SN Subrahmanyan (Sekharipuram Narayanan Subrahmanyan) is the Chief Executive Officer & Managing Director of India's major infrastructure firm Larsen & Toubro Ltd (L&T). He took over the reins from Mr. Anil Manibhai Naik on July 1, 2017.
In a recent interview with ET Now at the sidelines of the Economic Conclave organised by Times Network India, he said about the strategies which make L&T one of the biggest multinational companies in the world. Here are edited excerpts:
A series of processes going on for many decades and some fantastic leaders have built this platform called L&T and have taken it to where it is now. We do see many other players coming up in this space but to have that kind of deep-rooted engineering, technology methods, the frontline, the training centres, the capability, the deep-rooted methodologies and people that we have embedded within the system, takes a lot of hard work. It also requires lots of gutsy and major decisions. EPC is principally a risky area. You enter into engineering procurement and contract with an organisation to deliver planned infrastructure. You are taking a lot of risks. These risks include engineering risks, performance risks, process risk, delivery risks and finally testing commissioning and handing over. Unless the organisation has gone through it multitudes of times, it does not generate the confidence within itself to deliver it. Worldwide we have seen many EPC companies disappear. Thanks to good luck and God’s blessings, we continue to thrive in this.
In the world of EPC to be 100% self-reliant is always a bit difficult. There are certain processes and deep-rooted engineering knowledge, some of which we do not possess and in certain areas we do. We have to depend on the world’s leading engineering and process companies that have knowledge in the space of hydrocarbon, metal and specialised metals. It will continue to be like that because everybody need not go to the moon. We have the knowledge, we have the access to it and we make use of it. But the fact is that an organisation like us has worked with many of the leading processes and engineering companies in the world and therefore, we have an excellent association with them. We have done projects with them. We have gone through the ups and downs and goods and bads and therefore the relationship helps us to continue developing on it to produce a total EPC solution. But what we need to see is beyond process and engineering.
Of the engineering capabilities Larsen & Toubro (L&T) has built, not much is known to the outside world but we have more than 7,000 engineers working within the various verticals of L&T and to an extent, we would be one of the largest engineering companies in the world. We do these services more for our own projects. We hardly do any consultancy outside. But if we were a constant company, we were also one of the largest engineering companies in this part of the world. Apart from that, we have our L&T Technology Services which takes engineering to the outside world including process engineering and certain aspects and they have nearly 15,000 engineers working for them. So in a way we are one of the largest pure-play engineering companies beyond being engineers and contractors. Now having said this as we go forward, beyond engineering this procurement and contracting, I think in EPC, anything that anybody can do, we can do in India and even better.
In procurement, there are certain specialised equipment and such which one can do in India but at the same time, there is not much economy of scale because that kind of development is not there. So for some of this processed equipment where there are patents, we may have to buy. But to a large extent -- nearly 90-95% -- we are quite capable of handling our needs. We are quite capable of making in India and not only by us but along with the ecosystem of partners, MSMEs, SMEs we are able to do it in India. This says a lot about the way we have propelled ourselves as an EPC organisation.
Much of the problems in infrastructure are because of delays that occur due to various reasons and also the way we go about choosing EPC players. It is my deep-rooted belief having worked in India and the Middle East and certain other continents including Africa and to some extent in the Far East and a lot of the emphasis has to be placed on how you prequalify the partner that you want to deliver you EPC. The unfortunate situation in India that we have gone on to for obvious reasons into the L-1 method of choosing a contractor, maybe rightly so but then the way you choose L-1 is important.
Now, if you allow joint ventures, if you allow unsolicited dilution of prequalification criteria and qualify one and all, somebody can always become L-1 but may not necessarily be the rightly prequalified contractor. We have seen umpteen projects get very badly delayed going into disputes and court cases and such and the government system may not be able to easily onboard and remove a contractor and then the project gets extremely badly delayed and a poor country like us cannot afford the kind of cost increases that take place so enormous emphasis has to be placed on prequalifications. It is possible that in some crucial jobs etc only one company could get prequalified. So be it, it happens in many countries, there is nothing wrong in having one company prequalify. So in such cases what you do is you have a gradation of contractors, for certain types and value of work you have certain types of contractors doing it, if two-three of them have done it very very well, you take them to the next value and then the next value and so on and so forth so ultimately at some point of time you will have two or three or five L&Ts working in this country.
It is not that we are afraid of competition; we face competition in every aspect of our lives. That is fair enough but there is a method. It is competing with somebody who has the knowledge. We have to get into the right way of doing things. First of all, we have to see that projects are done properly and on time. The second is land acquisition and clearances. In many cases one gets into a job and then you find the land clearance is not done, right of way is still not done and all this creates a lot of time and cost overrun which can be avoided if proper planning and proper thought through is done prior.
The next point of course would be after you get the job. There are the scope of changes or deviations or alignment changes or multiple authorities working at cross purposes and therefore you have to stop and find the right balancing to get to do a job and naturally if time delays their having mobilised the resources are very much there, the cost is ticking along, working capital is ticking along and you need change orders and such and which again leads to cost increases. The other important thing which is really hitting us nowadays is the frequent resorting to disputes and arbitrations which are also not ordered and some of them go to court and much of them go to court and the court system works in its own way and takes 10-12 years to get a decision.
I am not sure that is the right way to do commercial projects; profit delayed is profit denied, cash flow delayed is cash flow denied and many companies have seen very bad situations due to cash flow management because in a project there are plant and money that do not get labour, material and plan can be mobilised with the contractor but money has to be given by the client. So money does not flow in the way it ought to. One cannot keep on taking money from other jobs and putting it into one bad job because the decision is not being made there and thereby it destroys the entire P&L and balance sheet. I think this is happening quite often nowadays. Some mind application has to be done whereby much of the matters are not sent to disputes, it is sort of sorted out across the table.
Second, if even it is taken to disputes you cannot have a conciliation process, the dispute process and arbitration process and then the lower court to high court to Supreme Court, nobody can survive this process. There has to be a method by which if a dispute is settled in whosever favour the other party has to agree to it, under very rare circumstances that should be allowed to go to arbitration. Arbitrations have to be completed within a year and there is a NITI Aayog rule which clearly states that 75% of the money has to be paid to the contractor or the client whoever wins the disputes 9/10 it is the contractor, the money has to be paid to move on, not being done in the manner it ought to. We have also raised it in many forums. I have personally raised it but this is something which we need to see how to make the system work in a more evolutionary manner, in a positive manner and in a manner by which projects benefit by taking quick decisions. And if that can be done I think many of the issues that we have will get sorted out. Last but not least when you start a project whether in whichever form, whether it is a private client or the government the financial closure ought to be done. Sometimes we have done projects fast enough but the budget allocation is not there and it has to wait for the next year and sometimes there is a dispute on the budget within the departments on where what has to be allocated and projects have suffered because of want of money. Sometimes a change of government takes place and priorities change, contracts are not honoured or the shifting of budget takes place, such if can be avoided it is much healthier from an overall ecosystem point of view, it gives a better feeling to how we take forward projects. At the end of the day, we are a hungry country and we need investments, we need projects in whichever, whatever form one does it, it is always good and whatever project is done is always good that is the way we view it.
No, much of the vision had been set in motion before I assumed my particular seat here. Mr Naik has deep-rooted thoughts and set the company on a particular track and method. Much of the heavy investments that we need to do -- be it heavy engineering facilities in Hazira, the huge power factories for making turbine and boiler in Hazira, the yards at Sohar, Hazira and Kattupalli for fabrication and for both normal and modular fabrication, the factories in Coimbatore, the shipbuilding facilities at Kattupalli and fabrication yard and the other factories and also the land towards IT expansions whether it is at Baroda, Mysore, Bombay or Chennai -- have all been put into place.
To that extent, my work in that kind of visionary thing is less and therefore my immediate priorities are to concentrate on sweating the assets out to maximising the output that we can get from the assets that we have created. Some of these investments have not gone well, especially the investments in IDPL, the investments that we have done in " Hyderabad Metro", certain heavy investments that we have done for the shop, on Hydel plant etc. We are trying to move these assets out of our balance sheet by finding a good place to house them. It is a work in progress and I guess in a year or two that ought to be done. My emphasis has been more on the services side. So we acquired MindTree recently, it has done quite well and the company has got well integrated with us a new leadership team there. We acquired smaller IT companies of platforms, digital, IoT and sales force of such natures it helps us to propel our IT businesses much further and in a more efficient manner. We have been placing more emphasis on engineering. So that is the way we look at it. So you look at L&T today it is 65-70% EPC and projects, 10% manufacturing and precision engineering and defence and the rest is services which is all the three IT companies; L&T Finance and if you want to call real estate service.
So my emphasis has been to push the services a little faster than what they were growing so far and that will continue to be my emphasis. If we find good opportunities, both organic and inorganic -- we will pursue that and to sweat the assets of EPC project side to whatever extent we can to become more global in nature and we will continue on that path as we see it. One other thing that we have been looking at very seriously is also the green portfolio. Not much is known but we are a large green player. We are the largest solar EPC in the country.
We do about 550 to 600 megawatts every year. Now with the solar business, we have also gone to the Middle East. We have the largest contractors of Hydel projects in the country. We have five to six projects going on at the moment. We are the largest contractors of nuclear power plants in the country. We have at least two projects going on at the moment. We are seriously thinking - we are the largest contractors of FGD, the fluid gas desulfurization units for coal-fired power plants. We are nearly 40-45% of the market share of that business. We are seriously thinking of looking at green hydrogen, which is the hydrolysis of water and producing hydrogen that is a business that we are seriously looking at. Carbon capture is another theme that we have been working on but the process involved is still very costly unless, we are applying our mind on it, we have some interesting talks going on with possible collaborators or solution providers. If something comes out of it we will look at it seriously. So in a way green is the way to go. All our offices and factories we are trying to make it as green as possible. We are in the process of doing it. There is a separate task force working on that within the company. And on the possible green initiatives of L&T, we have explained and if there is a good method to look at it from a business point of view we will take it forward as we go along. So this is probably one thought process that I thought I would mention.
One has to be practical out here to state the obvious right. We have had politically at the central level, we had a very fantastic seven-year of stability with the majority government being in place. I think there is a very big positive thing from a citizen point of view, from a business point of view and I think it is an extremely good thing that has happened to the nation. On top of it this government has been very bold in taking certain very far-reaching decisions to state a few the GST act, the one nation one tax act, I think it is a remarkable tax. Earlier we used to have huge sales tax departments and to understand the sales tax of each state etc. has all gone now, we just have one nation one tax. The RERA act that has come in, the IBC Act which is in play, the various measures that the government has taken towards easing the crisis that happened after the pandemic in terms of easing out interest rates reducing bank guarantee interest and easing out cash flows in many projects, putting in conciliation methods to sort out tough situations in many projects and contracts, easing bank restrictions, advancing loans to MSMEs and SMEs from their business point of view.
The Aatmanirbhar programme which I think is a phenomenal measure to make things more within the country, the nationalistic feeling which came in when the Chinese incurred did the incursion of the border many of us were buying products and other fabrication from China which has now all been shifted to within our country. I think the way we look at ourselves is totally different today, we are I think more self-confident and more positive as people and a nation.
Of course, usual headlines on the paper on this keep going on because we are a vibrant democracy but from an overall point of view I think all of us feel a lot more reassured, a lot more positive and a lot more self-confident in how we are going about life and our businesses. L&T is part of that, it is a reflection of it even during this pandemic we book the largest order in history - the high speed of $3.2 to $3.3 billion, we book the longest bridge ever Dhubri-Phulbari - the bridge in Assam Meghalaya border. We book the largest equipment order from a construction equipment point of view from Tata Steel, we book the largest head row refinery and FCCU order from HRRL Barmer and therefore in my view and there is a positive feeling, there is a positive intent during the pandemic many good things happened and that is the way we look at it and therefore I feel that many things that have been put into place. The fundamentals that have been created, the many reforms that have taken place in a quiet manner have laid the foundations for a very strong national development for the next 10-15 years and let us all be positive and do whatever we can to push this in a nice manner to take it forward to wear it out to go to. At the end of the day, the key thing - as we have a young burgeoning population and the key objective is to provide employment and more projects, more infrastructure - their people will get employment, we feel good about what we see around us and that is healthy and good from a national point of view that is the way I look at it.