Disruptive effects of reforms have worn off, signs of stability emerging, says L&T’s CEO and MD SN Subrahmanyan

While the government’s structural reforms augur well for the long term, much would depend on a supportive macro environment and adaptiveness of businesses to the changes, SN Subrahmanyan, CEO & MD, Larsen & Toubro, tells Shubhra Tandon. Excerpts:

The year 2017 saw some significant reforms, the most important being GST. This also caused some disruptions to business. How do you view business activity now and what is your outlook for 2018?

In the last one year, the country has seen a slew of transformative reform measures that are likely to yield medium- to long-term macroeconomic gains. Structural changes like demonetisation, RERA, the Insolvency & Bankruptcy Code and GST will be growth enablers, facilitating a conducive business environment, widening the tax base and channelling investments to meet the infrastructure needs of the country. Many of these reforms have caused short-term adjustment pains, but they augur well for the economy in the long term.

My sense is that things have more or less fallen into place and signs of stability are emerging. It should get easier and more stable henceforth. Having said that, much would depend on a supportive macro environment and the willingness/adaptiveness of the business community to the changes.

L&T has said private capex recovery could happen only after 2019 and growth would be driven by government orders for now. By how much do you expect government spending to go up?

With the Union Budget of 2018-2019 pivoted on farm sector reform, housing and infrastructure growth, that is self-explanatory. The Budget has reiterated that infrastructure investment is the ‘sine qua non’ for sustained growth, with a long-term requirement of Rs 50 lakh crore, drawn from the government and, more important, the private sector. Public infrastructure investments are set to increase by 21% to around Rs 6 lakh crore while the railway capex is pegged around Rs 1.5 lakh crore in 2018-19. There is a lot of stress on urbanisation through smart cities and smart infrastructure and investment in large linear transport projects like ‘Bharat Mala’, as also in the aviation and port sectors. These are the direct drivers. Reforms like adoption of the IBC, emphasis on recapitalisation of the banking system and strategic disinvestment targets reflect the government’s long-term commitment to catalysing the ‘structural drivers’ that can ‘crowd in’ private investment and restart the capex cycle. The recovery of the capex cycle is predicated on this logic. However, one must bear in mind that 2019 would be an ‘Election Year’, making possible a delay in the award/tendering of some large-ticket infrastructure projects.

Are large public-sector enterprises like NTPC, ONGC, GAIL and SAIL

committing to large capex plans yet? If so, what sort of opportunities would these present to L&T?

Certain opportunities have come up due to a revision in the emission norms for power plants; for instance, NTPC has released bulk tenders for emission control systems, which is a sizeable opportunity for us. The proposal to replace old and inefficient power plants with efficient super-critical power plants also holds promise for the coming years.

Are you sticking to your guidance of a nominal increase in orders in FY18 or can we expect an upward revision in this guidance?

We are sticking to our earlier guidance for the present.

Is there any improvement on the front of decision-making, which has been delaying the order flow?

Efforts are underway to accelerate the decision-making process by reducing the layers of approval, among other things. The process is also related to a mindset and it would be unrealistic to hope for overnight change, though India’s unprecedented jump to the 100th place globally on ease of doing business does reflect forward movement.

What do you think are the issues the government could address to change this scenario?

We would like to stress three prerequisites for better/more efficient delivery of large infrastructure projects. First, a feasible timeline for delivery and an equi-balanced contract. Second, some hand-holding by the government to mobilise the huge resources required for timely delivery of such projects. Third, the availability of timely and good credit from financial institutions/banks.

West Asia continues to pose risks to the company, given the volatility in oil prices and the geopolitical situation there. How worried are you and what steps are you taking to mitigate the risks?

West Asia remains a market of uncertainty. The recent spike in crude oil prices, partly driven by robust global growth, is a favourable development but geopolitical tension in the region owing to the embargo against Qatar and political instability in some of the other economies are cause for worry. For us at L&T, the focus would be on timely completion of projects. While we are open to new mandates in the region, we will be extremely choosy, only taking up projects with safe margins. At the same time, we are exploring fresh geographies of potential like Africa and Far East Asia, having made decent inroads into those markets.

What is the update on the defence orders space? Can we expect some orders of interest to L&T in 2018?

Defence can be the real game changer for us. There are projects for which we have bid and, considering our inherent strengths, we seem well-placed to win some of them.

The government has been pushing infrastructure development over the last 3-4 years through projects like Bharat Mala, Amrut, mass housing programmes, smart cities, Swachh Bharat, electrification of railway lines, railway station redevelopment, high-speed rail, etc. Some of these projects have taken off well and are under implementation, while we expect the others to be rolled out in the coming year.