Malini BhuptaMoneycontrol
Larsen & Toubro, India’s largest engineering and construction conglomerate, will have a new CEO in place by July 2017. But SN Subrahmanyan will be taking over the company even as group chairman AM Naik has not found a solution to all the legacy pain-points, which have been plaguing the company’s return ratios.
Several of the company’s investments, which were undertaken in the last few years – like nuclear forging shop, road projects and ship building yard – have dragged the return on equity down due to lack of orders. These businesses have come about ahead of their time and orders are taking time. He says: “The power investments on the EPC coal-fired business, the ship-building business, if these are considered heavy businesses and also the investments in (infrastructure development subsidiary) IDPL, our build-operate-transfer (BOT) and build–own–operate–transfer (BOOT) kind of projects, these are little ahead of their times.”
But SNS, as the incoming CEO is called, blamed the environment, adding that nine times out of 10, these investments would have done well if the economy had grown at its potential. “The environment does play a part. Nobody predicted Fukushima and beyond that nobody predicted an event that happened in Fukushima will have such an impact across the global environment. Suddenly nuclear became a bad word,” he said.
But L&T’s CEO-in-waiting is not overly concerned about the problems as he believes the balance sheet can handle it. “At some point of time, it will come back. These plans take time, and one has to be little patient and persevere with whatever we have done there. It is a bit irritating but I think the balance sheet can take this," he said. "It is not that the right way for me to speak from a stakeholder or a shareholder point of view, but having done the investment, we think we have to bear it out and at some point of time, there will be some necessary positive inputs into it. We will wait and see and I have a feeling things will turn out positive.”
Subrahmanyan said Naik's decision to enter the shipyard business was based on his assessment that public sector shipyards would take too long to fulfill orders."Private sector is supposed to be more efficient and that is how the government it to invest. So we did invest. The policy changes to that extent of speed have not happened," he said."We have bid for vessels right now where at least five or six offers that we have made to the navy are under scrutiny. I am sure we will have positive results as we go by and if that comes at some point of time, we may say the shipyard is doing well," he said. "But at the moment it is financially not a sound investment. It has a fair amount of investment that has taken place therefore there is an interest cost, there is depreciation and there are yard overheads which are very much striking us on the face."
One of the ways the government is trying to revive infrastructure spending is by addressing mistakes of the past. “I think the present government realized that concessions agreements had not worked out and, therefore, the minister concerned also spent a lot of time to remove some of the dead wood projects, to move some of the private sector investments out of it, to come out with EPC projects,” SNS explained.
The government has realised that the only way to get some of these companies out of trouble was to come out with EPC and, thereby, companies got advances and payments as they did projects. Therefore, contractors have made some money and brought down interest and debt.
“I have a feeling that now with the revision and concession agreement and with certain changes that have been made and also introduction of the concept of hybrid annuity model over a period of time, concessions would revive with the business environment but we need to take a call whether after having gone through that, whether we need to be in concession business.”
At the moment, L&T is hesitant about it, “we have not had a good return there, so, we will have to think about it but we will decide as is appropriate from market conditions and economic point of view.”
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