You cannot run L&T as you did before: A.M. Naik
Sunny Sen and Josey Puliyenthuruthel April 1, 2011At the age of 69, AM Naik, Chairman and Managing Director of Larsen & Toubro, has spent almost half a century with the company. But he is still passionate, and wants to see a changed L&T in the next 18 months (that's when his term ends). There is a lot he has to do, from finding a successor to forming new virtual companies and boards and sell businesses that are not doing well. BT's Sunny Sen and Josey Puliyenthuruthel chatted with Naik for almost four hours on how he plans to spend the next 18 months restructuring L&T.
Q.Tell us about your journey within L&T and how has L&T changed over the period?
A. When I joined in 1965 the whole company would be of Rs 16 crore and 3,000 people. My heavy engineering (division) in March clocked Rs 2.5 crores. That is when I joined. The story of mine started from there. Till 1974 we had 4 Executive Directors - Mr Larson, Mr Desai, Mr John Hover and Mr Hansen, running this company. But you must remember that there was an equivalent board member who was running ECC which was a subsidiary. Utkal Machinery which is now Kansbahal Works was by itself an independent company. So when you add up all these, perhaps 6 executive directors was running a company of 15-20 crores… Mr Larsen stepped down in 76 and 2 more (directors) were inducted which made it 9.
When I go back to 1977 it may have been a 100 cr company, perhaps equivalent to today's 1,500 cr. It was all based on SBU and quite a bit heavily functional. For example, there was in-charge of HR, in-charge of international, in-charge of Delhi office, in-charge of govt affairs. In 1974 there were only 2 people out of 5 running the business; of course there was a CEO. In 1977, when ECC got merged it became 3 running business… The no of directors have not changed, but has come down. The volume of business has added. The magnitude has increased multi-fold and the complexity has increased unbelievably. These were the times where there were five businesses. Construction machinery was one, but it wasn't manufacturing, it was only import and sale, only trading. Manufacturing started in 1977 that was the Pokhlan Excavator.
Q. You wanted to get into nuclear long time back…
A. We had made the first nuclear in 1971. This was after my coming. The heavy shop was build to handle 240 watt nuclear reactor-a small one then. In 1984, the atomic energy announced 500MW. And that could not be made here as the shipment could not have taken place in the city, as the equipment has big. That is the time I went around all India and finally selected Hazira. We did not want it too far from Mumbai as technology transfer becomes difficult. At the same time we wanted not too far from a big city. No engineer wanted to go from a big city. Even I faced hell of a time in recruiting people in Surat. Reputation of Surat was not got, because of the plague and 100s of people died. It was considered to be Gujarat's dirty city. Not it is the prettiest city.
Had we taken any other city we would have never got high tech people. We did not go there to make nuclear alone but for the sake of making offshore platforms. Then we did not get licence to make offshore platform, we wanted to make boilers and we did not get a licence. I went nearly 52 times in 70s and 80s and did not get a licence. India would not have had a power crisis if we were allowed to enter into the manufacturing of power equipments. We were an MRTP company and in 1981 we had crossed 100 cr.
Q. What is the main idea behind this restructuring?
A. We have gone into terrible transformation in product range and why am I telling you all this which has led to this restructuring which is undoubtedly required without which this company cannot function now anymore. Now remember at each point I am personally involved in all the new businesses. The last new business which was done apart from any of the businesses I was running was the hydraulic excavators in 1975. Since then from Boilers, and then nuclear and then Aerospace and all of that are phenomena which started in 1975 and on until now. Then in 80s we started in cooperation with DRDO with various laboratories, as we were not allowed to manufacture defence equipments. Till now we are not allowed.
There we were allowed to create a core development with defence labs for DRDO. Slowly we started doing small numbers and could not do mass numbers. This is how we do a few hundred crore which is the largest for any private sector, but represents hardly 2 or 1per cent or less than of the group turnover. If you notice all through this time the number of directors were 9 and then came down from 9 to 8. By the time everything was merged into L&T. Number of board members came down form 18 to 16. Mean while ECC continues to progress, switch gear continues to progress. Even when I took over they continued to do 5 crore projects and I stopped and asked them to do 20cr and next year 50, following year 100 and now don't allow them to do anything less than 500, because it is just not possible to cope with it. Because if you have to do 50 cr you need 600 sites and you don't get 600 project managers today as no new generation wants to go into construction.
Q. We have heard you were offered quite a few jobs even when you were the CEO.
A. A head hunter called me in 1999 when I was the CEO of L&T and said "Mr Naik I have a position for you as the CEO of Asia Pacific of one of the largest MNCs." I asked him if he is aware that I had just taken over as the CEO of L&T. He said "Yes, but this is a bigger job." So I asked him to come and meet me when he is in Mumbai and said possibly I can use you to hire some good guys for me. So finally he came and said "I have never seen a person like this in my life who is so straight." I don't even remember the company.
Q. What did you do as the CEO of L&T?
A. When I took over I made a plan in 100 days of what all I will do and knew that I will do this no matter what. Had it been 5 years earlier I would have contributed a lot more but it was always a seniority driven company. I was one year junior on the board. And that is the time we missed on IT. L&T had everything needed to create an Infosys. Infosys was no where and we had more than 400 people in it at that time. If we had applied our mind and started IT services we would have been 4-5 billion only in that. These are missed opportunity. It was never a part of me. It was a part of the services business. First thing I will do is to create a new vision a new strategy and therefore bring in 1-2 of the top three strategy firm to resolve issues that are inherited. That was keeping me occupied with a lot of things. Economy was also doing badly at 4.5 per cent. Profit was only 210 cr. We had sales tax deferment scheme in cement which I converted into sales tax exemption scheme and that is how I ensured a 310 cr profit (1999-2000). Therefore hardly anyone would support me to spend 10 cr on strategy firm or for therefore many other schemes that I started.
Q. On complexity of L&T's businesses…
A. Hydrocarbon process plant....we have added more complexity by adding cross country pipe line. This SBG has a mirror image in Gulf. All adds up to another Rs 2,000 crore. The biggest company just in gulf is Rs 10000 crore and otherwise there are 200 companies in the world doing this. All of this is under one man - Mr Venkatramanan. Similarly, power also is equally difficult. It has also got 3 SBG - gas, coal and construction. Multiple locations for engineering for engineering...multiple sites and that may become 3billion in 3 years. I started this and now Mr Ravi Uppal has been installed there and I am still the chairman and I have not given up, because it is new and still needs a lot of support.
When I formed the nine IC I withdrew from eight, except Power. This was not that mature and I am still working on it. It takes one hour average per day of mine. 25 companies, 25 different CEOs, we are trying to compete with and we are trying to compete with different CEOs. Each IC like in hydrocarbon has 3 businesses. Now you can see how complex it is if I do this for 9 ICs and 6 subsidiaries as Hyderabad Metro is a part of IDPL. It is the world largest Metro done in a single phase - 92 kms. 112 kms that Delhi metro is, is done in 4 phases. Each time you have to create a marvel. Delhi airport the world says has been fastest in 48 months, but if you ask GM Rao, he will tell you it took 58 months. But I don't count the planning stage. Here we have done in 37 months and if I count the planning stage it is 44 months.
L&T is not one company, it is 25 companies. Can it be run by a single man? People tell me you have not left a successor. I tell him "you find a man in the world who will kill himself 4 times a day, has worked for more than 100 years, started more than 60 per cent of the company himself with devotion passion and did not bother about his own family. The day you find such a man he is my successor. And by-the-way knowing all this business."
Q. So what should we do with Larsen & Toubro. There is no such person. And therefore you cannot run L&T as you ran it before. So what can you do? When did you actually think that this restructuring should happen?
A. When the company was growing at 25 per cent and the growth began to slowdown. BTW I have been telling this for 10 years. Since 99 L&T has to be restructured but old habits die hard so it started with SBUs and then restructuring companies and then IC. Could I have possibly done 3 yrs ago. Then suddenly there was a growth in the economy and everybody was running after growth. Therefore 12000 to 50000 in just 5 years.
Q. What if Birlas still had the stake (in L&T)?
A. They would have sold the remaining company to someone else. That was their lob. They were consolidating cement. To run this company however complex it is not everybody's job. And I know several companies who have said that I want only L&T EPC and heavy engineering. Some MNCs wanted only switch gear, so all I have to do is to break up the company and sell switch gear to Schnider and this and this to XYZ and this and this to somebody else. And I found out that they would have recovered more than 2 times the money by splitting and selling and the cement would have been free on the top of it. But the value would have one down because they would not have been able to retain even 10 per cent of L&T top guys; they would have just left, just like that. So finally companies as good as your leadership. (including you?)
Mera to sawal hi nahi hai na, I would work for nobody else in this life than L&T, L&T so called managed by us and not managed by someone else. So when we were finally done with, we formed L&T employee's foundation, these 15 per cent were sold there. L&T through government intervention gave two 75 crores interest free loan, to be returned 25 crore per year. I went and pledged some shares to the bank, you know this 15 per cent and got one 75 and we bought the shares. Which was then one for Rs.40. To their trustees worth 12000 crores. Then I gave 5% per cent of the raise to all the employees (one time raise)with a clear direction to them that post tax, you have to give this money to the trust foundation and I gave them 7 year paper, compounded they will get back in the end of 7 year at 5 per cent tax free interest. And everybody gave, although outside they would have got a little better interest.
But then the increase was meant and we collected and as the price of the share went up I levied, this is an appeal that I made that you please pay Rs 20 to L&T foundation out of your gain and then I made Rs 30 to be paid to L&T public charitable trust, which did not exist at that point of time. And the company will have Rs 30, an equal amount. Today, we get Rs 120 cr basically out of stock options. Then first the banks were paid off. Then we paid off employees. Therefore a trust of Rs 12,000 cr worth of share was created without paying a single penny. This is a voice for L&T employees for any future attempt of any hostile takeover. I always a dream that this should be owned by employees because Mr Larsen and Tubro behaved like employees, not typical owners per say. They diluted to 2 and � per cent within 10 years with repeated public issues.
The problem is after that I negotiated how much debt should come. I made 23 yrs balance sheet to go into cement and build ships. We had become 1.2:1. And we were downgraded from AAA to AA+ because of inadequacy of debt repayment and then we suddenly became 0.9:1 because most of the debt was gone to Grasim. We had not given the bonus share to share holders since 1983, and company which was supposed to give was not giving since we had entered into cement and ship building in 1981.
Q. On L&T's comparison with other conglomerates…
A. What is Adani's business, I asked him 6-7 years back. He said running Mundra port. He created value of 10,000 cr of it and became bigger and bigger and bigger, so it became a port city. And you needed a captive power plant. For that he created a JV as he did not know anything about power with CMS energy of US - 500MW. Halfway through CMS walked out so he tried to study what all is required out of power. And as he was doing it he realised what big potential it has. He is politically very savvy. He went ahead and put 3000 MW in Praful Patel's constituency, 2000 in Kamal Nath's constituency, so he had all the help. Then he made an acquisition of a huge coal block and standardised on Chinese.
Then I recently took him and said my life's mission is to convert you out of Chinese, to make you more patriotic. That's what I told him. And he has huge regards for me. So he is 3rd or 4th richest person through two businesses. Power and now he doesn't call Mundra but ports as he is making the Hedge Port and the Hazira port and wants a port on the west side. He has number of CEOs and presidents. And what are we doing - 64 businesses, 152 business segment - same market cap. Look at Infosys, one business and value higher than L&T. So this is value creation if you focus on speed and scale. These are my Mantras. Then you can afford to get the best talent from any where in the world and pay the CEO 20 crores, don't care. But if you want it for 16 guys, can you afford to pay 16 x even 5 guys? No, because they are tiny businesses. I recently talked to somebody who has just come out of a big organisation. I called him. He came and offered him one entire IC. He had the potential of becoming a board member of L&T. He nicely wrote back "thank you Mr Naik, you called me, but I have run much bigger business." Although he had only one business and what I was offering him was 11 SBUs embedded in one. JP Nayak's job who is retiring on 31st.
Look at Tyco, they broke the company into 3 parts. Look at Motorola, they went to dogs because they had 4 businesses although all relating to telecom. Now they are not even in top 5. And why did that happen and this is a case study. The founder chairman retired and the son came. The son was not good. Then they got a CEO. The share holders wanted a CEO. The CEO could not cope with the complexity. Then they had another CEO. Before that they said let us sale the semiconductor, which became Freescale. They de-merged like us. Now only 2 businesses remain - handset and infrastructure, and now broken up into 2 companies. Now they have a chance. The moral of the story is unless you have a focus, you cannot win. You at best can struggle and survive. That is the story of L&T - to struggle and survive. People say Tata Group. But Tata group is a privately held company and then every company is spun off which is well managed. Tata Steel is steel, run by itself, like I want L&T Finance.
Q. How will the ICs or virtual companies be run?
A. Each IC will have a non-executive nominee from the parent board who will be the representative and the bridge between, if anything goes wrong and is not happening as per directed by the main board.
Inducting 27 directors, 3 for each board and one nominee that is 4. Again I have been negotiating with someone for Hydrocarbon. Anyway KV is retiring next June. That man will join only if we spin of the company and call him a CEO. He is an international man. So even if you have to get a top talent and you have a spun off company - from an IC structure to a spun off structure, there will be minimum 5 board member with the CFO. Each of the IC has the potential to spin off and create a talent of 6 executive directors. Now it is one. Now anyone and everyone we recruit they want a board membership.
So I tell them pls join IC board member ship. They will join only if they see high power non-executive directors in the board, otherwise they would say this is a manager's job. I have already appointed 18. Quite a few will join on 6th April. We are going through a major shakeup and major transitioning. These are people who will give their life for L&T. They don't have to work. With their stock option even four levels of people don't have to work. There are more than 500 millionaires in L&T and more than 1000 adhipatis. They don't have to work, but none of them can see L&T week. Certainly I will have sleepless nights. And therefore we have a mission to go through this transition. So Mr JP Nayak is there for one year as an advisor.
Q. But do you think one year is enough?
A. I can't answer you. The idea is simple that the transition should be complete. And for J P Nayak it was more complex that Mr Raghavan who succeeded him is also retiring on the same day. I have given one year extension to Raghavan. That why I am looking for a person which I was telling you. But that person wants a main board position. Which I can't give because I don't have vacancy now… We are trying our best for September 20(12), but if that means not only me, if that means J P Nayak to work 6 months longer he will. This cannot be left incomplete. Then we are not L&T-ites who worked life and death for this company. And none of us have to work for money.
Q. What are the risks of this restructuring?
A. If we don't do proper restructuring a lot can go wrong, therefore we have to make it work. Therefore we have to work day and night relentlessly with devotion and make sure we do everything thought and reinvent to suit the individual businesses to be run in the best possible manner in the industry and be one up against them. So having said that is it an easy task. Its not. Will it be finished in 18 months. I cannot say that, I want them to finish in 12 months. The moment there is a smallest doubt it will drag. I cannot afford to have the smallest doubt. My job is not to create doubt but to create confidence that it can be done. Simplicity wise the task is undoable. The easiest answer to tell you is 'it will take five years'. But if you ask me that if you break your neck and back and with the total involvement of the organisation it can be done. I am interviewing 10 people every week. Almost one hour every day I am spending on interviewing.
Q. Do you potentially miss out on perfect value capture, when you set out a time limit like this?
A. Not really, it is so tiny that it will be 50 cr this way or that way, that I don't even want to think. Either I will sell it for 150-200 cr or 250-300 cr. One small project I take of Rs 500 cr, sometime I loose Rs 50 cr. So isme kya jayega? But efforts wise we will gain a lot. So my talent now can be better utilised on a bigger business. So there is always a time table required for anything you do.
And then we have a big hot potato for the past 49 years in Kansbahal Orissa, which merged with L&T in 62 - Utkal Machinery, which is where we need some strong products and that is not a saleable asset, because it will have a huge political backlash - makes paper machines, some parts, steel machines - some parts, but primarily crusher and screens for cement industry. That is a big jungle and I don't have a ready answer and will evolve as we go. If that is the only problem left when we transit out I think it is not going to impact L&T as a whole or even that IC as a whole. 5-10 cr PBIT idhar udhar hoga. Woh thik hai.
Then you come to construction machinery, where we have L&T Case and our market share is only 12 per cent. JCB controls 65 and everyday new people are coming, but we have gained market share from 8 per cent to 13. But aadha taka, ek taka mein main usko bola kya farak padta hai. Ya toh tum usko kharid lo, ya tum usko de do. So now he is working on that. And he has been given deadlines of September. Then come Kumatsu. Kumatsu nowhere in the world has JV, they are 100 per cent. But everywhere they market and sell through people like us, dealers. That is there wish list. And that is not our wish list. That is the complexity. That puzzle will have to resolve. That I have given him time till march.
Q. So will we finally see Mr Naik retiring? What about continuing as a non-executive chairman?
A. I am laughing, smiling and saying in good faith and with good wishes - I wish L&T grows strength to strength and that will be the best day in my life (without AM Naik). September 12, that's the day when my term and it ends. Non-executive has no value and in our kind of situation it has no value. It will just not work.