L&T to focus on core businesses; thrust on services, profitability: Subrahmanyan

S. N. Subrahmanyan, Chairman and Managing Director of Larsen & Toubro (L&T), took charge as CEO and Managing Director on July 1, 2017, and later as Executive Chairman on October 1, 2023. In the last eight years, L&T has changed a lot, sold off some non-core businesses, started new businesses and strengthened the core business to make L&T a tech-driven engineering behemoth. Under SNS, its revenues grew to over ₹2,55,735 crore in FY25, with a remarkable three-year CAGR of 17.8% and profit after tax (PAT) of 20.2%. Excerpts from an exclusive interview with PB Jayakumar & Nevin John.

Q: L&T’s revenues rose to ₹2,55,735 crore in FY25, with a three-year CAGR of 17.8%. PAT grew at a CAGR of 20.2% to ₹15,037 crore. Now, the company is sitting on an orderbook in excess of ₹6.5 lakh crore, more than double the five-year target set in 2021.  What are the reasons for the growth?

Answer: We have made lots of changes in each of the businesses. Take L&T Finance, for example. It had a mutual fund business, an insurance business, and a wealth fund business. We sold off all those unrelated businesses. It was doing wholesale lending in infrastructure and real estate. I moved all that out, and we said simply focus on the retail business, both rural and urban. That focus has brought out terrific results for L&T Finance. Its share price has moved up from ₹65 to nearly ₹260. AUM has gone up by 1.5 times, now nearly ₹1,10,000 crores.

Similarly, if you take LTI Mindtree, there is L&T Infotech and Mindtree. We brought it together and we straightened out the structures. When Debashis (Debashis Chatterjee, the former CEO of LTIMindtree) retired, we brought in Venu (Venugopal Lambu, CEO & MD), who was already known to us; he had previously worked with Mindtree. So, management got steady, and there was no major upheaval cost. We started focusing on large deals and AI. They created an AI platform called Blueverse, and the results are there to see. The sales and PAT have gone up 3 times, and it is doing well.

Same with L&T, which has three parts -  construction, energy projects and manufacturing. The construction business is generally low-margin. So, we put separate leaders to manage the business,  reduced working capital and increased cash flow. So, return on investment has gone up. Profitability-wise, it is still probably the most profitable construction company in the world.  

We broke it up into various verticals and told them not to venture into unnecessary diversifications and markets. We had lots of projects in the Middle East, and we cut them down. Now, only 3 businesses are there in the Middle East: hydrocarbon, renewables and power transmission & distribution. All the other businesses are advised to focus domestically. Luckily for us, the Indian economy was doing good and could capitalise on that.

The energy business was put under Deputy Managing Director Subramanian Sarma. In manufacturing, we have a heavy engineering business and precision engineering, which we earlier used to call defence. Now, heavy engineering is predominantly an international business, and most of the big equipment that we make is reactors, columns and heat exchangers, etc. We put people in the US, France, South Korea, Japan and the Middle East. On-time delivery was a problem in the past, and we made factory 4.0 systems, including robotic infrastructure.

In precision engineering and defence, we started chasing large orders, K9 Vajra, close-in weapon systems, high-power radar etc. That has built confidence that we can do big orders and do it well. And I think, focus, ability to think big, ability to go behind big orders, to delegate and how people can execute these orders on time with quality and safety. That has been the success formula.

Q: Now you are working on the Lakshya 2031 strategic plan for the next five years. How will L&T grow in the next five years?

Answer: As much as I can see, people are optimistic. There is not going to be any major diversification. It is likely to be simply focusing on what we know. We are also closing down some businesses. So, naturally, we had opened some businesses so that the momentum is sustained. Some other businesses are getting commoditised, and we will move out of that. In some places, competition is very severe; there is no point in being in that space. Keeping all that in view, I am happy to say that it looks like we are doubling ourselves, but let the plan get finalised and approved by the board, then we will definitely mention where we are going to be, but at the moment, it looks very positive.

Q: In which areas of business is L&T going to focus more?

Answer: If you look at the company today, it is - project business (construction and projects), manufacturing and services, which includes LTI Mindtree, LTTS and L&T Finance. Maybe L&T Realty, if it does well and grows big. My thrust has been to grow the services faster than the construction projects and manufacturing business, but that does not mean we have told the construction and projects to slow down. The services have to grow faster, and I have been spending more time on the services, LTIMindtree, LTTS, L&T Finance and to some extent, Realty. They are now nearly 25% of the total turnover and nearly 30% of the profit. I think at the end of the plan, as I see it, it is not going to change too much, but even if the services become, let us say, 30%-35% of the revenue, I think it will contribute nearly 45 to 50% of the overall profit. It is a big thing because the project's business margin will be in that 5 to 6%. IT can grow faster, technology services can do better, and L&T Finance has the huge ability to grow. Realty is a new thrust area. We are putting a lot of effort into it. It is nearly 75 million square feet of properties in front of us, and more are getting signed. I have also announced that sometime next year, we may think of taking it public, subject to the approval of the board. I sincerely feel the services business can grow faster than the projects and manufacturing business.  

Q: Other than Realty, do you see any other company that can be separated and listed?

Answer: We have L&T Green, which is into making electrolysers and making green hydrogen. It is in the nascent stages. We have made India's first electrolyser and are about to commission one of India's largest electrolysers. We have got the first green hydrogen plant for IOC at Panipat. We have signed an agreement with Itochu to make green hydrogen at Kandla. L&T Green will require a lot of capital. At the moment, it is still very nascent, but listing is a possibility in the future. I do not think anything else has that possibility.

Q: In the immediate future, which areas of the defence and aerospace sectors are you going to get substantial orders?

Answer: We have made India's first light tank, the Zorawar, a 25-tonne tank jointly developed by us with DRDO. I expect more orders for K-9 Vajra tanks, for which 100 tanks we have supplied and another order of 100 has been placed with us. Close-in weapon systems, submarines and ship building, missiles and their precision parts like the fins, boosters, etc. So, we will continue to be in that. There are plenty of opportunities. Defence and aerospace orders are currently worth about ₹50,000 crores.

Q: Newer technologies like AI, 3D Printing, etc, are coming big, and how will future L&T adopt them? L&T is one of the largest employers in India, and can these technologies reduce the labour force?

Answer: It is a challenge. Currently, we have approximately 230,000 staff and around 400,000 labourers.

Let us say we double ourselves in size, and do you expect us to double our staff or labour? I do not think that is going to happen. On the staff side, I think we have to see how to attract better talent into the company. The youngsters today do not easily want to go to a project site and work. Everybody wants to sit in the office, be in IT or retail or banking or other services. To attract young engineers to work at the site is going to be a challenge. That is why we have started digital and IOT across all our sites. These are done by young people, and much of the monitoring at the site is done through iPads, laptops and IOT devices. Attracting workers to the site is going to become a major challenge because, as the economy develops, people find better jobs in their towns and villages. They do not want to migrate to difficult places to work. The climate outside is also during summer and otherwise getting very hot. A lot of skill training would be required in future, and have to use more mechanised methods like pre-casting, modular, make many things in the factory, and get them to the site.

We already have 14 centralised skill training institutes to train labourers on carpentry, bar bending, masonry, welding, rigging, and all that. We will have to increase that. We will have to use some amount of mechanisation at sites like, for painting, for example, there are robots which can do it, plastering for example, robots can do it, bricklaying can be done by robots, and some amount of 3D printing is possible.