t happened for them,” said the analyst. “L&T continued to show the market that it is a growth company when the market itself has not grown.”
It is all part of the Naik way of working: keep the order book flowing and the investment tap running. For years, it has worked for the company and while his successor Subrahmanyan may well take a fresh look at the strategy, it is unlikely that he will deviate too far from the path laid down by his guru.
“The challenge for them is to make sure that they prepare the next generation to take over, and to continue to change their business model to the rapidly changing environment,” said Uppal. “They have to remain in a state of transition. The model they had a decade ago is not valid for the future. The world has become more digital, the market is becoming a global space, the energy businesses have gone through huge changes, new renewable sources of energy are coming.”