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"The investment climate continues to be difficult..." - Views on News from Equitymaster
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  • Jun 12, 2000

    "The investment climate continues to be difficult..."

    Mr. Y M Deosthalee joined Larsen & Toubro Limited (L&T) in 1974 and has been with the company since then. He is a qualified Chartered Accountant and holds a degree in law. Mr. Deosthalee is on L&T's Board of Directors and is designated as Senior Vice President (Finance).

    Mr. Deosthalee is also on the Board of various subsidiary and associate companies in the L&T Group of companies. Mr. Deosthalee is directly responsible for the operations L&T Information Technology Limited, a wholly owned subsidiary of the L&T Group of companies.

    In an interview with Equitymaster.com Mr. Deosthalee spoke of the business prospects of L&T in the coming years and its plans regarding its cement division.

    EQM: Please share with us your view on the current economic climate.

    Mr. Deosthalee: Well it still continues to be difficult for companies and sectors that are investment-oriented because we are not really seeing significant change in the investment climate. The growth that is being talked about is the growth generated by consumer durables, consumer products and intermediate products and not by investments. We are however seeing some activity in two sectors as a result of which we have picked up a few good orders in the first two months of the current year. And we do hope that in FY01, there will be a significant pick up in order booking. Two sectors that are likely to contribute to this growth are refineries, from where there is large demand for modernisation and upgradation, and power, where again we have recently bagged two contracts. Apart from this is the infrastructure sector where normal activity is going on. There is no stoppage but it continues to be constrained by lack of funds. Last but not the least we are also seeing a large inflow of orders for buildings and structures. These are specialised kind of structures like software technology parks.

    So, our growth in FY01 is likely to be from these four areas - refineries, power, infrastructure and buildings and structures. We have also picked up a couple of orders for cement plants. We are expecting a large increase in order booking during FY01. Overall we do not think that the economy or the investment climate has substantially changed. But there are some signs of better times.

    EQM: FY2000 has been, in the words of the company, 'one of the most difficult years'. Does FY01 hold better prospects? Which divisions do you see rebounding in the current year?

    Mr. Deosthalee: Of the total order booking that we expect to record this year, 20% - 25% will be from refineries. Similarly, major orders should come from the power and infrastructure sectors. In all, these four sectors - power, refineries, infrastructure, buildings and structures, will account for 50% of the order booking during the year. We are expecting atleast 30% increase in the order book position.

    EQM: The cement sector has been adversely affected by the drought. What has been the impact on L&T in terms of volumes and realisations? When do you expect the situation to improve now that the monsoon has been declared to be normal?

    Mr. Deosthalee: In terms of volumes, there has been no impact. Both production and despatches have not been affected at all. And we do not expect any impact on volumes throughout the year. Prices have dropped in almost all the markets except in the East. This has been mainly due to the drought situation. The monsoon is good news for cement companies. In the coming one or two months there may not be an immediate improvement but if we have a good monsoon, from September onwards, prices are likely to improve.

    EQM: What is your view on the consolidation that is taking place in the cement sector?

    Mr. Deosthalee: It is desired. Consolidation is necessary because one of the problems of industry has been far too many players. We are one of the largest cement manufacturing countries in the world. Cement is a basic commodity and as the economy grows, the demand for cement will grow. There is a lot of infrastructure that needs to be built - be it roads, bridges or housing, both in rural and urban areas. Moreover, there is no substitute for cement. Therefore in the long term the industry is going to give good returns. But there are far too many players. There are inefficient producers and there are undisciplined producers. Therefore consolidation is necessary. World over few players control a large part of the market. In India too a similar situation will emerge in coming years. Our view is that the consolidation process will continue.

    EQM: The EPC division, as was highlighted by you in the Analyst Meet, continues to earn high margins that are not sustainable. How do you see the company coping with this in order to maintain overall profitability levels?

    Mr. Deosthalee: Well what I mentioned in the Analyst Meet is something like this. Overall margins in engineering and construction division, which includes the heavy engineering and construction business are by any standards high margins. And what we are saying is that in coming years these margins will align with international levels. But we are not anticipating a sharp decline in margins in a year or two. There will definitely be an impact on margins but this will have to compensated by higher volumes. We are moving towards that. Already we are qualified to bid for larger projects independently. Profitability will come from this higher volume growth.

    EQM: The company is said to be implementing a restructuring exercise. What is the purpose of the exercise? Please could you clarify the company's position on its cement business?

    Mr. Deosthalee: The purpose of the exercise has been amply clarified. The purpose is basically to add shareholder value. But it has a certain pattern. It cannot be done overnight. It s a process that will take time. We have started implementing restructuring exercise. Let me also clarify that restructuring is an ongoing exercise and we have started this some years back but it has gained momentum in the last one year and it will continue. If you really analyze the business portfolio of L&T over the last few years, you will see that there has been a lot of change because we have got out of a number of businesses. We sold off shipping and closed down small businesses like merchant exports and shoes. We stopped manufacture of some electronic products. We are committed to this kind of restructuring on a regular basis. We have appointed Boston Consulting Group (BCG) to help us in this process. They have given their report and we have started implementation.

    A lot of steps have been taken. Business committees have been set up, which are monitoring the performance of individual divisions. The business portfolio has been divided into five divisions. We have started measuring the performance of these divisions based on the new performance measurement system which has been introduced. The synergy exercise between E&C Projects and Construction businesses has gained momentum. All the heavy engineering related businesses have been brought under one umbrella. In each of the businesses, business specific initiatives have been taken which are being monitored by the Business Management Committees.

    As far as cement is concerned there are four steps that are involved - divisionalisation, subsidiarisation, inviting a strategic partner and eventually listing. The first step is over and we are continuing with that exercise. But before we get into the second stage we need to cross certain hurdles in terms of taxation and legal requirements. That exercise is getting completed now. Therefore regarding the next stage, which is the subsidiarisation of the cement business, we should be able to make an announcement within the next two months.

    EQM: Much has been spoken regarding L&T's IT initiatives. What is the area of focus for the IT subsidiary and what kind of growth are you targeting?

    Mr. Deosthalee: The focus areas for the company are five. It is a software services company offering services in the financial sector, manufacturing, utilities and other service sectors. There is one more line of activity, which is more technology-oriented and that is communications and embedded systems. In each of them e-commerce is the main focus. In the communication area, wireless is clearly the focus area. Over the next five years we expect to grow @ 50% on a year on year basis. A number of initiatives including stock options are being launched to retain employees. New marketing offices are being opened. We plan to list this subsidiary by middle of 2001.

    EQM: Who are the three people that have influenced you the most?

    Mr. Deosthalee: I am Indian, and the people that have influenced me the most are Indians - Mahatma Gandhi, Rabindranath Tagore and Jayant Naralikar.

    EQM: What are your favourite books?

    Mr. Deosthalee: I have too much to read on technical subjects, especially information technology related. Two books that have influenced me are 'Seven Habits of Highly Effective People' and 'Kane and Abel'.



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