Interview | Budget plan implementation, faster dispute mechanism key to infrastructure growth: L&T CFO 

The Rs 7.5 lakh crore is generous. The good part of the allocation is that they've chosen sectors where there is likelihood of a multiplier effect in terms of job generation, distributed income, earning potential, etc.

They have focused on transportation sector, like on transit-oriented cargo terminals, logistics parks. These are all connected projects and they are linear; this will take employment generation to different corners of the country. The Finance Minister spoke about renewable energy, water and housing, which are important issues from the political point of view common man's needs as well as development as more of these centres are coming up. While no specific tax incentive exists today, (with) the inclusion of data centres and energy storage systems, financing these projects will become easier.

Except for the removal of the surcharge on long-term capital gains, which is good in a way, they've have kept the tax structure stable. This is a good strategy because one moving part in the entire investment and return on investment gets addressed if the tax regime is stable. That in a way adds to the attractiveness of the infrastructure sector from a capital attraction point of view.

The most telling thing about the viability of these investments doing well is the thrust on manufacturing. Today, one of our biggest constraints is logistics—moving goods to the market of a manufacturing unit. The thrust to defence, manufacturing, electronics, telecom equipment, solar modules, will improve the viability of these transport and logistics projects. If there is traffic movement of goods, it will justify the investments. Often investors look at these investments which are perceived as good, but the viability is so long-term that only pension funds and sovereign wealth funds are able to invest.

Also read: Budget 2022 | Government strikes a fine balance between growth and fiscal consolidation

India needs to invest $1.4 trillion by 2024-25 on infrastructure to achieve $5 trillion gross domestic product. The Budget spoke about capex, infrastructure, and even climate financing but did not give specifics. Where will the financing come from? 

The numbers are suggesting almost Rs 15 lakh crore for financing. The tax collection is expected to be robust. They are also talking about allocating almost Rs. 1 lakh crore to the states for them to participate because they now realize that some of these projects cannot get stuck at state boundaries, they need to flow to  the natural destinations. It's important to get states on their side and get projects on track. All this is going to possibly going to come from the Rs 15 lakh crore gross market borrowing that they mentioned, and also the sovereign green bonds. But clearly the financing has taken a backseat and they have put the end-use first. If the economy grows the way they are projecting it, if tax collection continues to be robust, if the market continues to be attractive, then funding would be available through market borrowing or FII remittances.

Also read: Budget 2022: FM focuses on speeding up cargo movement, improving logistics network

What are the risks to this plan? 

The biggest risk in this is implementation. In the past, too, we have always had decent announcements, but the ability to follow through and implement has been our biggest challenge. Secondly, with so much money mobilization, interest rates are at a risk. If interest rates rise, then they puncture the viability of the project. Finally, all these projects require steel, cement and other commodities, the supply of which are constrained as it is. With additional demand for all this due to the additional capex, there will be a need to manage the supply-side; otherwise inflation will spiral and to that extent, assets will become uncompetitive. These three items are risks to this plan—implementation that includes ability to find the money, interest rates and inflation. If they are able to manage this, this budget could be the much-needed dose for sustainable growth. Because of last year’s base effect, growth looks attractive. But when you talk about the next year on the basis of the current year's estimated growth, unless the implementation plan is solid, there could be issues in terms of handling the expectations.

As the largest infrastructure company in the country, what are the opportunities and challenges for the sector now? 

We had said after our financial result last week (that) the project pipeline looks good, the pipeline even without this budget announcement. That was based on what activity we saw around. The budget announcements give further emphasis on investment and growth through investment. It makes the pipeline more certain for a longer period of time than it was before the budget. But how much of that is going to be put into smaller programs, when will it be rolled out, timing of bids, conversion of bids to order—this needs to be seen. The biggest challenge is to complete the whole cycle from bidding to awarding quickly. If it happens as briskly as it did in 2020, then we could even see the benefit of all these investments within the budget period.

Also read: Budget 2022 opens coffers wide for road, rail investments

L&T is seen as a proxy of India’s infrastructure story as you have a presence across sectors. What are the growth drivers now and would you revisit plans after the budget? 

We have been pitching out tent in all the areas of infrastructure. We were not sure about the sizing of our defence business because we were not sure how much preference would be given to domestic manufacturing. There seems to be a little more definitive direction towards that. So now we will have to see how much we are able to deliver from our factories; it’s a good development.

We have been talking about energy storage as part of this energy transition, and electrolysers, etc. The budget gives attention to these segments on a national level so that will help in firming up the plans. The benefit out of this budget will be seen over a two-three year period if we are able to sustain. They continue to talk about projects like river interlinking, but that requires consensus with the states. These could take more time and have long-term prospects. But the rest of the areas that have been talked about are all workable. But if we are looking at a private-public partnership model for financing projects, we need to ensure these projects are more viable. The PPP projects in the past did not contain sufficient relief measures for dispute resolution, speed of clearances, right of way, etc.

The government announced National Monetisation Pipeline last year but the Union Budget did not specify the plans for it… 

I don’t know where the asset monetisation plan figures in this. The budget spoke about kilometres of expressways, but are we planning to finance it by divesting some developed assets? They have not made that clear.

But would L&T be looking at these assets if they came up for sale? 

No, we will not looking at it at all. We are watching this space because asset monetization would pump liquidity into the industry, and to that extent new programmes would get financing. We are interested in engineering, procurement and construction (EPC) projects and we are looking at it only from the point of availability of liquidity with our customers.

The other thing the budget did not touch talk much about was the thermal power sector. L&T’s power business has been a laggard due to the challenges in the sector, what do you make of this budget? 

The Economic Survey very clearly talks about fossil fuel; how it continues to be relevant and we can’t scrap it overnight to switch to renewables. The budget is very silent on this. Our belief is that the desulphurisation of existing power projects will continue, but we don’t expect any major EPC order for a new thermal capacity asset. But if India is going to grow at the pace at which it's predicted, I wouldn't be surprised if some thermal capacity addition comes about. While solar projects take only 18 months to come up, it requires a lot of land and then the cost of modules continue to be high. The government will have to revisit some conditions to give confidence to developers that power purchase agreements will be honoured.

Dispute resolution continues to be challenge for the industry with many projects stuck in arbitration. What more can be done? 

Of late, there is a movement to settle cases outside of court. But that works well only when the two parties are equals; the government is not really an equal party. The conciliation becomes difficult when the other party has a more powerful position at the table. The arbitration has some ticking timelines, but conciliation is open-ended. If a plan has been implemented we have to respect time; interest during the construction itself can make it unviable. Speed is money.

After the second quarter of FY2022, you sounded more confident of achieving you sales and order inflow targets for the year than how you did last week after the third quarter. Should we be worried that an industry bellwether like L&T is not as confident on execution and implementation? 

Things are improving with every quarter. We have hit a good season now in terms of weather conditions and festival season getting over. We get an uninterrupted run of about six months, till about June. This is possibly the best period for execution of projects and planning budgets. There is always the pressure to execute more projects faster because ultimately the order book has to be converted to sales, profits and cash. The turnover of people is very high, managing people movement is a challenge. But we were far more worried this time last year as compared to where we are right now.

Does that mean this is the best time for mobilization of people? No, we have seen better times but we are moving forward.

Also read: L&T Q3 results | Profit, new orders dip but order pipeline remains strong, says CFO

This fiscal is coming to an end, what will be the top priority for 2022-23 for L&T? 

The priority is to catch up with the commitment to clients because we have been pushed back on time due to the three waves of the pandemic. The second priority is to ensure that the non-core assets exit that we have been working on gets completed. The third priority, we catch up with our commitment to the plan; we have to make sure working capital stays disciplined and money management has to remain intact. And finally, we have to manage talent, some of the businesses in our portfolios like IT (information technology), IT-enabled services and financial services have a lot of attrition, so we have to manage that well. Of course inflation is always an important factor to manage.

L&T have identified the Hyderabad Metro project for divestment. You have been in talks with the government to reduce the stress on the projects due to Covid19 disruptions. What is the status of the plans for this project? 

Every month is two steps forward; we are definitely making headway. We refinanced the loan in December, that is giving us a saving of Rs 300 crore – 400 crore on interest payment. Now we're trying to restructure the capital so that the debt level comes down in the project. So sometime in the course of this calendar year we will be able to mention what exactly we're doing to make this project not such an overhang that it has been. Ultimately, what will help is people commuting on it, which has been disrupted by the pandemic.

When do you expect to close the divestment of L&T’s infrastructure development arm, IDPL? 

We are working on the divestment process to exit it. We are hoping against hope that we will be able to close the process. We will speak about it when it is done.