How Krishnamurthi Venkataramanan is striving to boost growth at Larsen & Toubro

Krishnamurthi Venkataramanan, 69, still remembers the motto of his alma mater, St George's Grammar School, in Hyderabad. "Perseverantia Omnia Vincit is Latin for 'perseverance conquers all things'," says the CEO and Managing Director of Larsen & Toubro (L&T). Perseverance will be the key to success as he leads the country's biggest engineering and construction company in one of the most difficult times in its 75-year-old history.

Venkataramanan , or KV as he is popularly known, took over as CEO and MD in April 2012 after a management reshuffle that split the post of chairman and managing director. The redoubtable A.M. Naik, L&T's public face for more than a decade, remained chairman but shifted his focus to completing a business restructuring he had started in 2011 and creating a leadership pipeline. KV was tasked mainly with running the day-to-day affairs of the company. He has faced a turbulent time since then with the $14-billion engineering behemoth's financial performance deteriorating sharply. In the year through March 2013, L&T 's gross revenue rose 15.7 per cent compared with a 24 per cent expansion the previous year. The company's order book increased at a muted 5.4 per cent in 2012/13 compared with growth rates of more than 30 per cent until two years ago. Other important performance metrics, including net profit  growth and return on net worth, have also worsened in recent years.

Part of the reason for the company's poor performance is the country's slowing economic growth. India's gross domestic product grew only five per cent in 2012/13, the slowest pace in a decade, as high interest rates curbed consumer demand. Also, a perceived policy paralysis in the wake of corruption allegations stalled investment in several sectors including infrastructure and energy, key operational areas for L&T. The economic slowdown also meant that the investments the company had made in creating manufacturing capacities in several sectors including power equipment, nuclear forgings and shipbuilding haven't yielded the desired results. "For the next few years, things are going to remain challenging," admits KV.
 
Overseas Expansion
Like Naik, KV is an L&T veteran. He joined the company in June 1969 after graduating in chemical engineering from the Indian Institute of Technology, Delhi. And like Naik, he is passionate about L&T. "That [L&T] is the only life I know," he says, sitting in his office at the company's Powai plant in suburban Mumbai. KV shuttles between Powai and L&T's corporate headquarters in South Mumbai's Ballard Estate while Naik has shifted to a new office in suburban Andheri. How do they share the work load? KV says Naik is more passionate about technology, real estate and Infrastructure Development Projects Ltd (IDPL), a unit that builds roads, ports and metro rail networks. "[There are] some business areas Naik focuses much more on. [There are] some areas I focus more on," says KV, who directly oversees the hydrocarbons business. "We have a good understanding."

What are his plans to put L&T back on track? The CEO says one of his main goals is to boost L&T's international business. The company first forayed outside India in the 1970s, but it continued to thrive mostly on domestic growth. It was only after Naik took over as CEO in 1999 that the company started strategising its international business in a more structured way. Now, it is looking overseas more aggressively than ever. The plan is to increase the contribution of overseas markets to 25 per cent of revenue from 15 per cent in the next three years. "Tactically, it is worthwhile to have an alternative market if India is not at its productive best," says R. Shankar Raman, Director and Chief Financial Officer, L&T.

While the overseas business is highly competitive, it provides a good opportunity to diversify the revenue stream. Kunal Sheth, analyst at brokerage Prabhudas Lilladher, says about a fourth of L&T's orders are now coming from outside India. This is partly compensating for the slowdown in the domestic market, he adds. KV says L&T is exploring markets around the world. The company has executed projects across West Asia and in a number of Southeast Asian nations. Africa offers opportunities in the infrastructure, mining and metals sectors. The company is also looking to sell equipment in the United States, where a shale gas boom is giving a fillip to industries such as fertilisers and chemicals.

Of all the businesses, the hydrocarbon subsidiary is at the forefront of efforts to grow globally. Overseas business makes up almost half the unit's revenue. L&T has hived it off into a separate company called L&T Hydrocarbon Engineering Ltd, which provides services to oil and gas producers, refiners, as well as chemical and fertiliser makers. The unit makes up about 13 to 14 per cent of L&T's revenue. The aim is to double the unit's revenue to $4-5 billion, says KV. He adds that he wants to attract global talent to create a multi-cultural leadership in this business.

The new subsidiary also wants to beef up its skills for subsea and deep-water projects. It wants to bid for bigger projects by enhancing its engineering and design capabilities. This could be achieved by forming a joint venture or making an acquisition, an area where L&T has been a bit conservative so far. "We have to be a little more systematic and good at doing small technological acquisitions," says KV. The company may look for a stake sale or overseas listing at a later stage. The order flow from the overseas market is already on the rise. In 2012/13, the share of overseas order flow in the total order inflow was 17 per cent. This rose to 27 per cent in the July-to-September quarter of 2013/14.

The hive-off of the hydrocarbon business is part of the business restructuring Naik is focusing on. Under this plan, L&T has created a dozen business verticals such as hydrocarbon, infrastructure and power. Over time, each of these will be spun off into separate companies with separate boards, which have already been constituted. Broadly, there are two aims to this exercise: simplify the corporate structure to focus on key businesses and develop a leadership pipeline that can take the company forward once veterans like Naik and KV eventually leave. The new structure encourages the second line of leadership to think independently and develop domain expertise. It also gives Naik and KV a chance to spend time on areas that require greater attention, rather than looking after each business.
 
Maximising Capacity
The focus on international business is just one part of L&T's strategy to offset the growth slowdown. Equally important is greater utilisation of the new manufacturing capacity it has created over the past few years. The company began investing in manufacturing capacity in the middle of the last decade, when the Indian economy was cruising at near double-digit growth rates. L&T formed a joint venture with Japan's Mitsubishi Heavy Industries to make supercritical boilers and turbines for the power sector. The venture has a factory at Hazira in Gujarat with an annual capacity of 5,000 megawatt of power equipment. L&T also set up a shipyard at Kattupalli near Chennai that is capable of building warships and submarines for the Indian Navy. Besides, it tied up with state-run Nuclear Power Corporation to make forgings for atomic power plants.

These ventures were expected to boost profitability, as manufacturing offers higher margins than project execution. But that hasn't happened because most of this new capacity is lying idle. The power sector has been hit by fuel shortages and land acquisition problems. The entry of Chinese equipment suppliers has made matters worse. In the defence sector, dominated by state-run organisations, there is little clarity from the government on whether greater participation from domestic private players will be allowed even though the country is one of the biggest arms importers in the world. The atomic power industry is also facing problems due to environmental and safety concerns, particularly after the Fukushima nuclear disaster in Japan.

KV admits that these businesses face several hurdles but defends these investments. He says L&T is working with the Defence Research and Development Organisation and has contributed to the BrahMos missile project. The company has also supplied equipment for the Indian Space Research Organisation's moon and Mars missions. The power venture is supplying components to Mitsubishi's overseas projects. The forgings factory is one of only half-dozen such facilities in the world and is making components for atomic reactors. "The capacity is not idle," he says, adding that the plant is making forgings for steel factories. The government, KV feels, will have to open up the defence sector for private players to reduce dependence on imports.

Power is another promising area - the country needs an additional generation capacity of 100,000 MW every five years to boost growth. India also plans to quadruple its nuclear power capacity to 20,000 MW by 2020. "L&T has always believed in investing a little ahead of time... We have the right investments in place which will stand us in good stead for the next 15 years. We are optimistic of India's growth story," says KV. Finance chief Raman agrees. "It takes four to five years to stabilise a new set up," he says. "These investments will pay off in the long term."

Analysts, however, are not entirely convinced. "You can do something in those plants and keep them running at 20 to 30 per cent capacity. But ultimately if you have made a plant for nuclear forgings, you have to use it for nuclear forgings to meaningfully utilise it and make money," says Sheth of Prabhudas Lilladher. But, he adds, L&T is still better placed than many other engineering companies. "Given the weak balance sheets of other companies, L&T becomes the natural beneficiary. A lot of these guys are under stress and probably will not be able to execute orders or bid for orders, whereas L&T's balance sheet capabilities allow it to have that flexibility," says Sheth.
 
Monetising Assets, leadership challenges
L&T is also looking to monetise some infrastructure projects executed by its IDPL unit. The company said in December it has sought government approval to raise as much as Rs 2,000 crore by selling a stake in the unit to a global investor. The engineering giant has made massive investments in these projects but has yet to see any substantial benefits. The subsidiary has a portfolio of Rs 45,000 crore (about $7.2 billion) that comprises 19 road projects, two ports and the Hyderabad metro rail network. Of these, 10 are operational. KV says the philosophy behind IDPL is to build, run and monetise these assets and then invest in other projects to grow the business.

Analysts say many IDPL projects have yet to start generating revenue. For instance, the Hyderabad metro rail, being built at a cost of Rs 16,400 crore, is due for completion only in 2015. Some operational projects, such as Dhamra port in Odisha where L&T and Tata Steel are equal partners, are also not making money. Emkay Global analyst Pritesh Chheda says IDPL will need to invest more and it will take at least another couple of years for these projects to start showing a profit.

KV says L&T's growth strategy includes an operational excellence plan across all verticals to cut costs and improve productivity. Besides, it is taking a hard look at its 54,000-strong manpower. "We are disengaging wherever we have surplus manpower," says KV, without clarifying whether the company is firing people.

{mosimage}The company's well-laid plans, however, could go awry if it fails to tackle its leadership issue. KV is due to retire in 2015 and Naik in 2017. This leadership vacuum will be difficult to fill for new top managers. One option, says a company executive who does not want to be identified, is to name KV the next chairman so that he gets more time to groom a new team. S.N. Subrahmanyan, who heads five business verticals, and M.V. Kotwal, a company veteran who heads the heavy engineering vertical, could be contenders for the CEO's post. The possibility of an outsider heading L&T looks remote. The company tried lateral hiring at a senior level when it recruited Ravi Uppal, a former top executive at engineering company ABB India, in 2009 to grow its power business, but Uppal left in September 2012.

Whether it is the leadership issue or the business slowdown, KV is not unduly worried. He is content and focused on doing the job at hand. A dog lover and a cricket enthusiast, KV describes L&T as a "learning and training" programme. He believes in maintaining a good work-life balance and has finished reading two books recently - The Billionaire's Apprentice by Anita Raghavan on the insider-trading scandal involving former McKinsey managing director Rajat Gupta and The New Digital Age by top Google executives Eric Schmidt and Jared Cohen.

What is his forecast for L&T? The company, he says, will be in much better shape by 2015/16.  However, that may not be sufficient to satisfy shareholders and investors, who sometimes look for quick returns. "You have to look both at the short term and the long term," says KV. "Obviously, there is no long term if you don't have a good short term. But if you think only short term you will not have long-term sustainability for the organisation."