Biz seeing margin pressure from pricing end: L&T's CFO

In a difficult economic environment, the industry has faced several challenges and R Shankar Raman, Whole-time Director and CFO of Larsen and Toubro said the past 24 months has made the competitive landscape more intense. He also added that they have witnessed pressure on margins from the pricing end. According to him, aggressive bidding has kept the pricing environment under pressure.

Also read: L&T may sell 20% stake in infra arm, shares gain
Raman further stated that India's acute power shortage is adversely impacting industry. Besides, he also clarified that there is no truth to L&T-Mitsubishi joint venture buying out BGR-Hitachi JV.
The World Bank's decision to debar L&T from participating in projects has had a negligible impact on the company's financials, informed Raman. However, L&T has been proactive in tightening bid norms post the World Bank issue, he said. Here is the edited transcript of the interview on CNBC-TV18. Q: As CFO of India's most loved infrastructure company what is your key challenge for 2013, is it maintaining margins in a difficult economic environment or growing your order book in what seems to be a difficult investment cycle?
A: It is a tough call because there is a bit of optimism in there about things moving forward. The businesses are looking forward to get some surge in the order intake as compared to possibly the past 18 to 24 months. Having said that, the past 24 months have really made the competitive pressures very intense, both in domestic market and international markets.
We find that the prices are getting tighter, the contract terms are getting tougher. Consequently, limited opportunities that are available for people to bid receives a lot of attention. There is definitely pressure on margins from the pricing end of it. So far as the cost is concerned, much of the profitability of organisations such as ourselves who are executing projects would depend on how efficiently we manage our cost, how we keep our productivity increasing as we go along. The margin is going to be more a function of cost play rather than pricing play in the market place. Q: In the context of this more difficult pricing environment there are reports that there could be some consolidation in the power space. For example, the L&T-Mitsubishi joint venture that you run is apparently looking to buy out the BGR-Hitachi joint venture. Is there any truth to that and could there be such consolidation which alleviate some of these pricing pressures that you alluded to?
A: Since you are speaking about power sector, we are having several parts of the country with outages of 16 hours and 18 hours. If you look at what the countrty needs and the capacity that has been lined up, I do not think it is a case of excess capacity, it is a case of not utilizing the capacity smartly.
My own sense is that the case is not yet ripe for across the board consolidation. Some selective consolidation could happen, particularly from a global context. For example, the development about Hitachi, Mitsubishi is at a global plane and the consequences of that in different parts of the world can have an ancillary effect to it. But, in so far as local players and consolidation is concerned, I still think our productive capacity is adequate if the opportunities are lined up appropriately.
Here we have a situation of the opportunities being inadequately placed and it is not so much for capacity to be in excess. Q: Is there no truth to that BGR-Hitachi joint venture buy news for L&T?
A: No, at the moment there is no truth in what is being suggested. But, it is a fact that globally Hitachi and Mitsubishi are coming together. We will have to wait and watch for developments in this space.
_PAGEBREAK_ Q: The business environment is much tougher and it is tougher to go out there and win projects. In that context, the market was a bit concerned to hear about the World Bank note debarring L&T from projects. You had put out a clarification at that point saying it is not material. But, would you talk about why that happened and whether or not there is actually any impact for you?
A: It is a pretty unfortunate development. It is an isolated event of an ex-employee not conducting himself in alignment with the code of conduct that the company believes in. So there was a misconduct and once it surfaced way back in 2008, the employee and the company separated. The employee is not in service any longer after the event got discovered and we also withdrew from the bid.
It was actually a bid for L&T’s medical division to participate in a project which was financed partly by World Bank and we realized that some of the client testimonials that were given were inappropriate and inaccurate. We took the matter with the employee and the employee resigned from the services of the company and the company withdrew from the bid.
It did find that its submissions were inappropriate and it withdrew from the bid and did not participate any further. It was about a million dollar or thereabouts in 2008. The impact of this on the company as a whole is USD 13.5 billion, having an order book of USD 32 billion. We think it is minimal but, the embarrassment is definitely there.
We felt the matter was fit for an appeal. So we appealed to the sanction board. The entire process took about five years for it to develop and in a way we are happy that the matter has come to an end and the sanction will terminate in September 2013.
It is not a case of the company’s normal way of conducting its affairs. It is an isolated event, a deviation by one of the employees. The company has done two things. One, it has punished the employee by asking him to leave the services of the company and secondly, the company has tightened its own bid submission process to ensure such a thing does not recur.
As you will appreciate, in its 75 year long and credible history this is an isolated event, an event which embarrasses us but is not of material impact in so far as the business consequences are concerned. Q: Another thing that you will have to keep a close watch on as a CFO is what kind of investment commitments you are making in your subsidiaries and particularly subsidiaries which are not generating significant cash flows. In that context, are you close to selling a fairly significant stake in your subsidiary L&T Infrastructure Development Project (L&T IDPL), news of which has been doing the rounds?
A: Actually our sale of stake in the subsidiary is on two accounts. One is in those subsidiaries where we believe the business is not scalable to global levels. As a part of our portfolio restructuring, we find ways to sell the stake or the business as part of the restructuring story which is a constant evolution in so far as the company’s portfolio management is concerned.
On the point of L&T IDPL, we have mentioned in the past that L&T IDPL is a growing part of our business. We do believe India's infrastructure story has just commenced. It would require a large presence of credible sponsors like L&T. So L&T’s own aspiration in that space is high.
We did not want IDPL’s growth plans to be constrained by capital allocation policies of L&T. We have decided that it shall no more be a wholly owned subsidiary of L&T. Even today, it is a separate entity, it is separately managed and governed. We just want to make sure that it is able to seek the capital that it deserves as it starts bidding and participating more in the infrastructure space.
It will remain an important subsidiary of L&T but, not remain a wholly owned subsidiary.