• DECEMBER 17, 2003

"I believe that IT division would be a significant contributor to L&T's prosperity"

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 business prospects of L&T in the coming years.

EQTM: What is your view on the Indian economy over the medium to long term?

Mr. Deosthalee: The policymakers are predicting a GDP growth rate in the region of 6.5%-7% over the medium term. I am of the opinion that these projections are achievable and there are quite a few reasons for the same. The country has huge investments needs in power, telecom and improving urban and rural infrastructure. Most oil companies (ONGC, IOC, GAIL) are planning substantial investments in production and transportation facilities. The growth potential for Indian companies in the international markets is good with the improvements in their competitiveness on the back of cost reduction and productivity initiatives.

However, the Government's ability to spend remains a concern on account of the high amount of fiscal deficit. If the government is able to balance it out through higher tax collections and other avenues such as the divestment process, then we should be able to achieve the desired growth rate.

Taking into account all these reasons, the GDP should grow at 6%-7% in the medium term.

EQTM: How does L&T stand to benefit from a host of favorable factors such as recovery of industrial activity in the country and the passage of The Electricity Act 2003?

Mr. Deosthalee: With the pick up in industrial activity, there will be a need for the players, both private as well as Government undertakings, to expand, modernize or revamp their capacities. The ongoing investments in infrastructure, oil & gas and a few other sectors provide opportunities for the company. The company with its diverse capabilities is well positioned to take advantages of the opportunities in fields such as infrastructure, refinery and oil and gas.

As far as the Electricity Act 2003 is concerned, the act allows companies to set up captive power plants, an area in which L&T has proven expertise. The company is also a major player in low- tension switchgear equipment and energy meters, the demand for which will rise, post the restructuring of the State Electricity Boards. Already, few Electricity Boards have made it mandatory to use energy meters and more are likely to follow suit.

Moreover, the company has an order backlog of Rs 156 bn, which provides good visibility of revenues.

EQTM: L&T has been concentrating on markets outside India for contracts. Considering the growth potential, multinational majors are also eyeing the Indian market for projects. How prepared is L&T in terms of facing competition? Where do you think L&T has to focus on to increase competitiveness?

Mr. Deosthalee: Competition from MNC's is not a new phenomenon for the company as it has been competing with them for many years in the domestic market. In order to understand these properly let us have a look at the different divisions of the company:

Electricals and Electronics division: The key to competing in this business is to introduce contemporary products at a very fast pace. We have been trying to introduce new products and at the same time reduce the new products introduction cycle. I am happy to say that there is a significant improvement in the same over the last 4-5 years and our new product intensity in the revenues has gone up. Just to cite an example, we have come out with a whole new range of products such as D-sine Moulded Case Circuit Breakers and U-Power Air Circuit Breakers in the last one-year. Besides, we are also embarking upon the internationalization of select products and this demonstrates our confidence in the quality of our products, which we feel, are at par with the best in the world.

Heavy Engineering: Our facilities at Hazira and Powai are at par with the best in the world and have been certified by several international process licensors and oil companies. These workshops have been a source of equipment for their refineries. Acceptability of products in the international markets is no longer a problem. The division today exports to more than 45 countries all over the world including advanced countries such as US and Japan. Close to 40% of our manufacturing business is for international markets and is high as 60% in some products. This has been brought about by a continued focus on improvement in quality and delivery standards.

Construction: The company has been undertaking construction projects in the Middle East for the last more than three decades. We will now be focusing on select areas such as transmission line towers, building commercial complexes, hospitals and also pipelines. In order to ensure focus and avoid differentiation between countries, we have divided the business into four zones viz. the East, West, North and South zone and each zone covers a few neighbouring countries in addition to the domestic market. We have also tried to put systems in place to ensure that we evaluate risks and take appropriate steps to mitigate such risks as far as international projects are concerned.

EPC Division: Since this division deals with turnkey projects involving a greater level of risk, a stricter approach is used while targeting international markets. The strategy here is to build expertise in India, and then after acquiring sufficient experience, undertake international projects. Some of the areas where the company has developed expertise are off-shore platforms and cement plants. The company is using this expertise in countries such as Qatar and Tanzania to set up large value projects.

On account of the various endeavors undertaken by the company, we expect that revenues from international business to contribute 30% to L&T's revenues in the next three years.

EQTM: Apart from Engineering, L&T also has presence in the information technology sector. How do you see this business contributing positively to L&T in the long term?

Mr. Deosthalee: Last year, the IT subsidiary generated revenues of Rs 2.5 bn and we are expecting it to grow by around 30% this year. We also believe that going forward, this division should achieve good growth. In the last couple of years, we have built our expertise in three key areas and we believe that in these areas we have advantage over our competitors. These areas are SAP, Mainframes and mobile phone applications. While the expertise in SAP and Mainframes has been developed with the help of in house implementations, probably very few people know that we have an end-to-end expertise in mobile phones and we can do every thing except hardware. We have a number of offshore development centers and are catering to quite a few customers in this field. These developments lead us to believe that this division would be a significant contributor to L&T's prosperity.

EQTM: L&T has diversified into various business areas in the past, with mixed success. Some of those businesses have either been closed or restructured. What should the L&T shareholder understand of these diversification moves? Will it continue in future too?

Mr. Deosthalee: L&T's diversifications have been driven by opportunities available for growth at a point of time. For example, when we entered cement or shipping in the early nineties, these were among the few sectors where L&T as an MRTP company could enter. The market size within India being small provided limited opportunities for growth in any sector. These diversifications were also based on sound business evaluation.

Today, with liberalization, L&T would focus on growing in areas of its strength. Once the cement business has been de merged, the Engineering & Construction business would form 85%-90% of the portfolio and going forward this would remain the focus area for the company. The company would strive to move up the value chain in terms of technology and scope of services to our customers.

EQTM: What is your vision for L&T over the next three to five years?

Mr. Deosthalee: Our vision is to create an Indian multinational, which will be recognised as a high quality engineering and technology company and constantly creating value for its shareholders.

EQTM: Apart from work, what else takes up your time? What activities you pursue to relax your mind?

Mr. Deosthalee: I like listening to music both classical as well as songs from old Hindi movies. I also indulge in a little bit of reading whenever I get the time.

EQTM: Could you please share with us the key personalities or books that have influenced 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.

Two books that have influenced me are 'Seven Habits of Highly Effective People' and 'Kane and Abel'.

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