Larsen & Toubro’s (L&T) new five-year strategic plan charts out a path for the company to add over Rs 1 lakh crore in revenue by FY26. SN Subrahmanyan, chief executive officer and managing director of L&T, said that the engineering major, which currently derives most of its revenue from the infrastructure sector, aims to be a technology solution provider of eminence in the near future. In an exclusive interview to Moneycontrol’s Rachita Prasad, Subrahmanyan talks about the road ahead, aspirations to be zero debt and a clean energy solutions provider, and how he is incubating startups within one of India’s oldest infrastructure groups. Edited excerpts:
Despite the challenges in order inflow that you witnessed in FY22, especially as domestic order inflows declined, you have given a target of 12-15 percent growth in order inflow and revenue. What’s behind this thinking?
It’s positive thinking. We’ve done well, we grew our orders by 10 percent, sales by 15 percent and we’ve grown profit by 10 percent. It’s a very good record to have under an excruciatingly tough situation born out by COVID, the European war situation, the commodity price increase, and logistical mismatch that is happening. L&T and the people who work here have been resilient. This gives us a good feeling that L&T-ites are able to outperform even in an extremely tough situation. Therefore, as the situation eases, we can continue on the path as there is momentum now. One of the biggest challenges has been to get people to infrastructure projects sites. At the project sites, unless you do physical work, there is no billing. We normally employ about 65,000 staff and about 290,000 labourers on our project sites. There was difficulty there as two times the labour went away, and we had to bring them back. We normally employ about 65,000 as our staff and about 290,000 contractual workers to do physical labour at our project sites. Due to COVID, on two occasions the contractual workers left for their native places and we had to arrange for their return. That’s not easy. In the last 24 months, we have not worked for eight to nine months because of COVID. Now the momentum is back, people are back to sites. But there’s a worry about commodity prices, for which we’ve taken adequate measures. But beyond that, we’re pushing on all cylinders and there is a possibility that sales, and profit can continue to grow in this environment.
At the press conference on May 12, the management said there is significant deferment in orders, and that government orders are not coming in as fast as it used to. What’s your outlook on the order tendering process?
The last two years, we had a blockbuster budget from the government. Now the budget has been translated into action. A huge amount of investment has been planned across core sectors like roads, railways, water projects, power transmission and hydrocarbon. We are present in all these areas so it has had a positive effect on us. And that’s why you see the robust order growth. Now what has happened is that when the crude prices suddenly shot up and as India is heavily dependent on crude, some of the money that we have budgeted gets diverted towards crude. Second, inflation is raising the head, not only in India but across the globe, and we need to be careful and watchful about it. Third, there is a very unnatural increase in prices, which is not only due to raw material price increase but also due to excess profit being made by commodity firms. This does impact the infrastructure space. The government’s budgets are made two-three years earlier, and when we bid for them, due to these factors we bid higher. If the bid is 10-15 percent higher in range, the government departments go through the process and bids are approved and orders are placed. But now due to commodity price increase, bid prices are higher by 20 percent or more. In that case, government departments and public sector companies cannot go through with the bidding and need to debate and justify the price rise. So there could be some deferment or shift in projects. That is bound to be a bit irritating, because what should happen in one month will take two months or three months to happen.
Your EBITDA (earnings before interest, tax, depreciation and amortisation) margin declined in FY22 and, as you mentioned, commodity prices continue to remain high. Given that and your ability to pass on the cost burden to customers, what will the margins be for FY23?
The margin depends on many factors, of which two are most important. As a project company, margin is realised only after the project has done 25 percent of its cost. During the COVID period, jobs which ought to be accounted for profit recognition or valuation in the previous year have not come through and have been deferred to this year. Second, due to the commodity price increase, we deliberately defer some projects. About 85 percent of our contracts are covered with price variation/reimbursement or other such clauses. But about 15 percent of the contracts are not covered by this. Today, the inflation is such that even the WPI increase does not reflect the inflation. Inflation is slightly higher than the WPI graph. So we are experiencing some cost pressures within the system. We will have to manage it. We’ll have to do projects faster, take it up with the clients, and hedge materials. One cannot run away from the fact that there is a cost push, that is what has been reflected in the slight decline in margins in FY22. That will continue during the year, but we will manage it.
What is the order pipeline for potential projects that you could bid for looking like? What are the sectors that will drive the growth?
Being very cautiously optimistic on this, the order prospects that we are looking at is Rs 8 lakh crore to Rs 9 lakh crore, same as last year. We expect momentum to pick up. Key sectors would be water, power transmission, minerals and metals, and hydrocarbon projects.
You have finalised the five-year strategic plan Lakshya 26 which aims at increasing revenue to Rs 2.73 lakh crore by FY26 from Rs 1.36 lakh crore in FY21. This plan was deferred due to the pandemic but now that it’s finalised, what is the goal?
We are in three broad sectors right now as an organisation, the largest being the EPC (engineering, procurement and construction) projects, the second being the hi-tech manufacturing which includes our heavy engineering and defence, and the third is the services sector, which includes L&T Infotech (LTI), Mindtree, L&T Technology Services (LTTS), and also the outlier L&T Financial Services. So when you look to 2026, these are the three sectors that we will be in; all our investments and plans will be centred on this.
What are the growth targets for the EPC and heavy engineering space in Lakshya’26?
The EPC project business will continue to grow at 11-13 percent. The last two years were impacted by COVID and looking at them does not give the right picture. If you look at the trend overall, it continues to grow at 11-13 percent.
The hi-tech manufacturing business will grow at between 12 percent and 15 percent. Our shops are full right now. We continue to expect that these sectors will get sufficient orders with the growth of refinery, petrochemical, green business and such.
How will the services business play out during Lakshya’26?
The services business, excluding L&T Financial, have been growing upwards of 20-25 percent. We do believe with the merger of LTI and Mindtree, subject to statutory approvals, the combined entity will see robust growth. LTI is very strong in ERP (enterprise resource planning), and Mindtree is very strong in the customer experience space. A combination of these provides a fantastic service input to clients.
What would L&T look like after Lakshya’26 ends?
As we look into the future, the EPC project business, which is about 70 percent of the company, may come down to about 65 percent and the 5 percent space could get occupied by the IT and technology services business. This means the market cap of L&T, which is now 30 percent by IT and technology services companies, can become 40-45 percent. So we will be more profitable, average weighted average profitability will go up. We will be more of a technology solutions provider company and that is robust and good from an overall point of view.
L&T has been increasingly looking at the green energy business. What kind of plans do you have for this space in the strategic plan?
L&T is a truly integrated power company—from mining equipment, transportation of coal, making boiler turbines, putting up EPC power plants, running your own power plant, doing power transmission distribution projects, and we were even present in the medium- and low-voltage switchgears business. We have moved away from some of these businesses one by one; we sold off the switchgear business. We don’t find huge traction coming in our boiler and turbine business for coal-fired plants. But we do not want to lose the fact that we’ve been in this business for decades and that is very fundamental to L&T because power is the backbone of the economy.
So the logical move is to look at the green power business. We are the largest EPC player in solar, but we don’t want to be invested in solar projects. So we are looking at getting into manufacturing for electrolysers (for green hydrogen), which can be done in our turbine factory. We are in touch with various technology players across the world, with the right technology and the momentum, to make electrolysers. The investment will be in the region of about Rs 1,000 crore for a 500-megawatt electrolyser production capacity, which is more than adequate at the moment. We also tied up with Indian Oil Corporation and ReNew Power for green hydrogen.
We also thought that being in the green energy space, we will have to be in the grid battery storage space. At the moment, it’s not viable because the battery costs upwards of $190 per kilowatt hour. It needs to come down drastically for it to be viable as a power source. We are again in touch with some technology players to see how we can jointly do some research and development to bring battery costs down. And if that happens during the latter part of the planned period, it could see some investments in the battery space, but not right now.
How are your monetisation plans for Hyderabad Metro coming along?
Two factors that were not going well for the project. One, a lot of people were not travelling to office due to COVID. Traffic had gone down very drastically, now it’s sort of coming back. As we speak, it’s about 300,000 people per day. The second issue was the huge debt of nearly Rs 13,000 crore, so there was interest cost. In our profit and loss account, this project was probably the only loss-making business. We cannot move away from this project because it’s a concession agreement; we are there for 65 years. We also have a minimum equity commitment of 26 percent. We appealed to the Telangana government and they have been kind enough to sanction a soft loan of Rs 3,000 crore into the project. That money will come in over a period of time and once it does, it will go towards repayment of debt which will reduce to Rs 10,000 crore. We have a term sheet with an investor, which I cannot reveal right now because a few conditions and precedents are to be overcome, which will happen shortly. And if that happens, another Rs 4,000 crore of equity money will come into the project. With this, we will come down from 100 percent to 51 percent. If the Rs 4,000 crore investment comes in, the debt of Rs 10,000 crore can be reduced to Rs 6,000 crore. We can also monetise some real estate, which we’ll do shortly. That will reduce debt to nearly Rs 4,000-5,000 crore. We have recently restructured the loan and the interest rate has been brought down from 9.7 percent to 6.2 percent. So with this, whatever can be done financially has been done in the project. We just have to hope that people start going back to office and the project will become cash-flow positive and even viable over a period of time. The best that can be done in Hyderabad Metro is to move it away from the balance sheet by doing an InvIT (infrastructure investment fund) over a period of time, for which we have in-principle permission from the government. It may take two-three years, but we will do that.
What about plans to exit L&T Infrastructure Development Projects Ltd (IDPL)?
We have a term sheet with a prominent investor. We have our stake down to 51 percent already. During the course of the year, we will move IDPL away from our balance sheet; it will no longer be an L&T company. It is a work in progress and we’ll announce it as it happens.
What’s the plan for the sale of your only thermal power generation unit, the Nabha power plant in Punjab?
We are talking to an investor and we hope to move the project away from our balance sheet more or less by the end of the year. L&T’s overall debt is Rs 1,24,000 crore, out of that Rs 84,000 crore is from L&T Financial Services, which is not really a debt but their borrowing so that they can lend. So the real debt was Rs 40,000 crore. If Hyderabad Metro’s Rs 13,000 crore debt, Nabha Power’s Rs 6,000 crore debt move away, all we have is debt of Rs 20,000 crore, which is what the working capital requirement of L&T is. We can become a zero debt company by the later part of the year.
L&T’s chairman AM Naik refers to some of the new businesses as “Subrahmanyan’s startups”. What’s the plan with that? And could we potentially see more IPOs (initial public offerings) from the L&T group?
He is a lovely boss. And he has his ways of going about things. We have, with his views on it, started two or three startups within the company. One is L&T EduTech, which is in the higher education space for engineering studies. We started it as a B2B platform, it seems to have done well. We’ve got more than 80,000 students enrolled right now. We will also end up doing professional teaching as well as move into vocational training. It has been received well. It is something unique that we are trying as most of the education startups are in the K10, K-12 and other such spaces. It is the first time we are offering engineering as an e-commerce solution. Second, we have a startup called SuFin, which is for trade of engineering goods between MSMEs, SMEs and medium industries. It is doing sales of Rs 15 crore per month and seems to be doing well. This is again a unique space. Time will tell whether the new initiatives are good startups or where it goes. I hope I can repeat the winning formula.
You announced the much-awaited L&T Infotech-Mindtree merger last week. Since then you have been talking to investors, employees and other stakeholders. From these interactions, do you anticipate any challenges?
There are no challenges. When we acquired Mindtree, you were the first person to pull me up to ask when we were going to merge it (with L&T Infotech). We could not do it at that time because ownership issues had to be settled at the company. We did that, we have now grown it. It has come back to 25 percent growth. So it has achieved what it needed to achieve. It also so happened that around the time we took over, Covid happened and Mindtree was big in travel and hospitality, and both sectors went down pretty bad. Now that we have brought it back, it is logical to put the two companies together. To have two IT companies, which have more or less the same offerings but in different sectors, was not the right way to go forward beyond a point of time. The L&T Infotech and Mindtree merged entity will have a very positive effect on clients as they will be able to source solutions from the same organisation.
You have a presence across the supply chain in the power sector. Looking at the looming power crisis in the country, and the steps announced by the government so far, do you have any suggestions on what can be done to resolve the issue?
I think the government is doing the right thing. Coal-fired has become a bad word across the globe and COP26 and other sustainability criteria are coming in very heavily. I think we are already taking steps which are late, we need to take these steps in a very, very hurried manner across the globe, not specific to India. India does not have any other resources. Coal is our biggest resource and is available in plenty. But we have shifted our views and we have started putting up more solar, hydrogen, nuclear and such other plants. Power is a very sensitive topic in India; it’s sort of a political animal where a lot of subsidy takes place and the discoms and gencos are not in the best of health. But that’s a subject that needs to be discussed in a different forum. Nothing can be done by me making a request right now. But we are very clear that coal-fired units will slow down from an EPC point of view.
What about your power equipment joint venture with Mitsubishi?
It is a work in progress. It’s not our own decision as we hold 51 percent but we have an excellent relationship with them. We are talking to them, they’re also worried. They also have coal- and gas-powered factories in other parts of the world. So both of us are in a dialogue and if something else comes out of it, we’ll do that. Otherwise, we will have to jointly think of how to take it forward, including making electrolysers and such in those factories.
L&T stands at a juncture where the order book is at a record high and you have so many different businesses across so many geographies, each with its own story. How do you divide time between the businesses? What part of your job takes more time?
Once you become a CEO, nobody wants you to be in their business. L&T is run by vertical heads. All my colleagues are fantastic and lovely people, they don’t want me to interfere with their business at all. And they’re doing quite well. So I’m happy coming to the office, having a cup of tea, talking to you and going back! (He says this laughing.)
Then what is motivating you to come to the office every day, what is the most exciting thing right now?
I think one always tries to improve on what one has. It’s a great platform given to us by Mr Naik. The biggest agenda on the mind is to take the platform forward to a higher plane and leave it there when one has to move out from that place. That’s the biggest agenda today. We have a robust strategic plan, which has been extensively discussed within the organisation. The key thing would be to implement this strategy to its subjectivity and spirit to see how to move it forward. As we move forward, the economy gets challenging. There is disruptive, terrific and smarter competition, there’s more entrepreneurial spirit. We need to look at all that and see how we can be more robust, more agile, entrepreneurial and aggressive in our way of business. That takes a lot of time. I think the other important thing is to develop talent. To achieve our strategic plan and be a Rs 2.73 lakh crore organisation by 2026, we need a huge amount of talent within the organisation. I spend a lot of time mentoring people, talking to people, even recruiting people. This is probably the single biggest chance and opportunity that I have to develop the right set of leaders from a succession point of view. That’s very, very important. And Mr Naik, some of my colleagues and I spend a lot of time on it. The third is technology. I think we need to be abreast with what’s happening globally in technology. We have taken some steps towards it by being in touch with many of our peers and competition, consultants and even world leaders. We believe we’re doing the right thing, time will tell, but that’s the way to look at it. It’s a very positive feeling. We are sitting on a good order backlog and, therefore, there’s no desperation about anything. It’s an engineering company where we get up in the morning, rising up to challenges. We hope to become a technology solution provider of eminence in the near future, and that’s where the platform is moving.
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