Policy makers need to enable investment momentum: L&T

Larsen & Toubro, the biggest Indian construction company, is looking for decision making to improve on infrastructure orders. Although the company has witnessed a slowdown in orders, it has a much stronger balance sheet than the peer group. Many of the company’s peers have debt that is close to 10 times the profit they make. In case of L&T, this is barely 2.5 times.

In an interview to NDTV profit, R Shankar Raman, group chief financial officer at L&T said that the order flow is going to remain flat in the second half of the year unless the policy makers enable investment momentum.

“Last 12-18 months have been challenging for the industry. Now we expect to see improvement in some segments in the second half of 2012-13,” he said.

Below is the interview. Don’t miss the accompanying video.

 Capital goods is a tough space. The year 2011 was one of the worst for Capital Goods. Do you think 2012 will be worse than 2011?
 

The second half of 2011 was tough. We think that with some activity is happening in some segments of our business; maybe the second half of 2012-13 could have better tidings than what we have seen so far in the past 12 to 18 months.

What do you think will be growth triggers for L&T and the capital goods space? What issues need to be addressed?
 

I think the solution has to be a little wholesome. There is no single initiative which by itself can get the momentum back. It is very important that the entire environment has to be far more conducive. It would be a great help if the policy helps to gain the investment momentum. There are several steps that need to be taken, some of which are beginning to possibly show results. Inflation is beginning to show first signs of moderation. 


The monetary policy makers are indicating that they are willing to take the foot of the accelerator in case the inflation slow down continues to sustain. It is also important that the government finances are in reasonable shape with the state elections coming in there is a lot of opportunity for populist measures and it is important that the government maintains the balance between what they need to spend and what they need to spend for making the economy get back onto track. 


If you take the power sector, we need to ensure fuel availability is credible. We need to ensure that the land acquisition is facilitated; there is availability of water and environmental clearances on time. Ideally, if you could have a single window clearance for projects of national importance it will go a long way in ensuring that the infrastructure industry and the capital goods industry find their feet again.

Coal linkages, environment clearance and financial closure- how important are these issues to be addressed & what are the likely solutions for the same?
 

They are all linked if you really see; fuel security is very important. The government has taken some steps in allocating coal blocks getting them on the auction mode. The government has decided the go no go policy. A lot of mining blocks which were held up because they were in the ‘no go’ area have been released in review, making sure that the people who are investing in power projects do get the promised coal. 


Many a times we find that there is a gap in the indicated availability of fuel and the fuel supply agreement that people tend to sign. I think those gaps needs to be filled in. Imported coal to an extent can be a substitute but expensive at $100 a tonne. The transportation cost to be factored in and many of the power plants have efficient unloading system and transportation system, rail connectivity back to the plant location, it’s a one big logistical effort. 


It is very important that we are strategic, when it comes to power because it is one of the single vital resource that is required for the growth of our economy, and hence, fuel supply needs to insured and all agencies which are connected with it, be it the coal ministry or the environment ministry, they will have to work together and have a common policy framework for that. 


As far as the financial closure is concerned, much of the exposure to the power sector has got affected because some of the input links is under stress. So consequently, the lending has paused. However, the bankers are very keen that some of these impediments are removed and you will find money coming back to the sector. So, it is very important that the sector puts up a very healthy face to the banking community and financial closure will happen.

Order inflow in the first half has been poor or lower than estimate. How has the current quarter been so far and what is the outlook on the coming quarters?
 

It would be a bit flattish for some time to come. Maybe, a couple of quarters before we see the people who are sponsoring projects feeling confident about committing their resources. Today, it is a combination of tough economic conditions as well as poor business sentiment. 

It is very important that the sentiment returns back to its normalcy before it gets back to its growth momentum. So we need to give it some time, just as slow down takes a couple of quarters to take effect, revival will also take a couple of quarters. It is important to be patient and it is very important for the industry to do what is right.

You have given an order inflow guidance of 5 per cent growth. Do you maintain that? Do you think times are tough and it may be a challenge to achieve that?
 

We have a process by which we reevaluate the guidance. We do it at the middle of the year and it is after that we stepped it down to 5 per cent from the 15 per cent that was indicated earlier. We will have to acknowledge that we are in an industry, where we deal with large lumpy orders. So, a couple of orders could make a difference between meeting the guidance and not meeting the guidance. What we are not concerned about is the accuracy guidance or the pressure to meet exactly the 5 per cent that we have put out. What is important to us is the trajectory. 


So as long as the investment momentum is regained, it doesn’t really matter what was planned to happen this quarter really spills over to the next quarter. However, there should be no cancellations, no massive cut backs on the programs. We feel hopeful that if not this quarter, the next quarter could get better.

Execution has been good so far from large names in capital goods. Are you facing any issues or delays on the Sub-contractor side which may lead to poor or delayed execution?
 

One of the good things about a slowdown every now and then is that it enables people to pause and rearrange their capacities. Today, we are in a situation, where the order flow for the lead contractors as well as the sub-contractors has slowed down. Now this gives good opportunity for people in the play to focus on execution and not worry about capacity shortfall. 

So, execution is not a problem today from the point of view of capacity being available to execute. Well, it is always a challenge that we ensure to execute within time, cost and the entire value chain with which we are connected, needs to follow the same principle. So, we are not at the moment very worried about execution; in fact we are more worried about regaining the investment momentum.

 

Recent bidding in the power sector has been competitive. Do you think margins in the sector will reduce?
 

The times are such that the most competitive will win orders. It is very important that a lot of people out there with excess capacity are able to have rational pricing policies. In such times, we have always found that there has been some irrational pricing.


So, it is very difficult to bench mark against irrational prices. But if you talk about NTPC order, the difference between winners and losers is quite close. There wasn’t a huge gap between L1 and L5 for instance. It does indicate that there is some maturity in bidding, and my sense is that while the fluff in the pricing will go away because of competitive pressures, good projects if they bid well and execute well, will continue to be profitable.

 

One of the problems in 2011 has been getting shilled labor. How big the challenge is in 2012 and what is the action plan for the same?

There is no shortcut solution to this problem. We need to spend a fair bit of our energy and resources in making sure that we upgrade the skill of the shareholders. We, in our own limited way, have established our construction skill training institutes. We have tried to propagate the idea of skilling people who have otherwise not been very productive. 


Economically speaking, we pick up school and college dropouts and try to teach them vocational skills, which will help our business as well as give them livelihood. The whole concept of inclusive growth would definitely have to address the issue of skilling the work force. All companies, which have long term vision in the business space, will have to address this issue. We are also trying to address the issue of trying to discover more and more skilled workforce.