Banking licence: Waiting for final RBI guidelines, says L&T

The Banking Amendment Bill, major reform legislation, got approval of the Lok Sabha on Tuesday. The government dropped the controversial provisions relating to allowing banks to trade in futures.

Also read: L&T Finance, Bajaj Finance rally post Banking Bill cleared L&T Finance Holdings, a group company of Larsen & Toubro, is a good candidate to qualify for a banking licence. In an interview to CNBC-TV18, R Shankar Raman, chief financial officer, L&T says clearance of Banking Bill is a positive. Raman is positive on aspect of applying for a bank licence. However, he says, the company still need to wait for final RBI guidelines before applying for a licence. Q: What is your view on the banking license bill and how aggressively will L&T look at applying for it through its arm L&T Finance? Are you keen on going the bank way and will you look to do that once the RBI issues guidelines to the effect?
A: The development is positive but we still need to wait and watch what the guideline will outline. Financial services are an important part of our business portfolio and it is doing well and banking is an area of interest considering natural extension of all its offering. Q: Do you feel that you have a good case to get a banking license?
A: I think we have stayed positive on this aspect. We are straddling the retail credit, rural credit and institutional credit. Our company has presence in the mutual fund space, general insurance. So, if you look at the breadth of our aspirations in financial services as a investor company, L&T is quite happy the way things have rolled out so far and the progress that the company has made.
So, nothing suggests that we need to be bearish on the whole thing. But unless we see the details of the guidelines it is difficult to come to a conclusion. The parent, L&T has to decide how it fits into its overall game plan. It is a positive and a welcome move. Q: While L&T surprised the market with a 30 percent growth in your order inflows in Q2 which was very well received our niggling concern is the construction segment which is driving most of the order inflows which comes with baggage of its own in terms of margin implications, etc. Are you are also concerned about the fact that this new order booking is looking at least from the last few months a one trick pony, the construction segment?
A: Not really, construction has always been a major portion of our engineering and construction (E&C) segment. So it is not something that is sort of cropped up off late. The business is over 60-years old and over the years we have straddled between civil, electrical, mechanical and all forms of construction. So, we have evolved as construction business and I do not think that the growth phase that they are going through needs to be worried about. In fact we are in a way celebrating and enjoying the success that business is having.
Secondly, from perspective of E&C business, we get busy in sectors which are attracting investments while the diversity of the company helps us to look at opportunities at a spectrum much wider than civil construction. The fact is that this segment is currently attracting investment interest, the clients are engaging with our company for construction related activity. So, in a way it is rather than concerned as a one trick pony it is consolidation of ourselves in that space.
Secondly, the construction industry is not going through best of times. Many competitors have their own issues to deal with. I think it is an opportunity for us to gain further lead and get into a leadership position more emphatically than what we have been doing so far. We are not worried in that sense but at the same time it is important that the other sectors like hydrocarbon, power where considerable investments has been made in building up capacity also comes to play. So, the broad basing of the sectoral dispersion will help.
I think it is a misnomer to think that construction business is margin dilutive. We have been maintaining in E&C margin of around 12-13 percent in good times and we have guided the market for some moderation because of excess capacity and limited opportunity in that space. I think the construction segment will see margins north of 10.

Q: There are reports that Korean companies have entered the business and have made competition tough on margins front. On a competitive turf, do you feel that next year will be tougher for domestic companies?
 A: I think the moves that the government has made to revive the investment sentiment and get growth back on track could also be brought into the equation. Given limited opportunities, everybody including Korean companies is looking at new markets and new geographies to expand and use their capacity.
So, it is no surprise that India attracts attention but I expect investment momentum to be better next year compared to what we saw in the last 12 months and that could to some extent counter balance the renewed competition. It is a competitive market in all sectors be it construction, hydrocarbon, power or other, players from around the world are looking at these opportunities closely. 
Our biggest advantage of us being a domestic player is that we have the ability to scale up and mobilise large teams at a reasonably short notice.  If the investment momentum does not pickup and they continue to sort of reflect the things where in the last 12-18 months, then pricing pressure will be felt in the marketplace. So, the whole levers of competitiveness and productivity and efficiency all of that needs to be cranked up to ensure that we produce decent returns for the investors.
Q: What is your view on the Land Acquisition Bill, do you see that as a significant deterrent if passed?
A: When you see some details you will notice that it still makes land acquisition expensive. While a certain amount of capital outlay can be managed, the fact that we will have to take care of livelihood, provide annuity for 20 years, adjust it for inflation all these causes many administrative challenges. I think it would be prudent if the total upfront cost is communicated when a project is put up.
The project would take 2-3 years to complete the process and it should be done and dusted at that time and should not be dragged for 20 years and provide annuity, alternate livelihood, etc makes it very punitive.
We need to figure out a way how to administer the good intentions of the government in providing fair compensation. Industry has no issue about fair compensation but if it is rolled out a little more easily and with more certainty then it would help the matter.
With the current trade deficit the government should also focus on manufacturing policies of the country. India has a great potential to have manufacturing as one of its core drivers and it would be very interesting to see if the government believes in this theme and works around the manufacturing policy to promote domestic manufacturing and help the economy get more broad based then being a little dependent or over dependent on the services side of the economy.