Focus on capital formation is the best way to create employment: L&T CEO | Business Standard News

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In a Q&A, S N Subrahmanyan says he is confident of margins through overhead recovery despite high input costs

S N Subrahmanyan, L&T CEO & MDFile Photo of S N Subrahmanyan, L&T CEO & MD, at a media briefing

Larsen & Toubro (L&T), India’s bellwether engineering, construction and hi-tech manufacturing company, last month reported a more than two-fold increase in net profit. In an interview with Jyoti Mukul & Aditi Divekar, its chief executive officer & managing director, S N Subrahmanyan, shares the company’s expectations across business verticals and the attempts at cost management. Edited Excerpts:

1. How far has the company been able to recover to pre-pandemic growth level? Do you see the growth sustaining in the coming quarters?

In Q1FY22, India was impacted by the second Covid wave. Both, the proliferation of infections and fatalities were significantly higher than the first wave. Despite the challenges, our group order inflows and revenues have registered a growth of 13 per cent and 38 per cent, respectively. Our PAT for the quarter is 4x the PAT in the corresponding quarter of the previous year. The road ahead is looking a lot more constructive. With the waning of second wave and lockdown restrictions being progressively eased, there are definite signs of pick-up in economic activity. The government with its fiscal ammunition and the Reserve Bank of India with its accommodative monetary policy remain committed to support growth revival. We remain committed to our guidance of up to a low to mid-teens growth in order inflows and revenues for FY22. Despite input cost pressures, our core business margins will remain at the same levels as last year. We are conscious of our capital employed in businesses and will efficiently manage the ratios. We do believe normalcy returns from Q2 onwards.

2. How do you see project execution going ahead and overall operations for FY22?

Our group order book at Rs 3.23 trillion is near record high levels in the history of the company. A large and diversified order book provides multi-year revenue visibility. Around 80 per cent of our order book is domestic and the remaining 20 per cent is international. A predominant portion of our domestic order book is from public space (Central Govt/State Government/PSUs). In challenging times like these, it is good to carry government risk on the balance sheet. The entire order book is active and if we do collect payments on time, we will be able to target robust execution going forward.

Developing and adopting sustainable and innovative execution methods sets us apart. Over the years, we have been leveraging new-age technology and digitalisation into our traditional construction practices in a bid to improve the control and efficiency levels of project execution. The pandemic has paved the way towards larger dependence on these digital solutions such as WISA (Workmen Management Solution) which has helped us immensely in identifying and approaching workmen with a specific skill set during our remobilisation planning; Digital Chipset to track and monitor our P&M assets; and Geospatial tech, LiDAR and drone based surveys which helped us capture and monitor site data remotely during the lockdown. These innovative solutions are set to become the ‘new normal’ for us in the future.

We will continue to take care of the health and safety of our people while aggressively pursuing opportunities for growth across key geographies.

3. What will the key drivers for the company’s growth be?

Focussing on capital formation is the best way to create employment opportunities during these times when household balance sheets are possibly at their weakest. We see capex opportunities across the Centre, States and PSUs. The current government is seized by the fact that investment spends can drive economic revival and we do believe that the government will broadly achieve its targets laid down in the National Infrastructure Pipeline. In the budget, the FM did mention relaxing fiscal consolidation targets for a couple of years in order to spend more towards economic recovery. Many of the state and PSU capex programmes in the country are being financed by the multilateral agencies in India today.

Our prospect pipeline for the remaining nine months of FY22 is around Rs 9 trillion. This is 45 per cent higher compared to the same time last year. We see strong prospects in all the different verticals in the infrastructure segment like heavy civil, water, power transmission & distribution, buildings & factories and transportation infrastructure. Post revival of oil prices, the hydrocarbon prospect pipeline is robust across onshore, offshore and construction jobs across domestic and international.

4. What is the major reason for a 67 per cent increase in manufacturing, construction and operating (MCO) expenses?

The MCO expense variation is largely reflective of increase in activity levels in our ex-services and concession businesses. Our ex-services and concession revenues have grown 57 per cent over the comparable quarter of the previous year. It is also a function of cost versus realisable sales value jobs in the quarter. We are a conservative company and we do not recognise margins on jobs till they cross the 25 per cent threshold. Lastly, increased input costs during the quarter also contributes to MCO variation, but we remain confident of maintaining our margins through better overhead recovery during the year.

5. How do you plan to maintain margins in FY22 given the increase in prices of steel and cement?

During FY22, we will maintain our ex-services and concession margins at the same level as last year. Our current composition of variable jobs, jobs that are expected to cross the recognition threshold in the current year, cost contingency releases for jobs nearing completion, overhead optimisation initiatives, enhanced productivity through digitisation initiatives, value engineering and wastage control initiatives, negotiation with vendors and discussions with clients on use of alternate varieties should see us through in terms of managing cost headwinds during the year.

There has been a sharp rise in prices of steel, cement and some other commodities in the recent months. We have multiple measures in place to bring the situation under control. We have formed a taskforce within the company to see how to ameliorate the situation. We have taken measures to redesign thereby reducing steel and increasing cement. We have gone back to the clients to talk to them on price increases, on certain key aspects of the inputs that go in. We have initiated several conversations with steel, cement, aluminium and other companies to see how we can get better prices because we give them fairly huge orders every year. We have taken efforts to tell the clients to prequalify other vendors who are not in the original list to see how we can get reduced prices. We have specifically made arrangements to pay them faster so that we get better prices.

With these efforts, although there is not going to be a drastic reduction in prices, we are able to manage this situation in a much better manner. We have been successful so far and we will continue to work on this to see how to minimise the impact of key input prices.

6. How are you foreseeing growth in the private sector orders in the coming quarters in comparison to pre-Covid years?

Currently, the private sector as a percentage of the domestic order book is around 15 per cent. We mentally bucket private capex in three parts, industrial capex, real estate & PPP. With the pickup in ferrous and non-ferrous prices, we hear many private companies announcing their capex plans. Real estate is a mixed bag currently with residential real estate in the low to mid ticket housing segment looking up whereas commercial real estate is looking weak currently. Some emerging new areas are data centres, warehouses and parks. Although balance sheets of many private players have healed to a large extent, we are not sure of the revival of PPP capex. Hybrid annuity roads may continue but beyond that PPP going forward looks tentative in the medium term.

In a world, where we are still battling the aftermath of the pandemic, and the scientists predicting a possible third wave, we look ahead with optimism. Since the past few weeks, things have begun to improve and we have every reason to believe that things will get better from here.

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