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Last Updated : Oct 03, 2015 06:25 PM IST | Source: CNBC-TV18

Will save Rs 100cr on RBI policy, but need bigger cuts: L&T

L&T Group Executive Chairman AM Naik believes the Governor needs to do more in terms of a bigger rate cut, in order to give the economy a much-needed boost.


Indian engineering and construction major Larsen and Toubro's cost of borrowing will come down by 25 basis points (bps), thereby resulting in a saving of Rs 100 crore, says group executive chairman, AM Naik.


Speaking to CNBC-TV18's Menaka Doshi, Naik highlights the issue of banks not transmitting the lower rates to corporates.


"Eight out of 10 companies here are facing financial crunch. The real issue is that banks are not passing lower interest rates to consumers. They have to be persuaded to do teh same. Capital projects that are strapped for cash will benefit significantly by lower rates," he explains.

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But Naik believes the Governor needs to do more in terms of a bigger rate cut, in order to give the economy a much-needed boost.

Below is the verbatim transcript of AM Naik’s interview with Menaka Doshi on CNBC-TV18.


Q: More recently we saw 50 basis points cut by the Reserve Bank of India (RBI) in benchmark rates. Are you cheerful about those rate cuts or that rate cut if I may put it so or are you maybe a little gloomy about the underlying prognosis for the global economy and therefore for slower growth?

A: Let us take two things not the same time. Last year in February when someone like you interviewed and asked me do you think we need to have rate cut and by that time the inflation was around 6 percent; I can’t say it was that high, I had said that if you want to give a boost to the economy you should have a drastic cut, not this quarter percent which happened thereafter.

Since the time I spoke the interest rates have been brought down by 1.25 percent. However, the real issue is the banks are not passing on that. I think the RBI has to do something about it.

The whole idea is that this rate cut reaches to the consumers and the economy gets a boost. Even State Bank of India (SBI) has only passed on 0.7 percent from 1.25 percent which has been effective cut. ICICI Bank has passed on 0.25 percent, somebody has passed on 0.65 percent and the highest is 0.7 percent.

My point is if 1.25 percent is the rate cut, why at least 1 percent could not have been cut?

Q: Given the transmission where it is today by banks, have you worked out roughly, back of the envelop calculation on what it means for your interest savings at Larsen and Toubro (L&T)? Will it have any sizeable impact in any fashion?

A: L&T is a AAA rated company, we have always got a very attractive interest rate. Our effective interest rate was only 8.75 percent, now they have brought to 9.25 percent. We think we may come down by 25 basis point and thereby may have a saving of about Rs 100 crore.

Q: I want to go back to the very first question that I asked you, implicit in the commentary on the rate cuts or the circumstances surrounding the rate cuts is a slightly gloomier picture of global growth and India cannot stay unimpacted by that. So, therefore I ask you while the rate cut might be cause for some cheer based on the transmission by banks how worried are you currently about the growth scenario?

A: I think the whole picture around the world is not that gloomy as possibly many people think; I don’t. The US economy is growing. I think it is one of the strongest today than in last several years. Now, let us look at the rest of the world. Rest of the world is not in such a good shape. Everyone talks about China’s growth slowing down and so on. Of course Europe is stagnant, Japan is no better but China in my view it is an opportunity. If China’s growth is slowing down unless it is due to internal consumption, I think the world like America should look at other destination for manufacturing under the government of India program of Make In India.

Q: You are saying India looks good, an oasis amongst the trouble around us, tell me what you make of the health of the domestic economy right now? Forget the numbers, the gross domestic product (GDP) growth numbers all of that, you have a finger on the pulse of the domestic economy through the projects that you work with. What are you picking up?

A: It is a mixed bag. You can say some sectors are growing well where the funds have been allocated, projects were already designed and crafted and therefore they could be put for implementation faster. This year and the last year, both years the road sector has taken off very well, the target of 30 kilometers per day, I think the government will meet. As I speak to you there are more than 20 tenders which people are bidding. Last six months about 18 roads have been awarded and they are talking about 10,000 kilometers of awards this year. I think they will reach the target, so, I think so far so good in that sector.

So far as the major problem on power that India is facing apart from power generation is power transmission. The entire power grid has to be strengthened and reaching out to every corner. A very strong robust national grid and regional grid has to be created which is very imbalanced, has been much imbalanced, quite a bit has improved over the years, that needs boosting and the government is giving it boost. So, there is a lot of money being spent there. I think these two sectors are doing well.

Third I would say likely to pick up and more so because of the two consecutive near drought conditions it is a issue that we must solve of water.

Q: What I am trying to get right now is the big picture view from you, you told me when I met you in March this year that you expected an improvement in the ground realities in the second half of the year. Are you finally seeing that improvement take place because it has been six months since we last spoke?

A: I am saying this that selectively it is taking place, as I told you on roads and transmission.

Q: At a speed fast enough to meet your approval?

A: In these two sectors I think they are picking up fast. However, there are many other areas where the implementation needs to be much faster. Lot of mega projects which could have given a lot of employment and quite a few are around Mumbai, last time I had told you, the bridge across the harbour, the coastal road, the fast train – I mean the super fast train, bullet train, the mass transit systems of Mumbai to be improved, Metro Line 2 and 3 to be created. All of these are moving but very slow pace. I would have like that to be much faster and I think the interest rate cut might help them as well.

Q: You have given us a bit of big picture view. Let me now try and bring it down to specifics. You have laid out a 15 percent orderbook growth guidance for the year. In March when we spoke you said you could see about a 100 basis point improvement in margins. Are you on track for both of those things?

A: I would say 15 percent growth had lot to do with some international orders. After the oil price crash we have seen slowing down, deferment, cancellation of many projects in our target geography which is Middle East.

So, I would say that the international is quite a bit slowed down and part of it we have to catch up domestically. With the kind of implementation movement taking place we may or may not be able to cover the entire international slowness in India.

What does that mean? We are still holding on to 15 percent growth. We think that in the second half we will do better than first half and which is always so in the project business because of spending and target budget by the government is always accelerated in Q3 and Q4 because otherwise it lapses. So, we think we will do fairly well in Q2. You can say we will maintain 15 percent. One or two percent here and there whether it will come down up to 12 percent or we go up to 17 percent, that is the margin that we are talking about but our all efforts are to stay with 15 percent.

Q: You are going to have to run at a far higher run rate of order booking in the second half of this year because your Q1 was a really difficult quarter. In fact I think it was the slowest quarter in 9 quarters or something like that. Since you declare most of your big project wins to the stock exchanges, your Q2 also does not seem to have met the need or the number it ought to have for you to clock 15 percent. So, from what I am reading of one analyst report, the run rate is about Rs 508 billion a quarter in orderbooking and in Q2 so far you have disclosed only about USD 85 billion.

A: No. Our target for Q2, we are on budget. Fact that we had budgeted even while talking about 15 percent growth, we had budgeted lower figure in Q1 and Q2 because some were taken already in last year because they got expedited. Some we knew that things had slowed down in the Gulf and we had factored that somewhat, not fully. Entirely our acceleration of the growth is supposed to be in Q3 and Q4. I can tell you that we are on our budget, we haven’t lagged behind that.

Q: JP Morgan has cut its order inflow expectations from 13 percent to 8 percent. So, when your guidance was 15 percent they expected 13 percent. They have cut that from 13 percent to 8 percent based on what they have seen you book in the first two quarters of this year and what you have publically disclosed about those orders. I am just curious to know whether you feel that the first half will under-deliver in as much. So, they have cut from 13 to 8 percent, I am saying when we look at the first half orderbooking will we see a far lower number than 15 percent?

A: Result is yet to be out. So, I won't be able to tell you what is the result likely in Q2. All I can say is that we have a annual budget exercise and that is quarterly broken up. The project business is never anywhere can be taken as per quarter. If you are on a standard product like auto, two wheelers and all that you know it will  regularly come out. Having said that, we are on Budget of internal target and more so it is tilted towards Q3 and Q4 if you compare to last year's JP Morgan's perception of cutting down from 13 to 8 percent may be in their way that they perceive what L&T will deliver. I am very confident that we will do between the range of 12-17 percent which I told you and we want to stick to our 15 percent.

Q: Will you manage to achieve 100 basis point increase in margins as well?

A: I think that is more likely than anything else because we had huge losses last year of hydro carbon and those losses have been cut down from Rs 1100 crore to may be Rs 200-300 crore and that itself gives me a boost of 0.75 percent. Then we have other areas in which we are doing better. I think we will get our 1 percent improvement in any case.

Q: Core working capital as a percentage of sales has been a point of concern and last time you explained it is not as much as your fault as the fact that the people that you do business with are not paying up on time, state governments are not necessarily paying up on time, that number is around 23 percent, do you expect to see any improvement at all this year on that or the stress will continue?

A: This year continues to be for a private sector huge financial strain. Obviously even if they want to are not able to pay. Mentally everybody thinks L&T can sustain time and others can't otherwise the business will stop. L&T is true gentlemen. So, in any case we can wait for a while plus the government delay. Whatever I may have told you in March has continued to put a strain due to working capital being around 23-24 percent. We are targeting to bring it down to 20 percent in the coming year and then eventually stabilise at 18 percent but economic situation and particularly private sector health has to come back.  

Q: When we last spoke we spoke of the trouble that L&T was facing in the hydrocarbon business. We spoke of the challenges in power, in ship building so what I am going to do in my next question is try and get very quick updates from you in each one of these sectors the progress that you are seeing. Let us start with hydro carbon?

A: Major old losing orders which accumulated huge amount of losses over three years have now come down to a point of this year onwards becoming zero. This means in next year we will have no losses on hydrocarbons.

Q: FY16-17 you will have no losses.

A: FY16-17 we will have no loss or may have slight profits. From this year it has come down from Rs 1,100 crore to may be Rs 300 crore. So, to that extent, situation I would say has improved.   

Q: Power whether it is generation, transmission, distribution. In all three spaces we have issues currently in the country. Power has been a big bugbear for L&T as well. Do you see any improvements on the ground in any one of these spaces and if you do how will it translate in to more orders or better profitability at L&T?

A: Let me take transmission because I mentioned that first. There is a spend taking place there. We have grown at the rate of 20 percent in transmission line not 15 and that momentum is continuing.

Q: So, this is installation of new transmission lines for grid connectivity?

A: Correct and that spend is as I mentioned taking place at a fairly brisk pace. So, I don’t see any problem about either drop in margin or for that matter the rate of growth slowing down at least for this year and next year. As far as the generation is concerned the number of orders on the horizon are very few compared to before.

Q: Even though if we have seen considerable progress in coal allocation, the cleaning up of all of that, the auctioning of coal mines. The hope that therefore this will help revive those power projects that are stalled?

A: This will only help power plant which are half done, three quarter done.

Q: So you think progress at least in those projects which may have stalled?

A: As I mentioned to you little while ago that the auction of the coal which had taken place if you put your own people how far that money is paid by the companies who had been given the mines on auction and how many of them have opened it I think one can do much better progress. So, to the extent we had seen that once the coal allocation issue is resolved lot of projects will take off. I think it is moving but at a slower pace than what it ought to have been.

Q: What about ship building?

A: Ship building is a nightmare and what decision we have taken about month ago, on Kattupalli that we will not do any more commercial ships.

Q: So you are in a joint venture now with Adani, is that how it works?

A: No, Adani is only we are talking about port not ship building. They have nothing to do with ship building. We have a port there as well as we have a ship building. If he is talking about anything his specialty is port and it is not our specialty and we lose money on the port. So, we want to cut out all the assets which are not necessarily our specialty to run, operate and where it is our core business.   

Q: So you have signed the deal with Adani?

A: Not yet, it is all under discussion hopefully in some time to come. So, don’t mix up that with ship building. Ship building what we have done our all losses were in commercial ships because no defense ship orders have come. Although there is a lot of talk about defense privatisation and it is intended and will happen, I am very confident because I meet lots of people and by and large everyone talks in the same tone that we need to take the whole of Indian industry in the defense sector to make India strong.

There is no doubt about that but having said that there is a huge time lag. We have tried to use that for the commercial ship building. We find that we have lost more money in commercial ship building then we would have kept that part of commercial ship building for the time being suspended and that is what we have done.

Q: So, financially you expect to halve the losses on ship building this year, this fiscal?

A: One month back we decided so obviously the full impact will be next year.

Q: You sounded sort of positive about defense, the last time we spoke you said even now the noises are all positive the direction is looking good but progress on ground, how is your defense business going. Because there are all kinds of numbers anticipating how big that business can be and I understand six months is not enough time to gauge progress in but none the less what is the update on defense projects?

A: When nothing much happens for all these years, India has gone backward in its defense capabilities for more than a decade in relation to the neighbouring countries.  We could have been much stronger than what we have been trying to depend on sick public sector unit who have not delivered in the past.

Taking the entire strength of a private sector wherever in whichever sector they are good at I think is a step in the right direction. I see movement in that.  

Q: Your orders in defence, I am told you just bagged an order  in self propelling guns, big one, Rs 5000 crore.

A: Rs 5000 crore in joint working with the Korean company but it is something which has to be delivered over 8-10 years. So, you can say it will add Rs 500 crore a year from two years from now because you have to design it, you have to do all the approvals.

Q: In this fiscal what is the incremental defence orderbook looking like? Have many orders come your way?

A: 40 percent more. If it was Rs 800-900 crore, now it is Rs 1200 crore.

Q: It is still small in the larger scheme of things?

A: Right.

Q: The other area that seemed very promising was the railways.

A: Freight corridors eastern and western which have been under implementation for long time has still Rs 20000 crore order to be placed. They will be placed this year and some of it early next year, that will happen and that is happening. Of course we will get some orders out of that.

L&T's therefore this year order target on railways is going to be fulfilled arising out of the past projects continuing where lot of sections of the projects have not been ordered. New projects however surfacing on railways from a new spend is something which is still I think at the planning stage and will come up for visibility in 6-8 months time.

Q: In the group structure reform you said in March that you wanted to put a little bit more though into this with your board and then you would tell me in October what your plan was. It is October now, so what is the plan now for group structure?

A: We have appointed now deputy MD, new one, 54 year old, obviously he will have a very long innings in L&T. He is the deputy MD and President, he was running the infrastructure group which was all the most 45 percent of the company, rest of the company  he doesn't know very well. So, I am orienting him now, he has just come back from USA after being there for 4-5 months, more on IT and technology service, so that he gets conversant with that. That portfolio is with him from the L&T shareholders perspective. That was something that I was directly looking after being the founder of that business. Slowly I am passing it on to him and over a year it would perhaps go in his hands.

Now I have put him in charge of ship building which is a very difficult task. I have to give him difficult tasks to see that he has a hang of things to come in future.

Q: So, this is your succession plan, Subrahmanyan is your successor, have I understood that correctly?

A: You can take the conclusion that way. I will say, he has a great potential to be one but whether he is a successor time will tell.

Q: In quality yes,  but in designation given that he is currently deputy MD which is the first and only step to MD.

A: He has the first chance. Finally it is not my decision alone, it is the boards decision. So, we have another two years to go. Suppose somebody comes out of the sky and said he is better than even the existing chairman, who knows. There are all kinds of possibilities but at least we have put public and shareholders at somewhat of a peace to say it is not as if there is going to be vacuum.

Q:  The next chairman after you will also be an executive chairman, will it be a non-executive chairman?

A: That is entirely upto the board.

Q: Will you stay on as chief mentor in some fashion or the other?

A: It is entirely upto the board. So, far as I am concerned I think it is time that I now take rest. That apart let me tell you that nomination committee and board will decide the issue regarding executive chairman or non-executive chairman  but CEO and MD will definitely be there.

Q: I say this with great admiration for the amount of energy and life you have dedicated to this role do you think you will ever be able to give L&T up?

A: It is not giving up. It will always remain in my heart.

Q: If you seize to keep any position in the group it is in a sense giving up all responsibilities, right? So I am asking you once you retire as Executive Chairman in 2017 are you likely to consider holding on to any other post?

A: As of now, no. I think that at some point in time we must detach ourselves from what you have been attached for too long and allow the younger generation to take the company to greater heights.



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First Published on Oct 1, 2015 11:42 am
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