L&T’s Infra Specialist

IN JULY, construction and engineering major Larsen & Toubro (L&T) announced the completion of ‘Mission 96’. It was an internal L&T initiative, a plan to build a 12-storey residential tower with 96 flats in just 96 days for its client CIDCO (City and Industrial Development Corporation) of Maharashtra, using its ‘Precast Large Concrete Panel System’ for ultra-rapid construction of public housing.

In another instance in March, it constructed a seven-storey flight control system integration facility for the Defence Research and Development Organisation in just 45 days using ‘Integrated Hybrid Modular Construction Technology’. Three months earlier, the company’s heavy engineering arm had dispatched six of the world’s largest coke drums, weighing 658 tonnes each, for a refinery project in Mexico.

The list is long. In June 2019, L&T completed the Medigadda Barrage in Telangana to provide water to 23 districts from Godavari river in just 24 months. It was a mammoth project — a 1.6-km long barrage across the Godavari equipped with 85 gates, piers and associated guide bunds and flood bunds of 18.03 km on either side, using record amounts of steel and concrete. A few weeks ago, its tunnel boring machine named Mavala achieved a world record for monthly lengths by excavating a 456.72 metre tunnel for the Mumbai Coastal Road project.

These are some examples of excellence and speedy execution India’s largest E&C company achieved under MD and CEO Sekharipuram Narayanan Subrahmanyan or SNS as he is known in inner circles.

When Subrahmanyan took over in July 2017, all eyes were on him. L&T had always been a one-man show for at least two decades. A.M. Naik, who joined Larsen & Toubro as a junior engineer in 1965, became its CEO and MD in 1999 and chairman since 2003. He was able to transform the company into an engineering and construction behemoth operating in several unrelated sectors and across countries — in construction, power, hydrocarbon, heavy engineering, defence, ship building, roads, metro, technology services, finance, IT, etc. The conglomerate currently has 160 entities — 93 subsidiaries, five associate companies, 27 joint ventures and 35 jointly held operations — as of March 2022. Naik also had a larger-than-life image among L&T’ians. The promoter-less company was able to ward off many hostile acquisitions in the past, by ring-fencing with an employee trust with significant minority stake.

It took almost 10 years for L&T to find Naik’s successor. When he reached superannuation in 2007 at the age of 65, the board gave him a five-year extension, which was further extended till 2017. Naik first noticed Subrahmanyan in 2004 and realised his capabilities in handling large construction projects. Since then, he was given more responsibilities and was chosen as deputy MD, before being elevated as CEO and MD in July 2017.

Design & Build (D&B) contracts, PPP projects, engineering and construction are key areas of strength for Subrahmanyan, a civil engineer from Regional Engineering College, Kurukshetra, who joined the engineering, construction and contracts (ECC) division of L&T in 1984.

In the last decade, the biggest challenge before Naik (currently group chairman) and Subrahmanyan was to make the group future ready — a technology led engineering company with a lean and focussed structure. The first step was taken before Subrahmanyan took over, when in 2015 L&T agreed to sell its Kattupalli port near Chennai to Adani Ports for ₹1,950 crore. In 2018, it made a large non-core divestment — the Electrical and Automation (L&T E&A) business was sold to Schneider Electric for ₹14,000 crore in an all-cash deal, which was concluded two years later.

The company is currently implementing the ‘Lakshya 2026’ strategy — which focuses on exiting non-core businesses, developing innovative businesses, scaling up digital and e-commerce businesses, focusing more on environmental, social, and governance (ESG) goals and shareholder value creation. The target is ₹2.7 lakh crore in revenue by FY26, Naik said at the company’s recent AGM.

The manufacture of electrolysers for making green hydrogen and battery energy storage systems will form part of hi-tech engineering, Subrahmanyan said in the company’s latest annual report. The target is to have order inflows and revenue growth in excess of 18%, and improve and sustain profitability. The strategy will revolve around design excellence, automation, value engineering, Factory 4.0, and on-time delivery. In engineering, procurement and construction (EPC), the focus will be on timely delivery of projects. Profitability will be driven by a combination of factors, including productivity of resources, operational excellence, and the on-going digital drive (L&T has started two new digital-focused companies in the last one year.)

Another focus area for Subrahmanyan is debt levels. Total borrowings came down to ₹1,23,468 crore in FY22, against ₹1,32,605 crore in the previous fiscal. Gross debt-equity ratio decreased to 1.29:1 as on March 31, 2022 from 1.51:1 a year ago.

According to the company’s latest annual report, it has become debt free after considering cash and cash equivalent during the year. Though cash flow from operations was 37% less in FY22 compared to a year ago, it made up for the losses by selling short-term investments, treasury income and dividend income from subsidiary companies to become debt free. While L&T sold off a hydroelectric power project to Renew Power for ₹985 crore, L&T Finance sold over ₹3,400 crore of stressed assets to Kotak Mahindra Bank-backed Phoenix ARC, and eight roads and a transmission project to Edelweiss fund for ₹7,000 crore. A few months ago, the company secured a soft loan of ₹3,000 crore from the Telangana government and is currently in talks to sell its majority stake in the Hyderabad metro project. Loss-making Nabha Power Ltd. in Punjab is also on the block.

Going forward, apart from capital expenditure, major investments will be in green hydrogen and data centres, Subrahmanyan had said.

Despite its presence in several sectors, L&T’s business is still driven by its dominance in infrastructure, an area where 62-year-old Subrahmanyan is a specialist. As of June 30, 2022, L&T had an order book of ₹3,63,400 crore, of which 73% came from infrastructure, 18% from hydrocarbon and power, 5% from hi-tech manufacturing and 4% from other segments.

Subrahmanyan’s tenure has been impressive so far. Consolidated revenue increased 18% in FY19, 8% in FY20 and 15% in FY22 year on year (FY21 was impacted by Covid-led disruptions). The company’s order book stood at ₹1,92,997 crore in FY22, a 10% growth over the previous year. Despite business challenges, PAT was unaffected thanks to exceptional income in recent years from the sale of non-core assets.

Commissioning of a green hydrogen plant at the AM Naik Heavy Engineering Complex at Hazira in Gujarat, expansion of Indian Oil Corporation’s (IOCL’s) Panipat refinery, Rishikesh–Karanprayag Tunnel 2 package in Uttarakhand, HPCL’s Visakh Refinery Modernisation Project, construction of Navi Mumbai International Airport and sections of Ahmedabad-Mumbai high-speed rail are some of marquee projects being implemented by the company, besides the many metro, road and smart city projects across the country.

Following a better-than-expected performance in recent quarters, analysts believe L&T should continue to benefit from execution and margin recovery as the negative impact of supply disruptions and sharp rise in commodity prices continue to ease. “Its record high order book, improving health of Hyderabad metro project and revival in private capex are positives for the company going forward,” according to a July 27 dated analysis of L&T by HDFC Securities.

Subrahmanyan has been cruising along, despite challenges on the way.