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  • Equitymaster.com : “I will rate the budget as 3 on a scale of 1 to 5…”

    “I will rate the budget as 3 on a scale of 1 to 5…”

    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 Chief Financial Officer.

    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 of Larsen & Toubro InfoTech Limited, a wholly owned subsidiary of the L&T Group of companies.

    In an interview with Equitymaster.com Mr. Deosthalee spoke at length about the impact of the budget on the economy, the infrastructure sector and on L&T.

    EQTM: How would you rate you the budget 2005-06 on the scale of 1 to 5, 5 being the highest? Why?

    Mr. Deosthalee:  I will rate it as 3. There are number of areas in which the budget is good. For example, the entire emphasis on infrastructure is very good and warranted because ultimately that is going to generate lot of employment and also aid the overall growth of the economy. And if you are talking about integrating with the global markets, that is one of major things, which is going to help. So, this aspect is very good.

    Secondly, this rationalisation of the direct tax structure is also a welcome move. The last point is on the indirect taxes. Overall, it is a reasonably good budget.

    The reason why I have not given this budget 5 is because one element has been left out in the budget for the capital goods industry. We have been talking about the inverted duty structure for the sector. There are some industries, which can import at 0% duty without any counter veiling duty. That is a clear disadvantage for our sector. We are not asking for any favor. The domestic manufacturers are required to pay sales tax, entry tax and some of the other levies that are there in the domestic market, which are a disadvantage. That continues. We have been talking about this for quite sometime. This is one aspect the Finance Minister has not paid attention to.

    EQTM: As compared to other developing markets, what are the missing pieces in the puzzle as far as the growth of the Indian economy is concerned?

    Mr. Deosthalee:  I think there are three main areas. One is of course, the reform in the labour sector because there is not much flexibility for manufacturers in the country. Secondly, our internal infrastructure needs much to be desired. For example, our port or road facilities, all those need tremendous improvement. There are lot of procedural delays.

    EQTM: What are the other initiatives that need to be done, from the policy perspective, to smoothen the process of infrastructure development?

    Mr. Deosthalee:  There are three things that we can talk of. As far as electricity is concerned, I think reforms in the distribution and transmission areas need to be accelerated. That is the major bottleneck.

    The second thing is the equity financing for infrastructure projects, which needs to be facilitated. This is one thing that comes in the way of pre-financial closure for private sector infrastructure projects.

    The last thing that they are talking about is the usage of foreign exchange reserves of about US$ 2 bn for creating a special purpose vehicle. That’s a very welcome move. However, one needs to ensure that this is not inflationary.

    EQTM: In this whole scheme of things, what role will L&T play in terms of the country’s thrust towards infrastructure development?

    Mr. Deosthalee:  There are many areas in which we are working on. So, in the infrastructure sector, L&T is working very aggressively in the Build-Own-Operate and Transfer basis (BOT). There are many projects that we have already implemented. The road sector, in the area of port, we are also promoting our first international airport and have got lot of work in urban infrastructure like information technology parks. We are also working on one more opportunity i.e. hydel power generation. So, we will focus on these areas. We have already committed a lot of capital. We have created a holding company structure through which all these investment are being made. If the projects are viable, in fact we are looking for more and more projects on BOT base, we will be willing to commit more investments and promote the activities of developmental projects.

    EQTM: On a broader basis, is there a dynamic change in the way the engineering companies are working now and compared to lets say, five years?

    Mr. Deosthalee:  Yes, one is of course the fact that most of the engineering companies are not looking only towards the domestic market. They are looking at international markets. And I think many of them today have become internationally competitive. For example, our company manufactures custom build equipments for all over the world. In fact, our manufacturing facilities are one of the best in the world and that’s why almost say 65% to 70% of our capacity is used for exports. These goods are custom-build, made-to-order, specific pieces of equipment used by hydrocarbon sectors, oil and gas and refineries. They are exported to all the countries in the world, in fact 50 countries. So, today, all the manufacturing companies, the ones that are globally focused, are looking at continuously creating competencies for facing global competition and also, for broad-basing their facilities.

    EQTM: In terms of where the global engineering majors are and where L&T is currently, how would you benchmark yourselves in terms of technology, execution of projects, ability to arrange finances and so on?

    Mr. Deosthalee:  We have two businesses i.e. products and projects. In terms of products, we clearly are one of the best in the world today, one among the five in terms of costs, delivery and customer satisfaction. In the project business, in the domestic market, we are clearly the leaders. Therefore, I would put our domestic market rating really high.

    If you look at the turnkey projects business, we are building the expertise because it is relatively a new business. What I am talking about is the EPC business (where you undertake projects on a turnkey basis, including engineering, procurement, construction and commissioning), all the responsibilities you undertake and you then hand-over the project to the customers. In this business, we are still progressing in the sense that we started this about 8 to 10 years ago in its real sense. We still have a long way to go. So, there I think as compared to the world benchmark, we may be just about 50%.

    EQTM: Where do you visualize L&T over the next three to five years?

    Mr. Deosthalee:  Both the products and the projects businesses will continue to focus on domestic and international markets. At the current level, what we are saying is that international markets contribute to 17% to 20%. Going forward, we will continue to be largely domestically focused. But about 30% of our revenues, may be in the next four to five years, could come from global markets. This is required from the point of view of improving our competitiveness, and it is also necessary for us to position ourselves in the world markets.

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