Subrahmanyan, 55, will take on the top job at the complex and diverse conglomerate effective 1 July, the firm said in a statement.
A.M. Naik, 74, the firm’s long-serving leader, has been appointed non-executive chairman for three years from 1 October for seamless transition of leadership and to provide guidance and mentorship to the management, said L&T. Naik’s current term as group executive chairman ends on 30 September. In 2012, he had received a five-year extension until the company’s annual general meeting in 2017.
Subrahmanyan will have large shoes to fill.
In Naik’s 18-year tenure, the $16 billion in revenue L&T has gone global, fought bruising battles with competitors, staved off a hostile takeover and diversified into several new businesses, including the manufacture of defence equipment.
Subrahmanyan also takes charge at a challenging time—private investment demand in India hasn’t taken off, there is a slowdown in West Asia because of depressed oil prices and the firm is saddled with high working capital and low return on equity.
“Management focus on reducing working capital and asset monetisation should yield results in 12-36 months. The share of low ROCE (return on capital employed) businesses like IDPL (L&T Infrastructure Development Projects Ltd) should reduce. We believe L&T will see additional benefits from macro tail winds of industrial capex announcements" in fiscal 2018, wrote Jefferies India Pvt. Ltd analysts in a 3 April note to clients.
At the same time, Naik has set the company a target of doubling revenue by 2021 with an average annual growth of 15%. As part of this five-year strategic plan, L&T also expects to expand margins by 100-120 basis points to 11.2% and improve return on equity by 6 percentage points to 18%. One basis point is one-hundredth of a percentage point.
“It’s business as usual in L&T," Subrahmanyan said over the phone. “Mr Naik has been grooming me for the last three years, it’s a well-thought-out process. Most divisions (of L&T) have involved me in most of the other businesses I’m already fully involved in... so from that point of view, it is business as usual."
Subrahmanyan, who ascended to the L&T board in July 2011, has spearheaded the company’s engineering and construction business over this period.
“Being a professional-driven and process-managed company, we have a strategic plan through 2021; most businesses have thought through the plan and what we need to move into and move out of. Our way forward is to follow that strategic plan," said Subrahmanyan.
“We have said we will look more seriously into the defence business, aggressively push our water business, the smart world communication business, and lay importance on our services and infrastructure business, which is the key growth driver," he added.
Naik’s decision to be around in a non-executive role would be important for L&T’s turnaround plan, according to Nitin Bhasin, analyst, Ambit Capital.
“Clearly, Mr Naik has built the business over the years and if he had gone, it would not have been the best-case scenario for the company. L&T has got multiple businesses, they are looking to divest some businesses, build the tech business, and correct the capital allocation mistakes of the past," said Bhasin.
Naik joined the company in 1965, was named managing director and CEO in 1999 and nominated as chairman in 2003. It has always been clear that he will retire when he wants to.
In 2012, L&T split the role of chairman and managing director, elevating Naik as executive chairman; K. Venkataramanan took over as managing director and CEO. His term ended in September 2015.
On Friday, L&T’s shares closed up 0.23% at Rs1,686.50 a share on the BSE. The benchmark Sensex fell 0.74% to 29,706.61 points.