Mumbai: It is perhaps a sign of the times that Y.M. Deosthalee, chief financial officer and a whole-time director of Larsen and Toubro Ltd (L&T), made it a precondition for an interview that no questions would be asked about the firm’s 4% stake in Satyam Computer Services Ltd, or about Satyam itself, considering the firm’s recent fall from grace. The reason was that L&T, India’s largest engineering and construction conglomerate with sales of close to Rs30,000 crore in fiscal 2008, is close to announcing results for the third quarter ended 31 December.
In the interview, Deosthalee spoke about the firm’s performance and its outlook for troubled sectors such as infrastructure and real estate, and its plans to enter power and railways. Edited excerpts:
Renewed focus:Larsen and Toubro’s chief financial officer and whole-time director Y.M. Deosthalee. Kedar Bhat / Mint
How did the liquidity crisis and fall in commodity prices and consequent asset value impact L&T?
I am not suggesting that there is a complete slowdown. But the fact is that businesses are thinking twice before embarking on new projects. Falling crude oil prices have impacted the hydrocarbon sector. Clients are taking a call on commodity cycle to bottom out to fix contracts at best possible rates.
When did you decide to have a different strategy for L&T Power and hire Ravi Uppal as chief executive? And how much will power contribute to overall revenues?
Ravi Uppal’s appointment is part of our renewed focus on power. It comprises just about 10-11% of our business. Order inflow is not necessarily based on our capabilities; it is dependent on those who put up those plants. If everything goes well, it should be 25-30%.
There is tremendous competition from Bharat Heavy Electricals Ltd (Bhel), South Korean and Chinese companies in this space. How is L&T going to react to it?
As far as Chinese companies are concerned, we are not very sure whether they are successful in the super critical equipment space. And definitely not in India because the coal content is different and equipment is dependent on these factors. Secondly, the world is moving to super critical boilers. But the Chinese have not been very successful in super critical boilers. Bhel and L&T are more or less comparable. Bhel depends on European sources, we depend on Japanese partners. But Bhel has been in this business for a longer time. So we have to do it at a much faster pace.
Hasn’t L&T scaled down its capital expenditure target?
We were talking about cash flow of Rs2,000 crore. We expect it to come down to Rs1,500 crore. It includes normal capital expenditure and balancing equipment required for our ongoing expenditure.
With the private sector scaling down, would your business depend on government projects on power?
Government expenditure will continue. We expect NTPC Ltd to expand. They will not depend on one supplier.
But L&T is yet to make its presence felt in major power projects?
We have not invested in any single major power project till now. We hope to get orders.
What’s the effect of the slowdown in West Asia on your order books?
In Dubai, we do not have much presence except in some building business. There is a perceptible slowdown. Having said that, there is enough business around. Some customers have indicated deferment of their projects but (the) majority are continuing.
Are customers renegotiating prices after fall in commodity prices?
No. In a large part of our business, because commodity prices were going up, we were insisting on an escalation clause. (It) cannot be one way. So when there is a downside in commodity prices, we pass on the benefit to the customer.
What about L&T Finance and L&T Infrastructure? They are growing fast and may pose a risk on your balance sheet.
It is not good to look at a consolidated balance sheet because the business models are different. As of now, the consolidated balance sheet looks good. L&T Finance and L&T Infrastructure are raising money on their (own) balance sheet strength and we are not giving any support or guarantee.
But they are your subsidiaries...
They may be 100% subsidiaries but L&T is not giving any financial support or financial guarantees.
What does your overseas order book look like?
(We have) 17% order book from exports. We would like to have 25% of our business from international markets. Hopefully in the next three years we will be able to achieve 20%.
You have scaled back your shipbuilding plans…
With the current slowdown, lesser demand and excess capacity, we are trying to go slow in the ship building expansion. We are going ahead in a truncated manner with a compact capital expenditure plan.
What about L&T’s ambitions of being a major railway infrastructure contractor?
Last two years, we did not get orders. This year, we have three orders and a team in place. We believe we can get business because railways are investing now. We will not bid for all (60) projects (the government has initiated) but will be interested in viable ones.
L&T Capital has picked up a stake in Kalindee Rail.
It is (an) absolutely clear strategy for our railway business. This particular company is small but they have good capabilities in signalling system, which is an integral part of EPC (engineering, procurement and construction).
Will L&T’s balance sheet be leveraged more than before?
As a company we are hardly leveraged. Our gross debt is 0.45% and net level is not even 0.2%. Consolidated may be 100% but they are two different business. L&T’s main business is EPC and it is a risky one. Cash flows are not even. Suddenly, because of the slowdown, order book may dry up. Secondly, some projects may get delayed and payments may not come. Another risk is cost overrun. So in this business, we should be always ready to raise money any point of time. Finally in this business, you buy materials, construct, commission and handover. If the customer is in difficulty, then working capital suffers. Our working capital today is 13-14%, but in the worst of periods, it can go up to 20-25%. So one needs to have flexibility to raise money.
Can the growth in L&T Finance by 80% and L&T Infrastructure by 806% be sustained?
L&T Infrastructure (growth rate) was (for) the first year of operation. This growth (rate) cannot be maintained. Many of these activities will show modest growth. We will have to protect these businesses as these are the first to be affected by the slowdown.
During the liquidity squeeze cost went up because interest cost went up and second there were no lenders. We have taken a conscious decision to be conservative in building these businesses now. We cannot overexpose and create non-performing assets.
You are also entering the nuclear sector now...
It is not a new sector for us. It is an opportunity. But we don’t expect orders to come overnight as agreements are still on paper. It is a future business for L&T.