In an interview, Raman said one should brace for an across the board spike in working capital requirements of India Inc. in the September quarter and warned that things are unlikely to improve for the rest of the financial year. Edited excerpts:
What impact has the implementation of the goods and services tax (GST) had on L&T’s operations?
We have been working very hard to improve our working capital-to-sales ratio from 26% to 19%. In the June quarter, too, we managed to keep it around 19-20%. But we didn’t factor for GST glitches. I remember the government saying that it was ready but the private sector wasn’t. But today, the government is not ready. The systems are not ready. It is extending the time for filing returns. Things are still being done manually. Today, we are paying GST after computing it ourselves, instead of the government architecture telling us how much to pay based on our purchases and sales.
As and when the system configures this and starts coming out with the figure, god knows how different that would be to the figure we have arrived at. Then there will be a whole host of issues in reconciling the two numbers and the first reaction of the government will be that private sector is cheating.
Given the revenue authorities’ best case assumptions that all of us walking on mother earth don’t want to pay tax, it’s going to be a huge problem to reconcile GST that the industry pays and that the government’s system will throw up. So, according to me, this pain is going to continue for another six to nine months and consequently, working capital is going to get blocked. For instance, even many of our customers in the public sector are, today, not accepting the bills that we raise, including that for GST, without an elaborate check of whether or not all the input taxes that we have paid have got reduced.
Small and medium enterprises (SMEs) too are really struggling under GST. I expect the volume of throughput from SMEs going down and hence I am not surprised with GDP growth slipping.
So, should we expect a shocker in the September quarter?
The growth that the industry might report will reflect the meltdown in GDP growth. How much each one falls is relative to its position and hence is hard to comment on. But working capital will spike up in the system. For L&T, it’s very difficult to predict how much the rise will be because then we are speculating on how many invoices our clients will accept. As we get into the home stretch for the quarter, a lot of our people are sitting with clients, trying to get the bills cleared. How successful they will be, will be known only when we close the quarter. I can, however, say this much for sure that the downtrend in our working capital requirement from 26% to 19% won’t continue in the September quarter.
Generally, however, how’s L&T’s order book shaping up? Are you sticking to your guidance for the full year?
We’ve said our order book will grow by 12-14% and that had already built in a certain element of conservatism. Nothing has dramatically altered on the order inflow front. The environment for ordering continues to be government-dependent and infrastructure-led. The private sector hasn’t come to the party yet. To that extent, I can say the environment hasn’t changed.
The government’s need to fast forward (its projects), however, has got accentuated because I don’t think it likes the position it is in. Slipping GDP growth numbers don’t augur well for it.
At the moment, I don’t have enough data points to change anything. We will validate this when we come out with the September quarter results.
You have been expecting a big rise in government spending in developmental projects ahead of the 2019 elections. Is it happening? Which sectors do you expect this push to come in?
It’s going to be a function of the leader who is pushing it. We find, for example, a lot of energy in the transportation sector. There’s a lot of energy in urban transportation, metros, etc. State governments have a lot of energy in water and power transmission and distribution. I don’t see this across the board, but it’s definitely happening in transportation. It’s happening in freight corridors, smart cities, affordable housing, etc.
Hasn’t there been any revival in private sector investment?
There’s no case for it. Let’s consider L&T to be a proxy for the private sector. Am I taking to the board any major investment plan? The answer is no. All of us are battling capacity underutilization. In fact, I don’t see the private sector coming back for the next couple of years.
Where does L&T stand when it comes to its ambitious dreams in the defence sector?
It’s getting that much closer to fruition. But if the government is going to say that anybody can come into defence, then we will have a rush of people putting their hat in the ring as it is happening now and that’s actually causing confusion and damage. So, the government has to get comfortable with the idea that there will only be a few who are well qualified and equipped. It shouldn’t just go with the L1 (lowest bidder), it should go by benchmarking. It should benchmark with someone who’s delivered defence systems.
So, what we are hoping against hope while waiting is that the government will begin to appreciate that it is comfortable with one or two players in each segment in the defence sector.