Expect a skillful balancing act from FM in upcoming Budget: L&T

I don’t see a great rush of bids that are coming out but the bids that have been in the works for a while are now beginning to move towards their consummation point. From that perspective the lead up to the calendar 2018 has been better than what it was same time in the previous year, he added.

There is usually a delay of 25 percent over government timeline estimate for infrastructure execution. The most important task between the government and the bureaucracy would be to see how to crash this timeline, said Raman.

On government capex for infrastructure sector, he said that the government resources are stretched because of so many diversions but the fact is that if they are able to meet their commitment of Rs 1 lakh crore, we would take a big step forward.

He expects actual government infrastructure spend of around Rs 75,000 crore versus the estimated Rs 97,000 crore.

Ease of business has to become the top priority and we have a long way to go in improving ease of doing business in infrastructure sector, he further mentioned.

Speaking about Q4FY18 numbers, he said he expects Q4 of FY18 to be productive because historically it has been the most productive quarter for us in terms of order inflow.

I wish FM walks the talk on reducing corporate tax to 25 percent and would expect the government to look at reduction of minimum alternative tax (MAT) rate, Raman said.

Below is the verbatim transcript of the interview.

Latha: What would be your prime expectation from the Budget, would it be on taxes?

A: So far as Budget expectation is concerned, you are asking me to do a job of a FM which is very difficult at this point in time. There is such a skillful balancing act that is expected out of the FM. It is not going to be easy but I would expect voicing India Inc’s views that the expectation that will be uppermost in all our minds is how investments are going to be enabled.

Sonia: Are you seeing an increase or a pick up as far as domestic infrastructure is concerned or the investments into domestic infrastructure?

A: Calendar 2018 is going to be a very critical year for the government and obviously for the industry. It sets the tone for a big year from a political point of view in 2019. So as a run up to that over the last few months, we have been seeing that there is a sense of urgency that is coming into opening tenders that have been submitted and were evaluated. I don’t see a great rush of bids that are coming up but the bids that have been in the works for a while are now beginning to move towards their consummation point. So from that perspective, I think the lead up into the calendar 2018 has been better than what it was the same time in the previous year.

Latha: What you say squares with what we got from some of the policymakers and bureaucrats who spoke on the channel, we had the National Highways Authority of India (NHAI) chief the other day telling us that the amount they have spent this year is a good 20 percent more year to date compared to what it was a year ago and they expect that next year they are going to spend 1.5 times what they spent this year. Incidentally this year’s target is Rs 90,000 crore and they have already spent Rs 60,000 crore they said and 1.5 times that is what they are gunning for next year in ordering as well, tendering as well, the NHAI chief expects to come very close to the targets that the minister has set them but is that your experience on the ground, are you seeing lot more projects to bid for or at least a progress in execution?

A: The arithmetic needs to be seen in context of time spent in getting the bids opened and projects executed. When the government estimate the project, they go by a certain timeline for completion of the project. In our experience, the timelines miss out by at least 25 percent and hence the cost that is incurred to complete a project is higher in my opinion by about 20-25 percent. Now that does consume resources but that does not add up to the productive capacity that they seek to put on the ground.

So I think the most important task in front of the government and the bureaucracy would be to see how to crash this timeline. If you are able to be very efficient in crashing the time between the bids that is submitted and the award gets done, I think considerable saving in infrastructure cost can be achieved.

Today the country is also facing headwinds on exports, so it is very important that we create competitive infrastructure to enable productive industrial output. Putting duties to deter imports is not a very good solution over long time. You can do that as a tactic for a certain given situation but that cannot be sustainable.

So I think the idea of the government should be to make sure that we have very competitive factors that are at play to make sure that India does stand out in the competitive landscape of the world map.

Sonia: Coming back to the expectation from the Budget, what is your own expectation as far as government capex in infrastructure is concerned because given the risk of the government revenues slipping and the possibility of falling short of resources even next year, there is an apprehension that the FM may this time opt for lower amount of capex for sectors like infrastructure etc, would that be your view as well?

A: Last year if I remember the numbers right, including railways about Rs 2.2 lakh crore was allocated of which about Rs 97,000 crore was for the transportation infrastructure. Today what is happening is with three months to go before the end of the fiscal, we are not very sure whether the money would have been completely spent on that account. For sure, the government resources are stretched because of the so many diversions, deviations to the plan that was dished out in last February but the fact is if they are able to meet their commitments of Rs 1 lakh crore incrementally, we would take a big step forward.

My assessment is about Rs 75,000 crore as against the Rs 97,000 crore would get spent this year and as against Rs 2,21,000 crore, possibly about Rs 1,60,000-1,70,000 crore would get spent.

Unfortunately, we do not have enough visibility about the railways spent other than at a transaction level in terms of bids etc, we don’t have a public document on that front but my guess is we will fall short of the planned allocation by about 20-25 percent.

The money would have been spent but elsewhere.

Latha: Let me zoom out and ask you something more general. Do you think that since you all represent very much – you are a proxy for the infrastructure growth in the economy, would you say that the last twelve months were better than the previous twelve months?

A: I would say that just from the point of view of the government increasingly dialoguing with the industry. I think the first part of our three-year term did not involve so much of dialoguing. I think there is a genuine concern that the government today has as to how to kick-start investment, how to improve on the employment track record, how to make sure that the purchasing managers’ index numbers (PMIs) don’t slip and the business confidence goes up and they do have a paradox on hand because the stock markets seem to suggest that all is very well and whereas the real industry on the ground is still battling progress in terms of order inflow, progress in terms of execution. The faster clearances are also still an issue, it is very creditable that we have moved 30 points in the ease of doing business but if you look at the ground level experiences, I think this has to actually go down to the lowest level of bureaucracy and the local village panchayat’s level to make sure that the ease of doing business becomes the top priority.

I think our experience has been that there is a gap between the government’s desire to push growth and what happens down the line but this definitely has improved over the period of last 12 months as you rightly observed but I think we still have a long way to go.

Latha: What is the timeline of non-core asset sale in your own company?

A: We are fairly diversified conglomerate and we have the legacy of 8 years behind us. There are several pieces of business that we had acquired and built during the period where we were to be given licences for what we do. These are not something which are actually stress costing today. Despite the existence of quite a wide variety of businesses that we have our balance sheet is still very much in tact and we are still a AAA company.

So, the idea was to prune the portfolio in a manner that saves management bandwidth and helps the management to look at the next 20 years going forward. So, scale and global scale is what we are focusing on. To that extent the smaller businesses that we have, we have a programme of divesting them and we have been doing this quite regularly over the last 3-4 years. My guess is it will take another couple of years for us to actually complete this programme. We are not in a rush because we do not want to sell at a distress. We are not doing this sale to bail ourselves out of a difficult financial situation. We need to unlock value for our shareholders. So, to that extent I do see next 24 months to be a period when these divestitures would continue to happen.

Sonia: We have heard that the order wins or order activity has been picking up for L&T over the last one to two months or so. Can you give us an update, are you more optimistic than you earlier were? There was also talk that you are bidding for the Rs 4000 crore Shivaji Memorial Project order as well, any status check on that?

A: The order inflow has picked up. The last two months have been very productive. I think much of these orders were long overdue. So, to that extent it is a relief that these orders have come. These are not new opportunities that came up in the last three months. So, the task would be now to complete these projects within cost and time that we committed quite a few months ago.

So, this augurs well getting into 2018 and we do expect Q4 which us January-March quarter to be productive as well because historically it has been the most productive quarter for us in terms of order inflow.

Latha: You started the answer extremely positively saying that the last two months have been very positive and there has been a pickup in activity, can you reiterate your guidance? Last time you had given us a revenue growth guidance of 12 percent and you said you won’t meet the order inflow growth guidance of 12-14 percent, would you want to change the second guidance?

A: The assessment that we did and this was as recent as November, was based on what we expected thing to flow between November and March. I don’t think there has been a significant change in that. We stick to our guidance what we articulated at the end of our Q2.

We are in the silent period as far as Q3 is concerned. Maybe later in the month we will be able to come back to you more specifically on where our assessment lies.

As we speak now, all the order wins that we are doing now is towards that guidance that we gave out in November.

Latha: There is one expectation and one fear in terms of taxes from the Budget 2018. Expectation is that the Finance Minister will take one more step towards lowering of corporate taxes and the fear is that long term capital gains in equities could get taxed in some fashion. What are you going with and your reaction to both these?

A: Taxation is going to be the favourite whipping peg for the Finance Minister. I think it also has to be borne in mind that we have squeezed so much out of the tax payers – corporates and individuals who care to pay tax that we will have to figure out a way to get revenues from the broad based data that they have on the tax compliance part of it. I think that would be more in order.

I am not very sure even though I wish the Finance Minister walks the talk in terms of reducing the corporate tax to 25 percent to every assesse. Last year I heard him do some kind of a segregation between bulk of the assessees who are at a certain lower tax bracket being given the benefit. I do not know why this distinction. Even people in the higher tax bracket if they are required to contribute to investment, then they should be enabled with cash on hand. So, if not for the tax rate coming down to 25 percent, I would expect them at least to look at MAT because today the rate of MAT is so very close to the rate of effective tax that most of us pay, that it ceases to be the benefit that it once was thought to be.

Secondly I think, if infrastructure is the way to go forward, I think some of the benefits that are there for investments in infrastructure sector needs to be restored. For example, contractors who have built the infrastructure assets are not given the benefit of 80-IA which a developer gets today under the tax regime. These are important tweaks that the Finance Minister can make of course in the overall balancing of things but it would enable more money with people who could co-invest along with the government in infrastructure sector.

As far as the capital gains tax is concerned, I think it is a very tempting opportunity for the government. I hope they resist the temptation and not go the Oscar Wilde way by saying the best way to succumb to temptation is to yield to it.