L&T: It’s all about Imagineering

L&T: It’s all about Imagineering
2 Sep, 2007, 0028 hrs IST,Moinak Mitra, TNN

Anil Manikbhai Naik has a lot on his head, even at 65. At an age when most retire and reap the fruits of their income, Naik’s 18-hours-a-day regimen is baffling even to his children, who often prod him to apply the brakes. As chairman of L&T, India’s gritty Rs 18,000-crore engineering company, that’s not possible. Not yet.

Today, L&T is a complex animal with 62 different businesses, which are undoubtedly difficult to manage. And A M Naik is determined to explore new business opportunities through separate companies with independent CEOs and boards. “The idea is to create several MNCs within L&T, with footprints across nations,” he says.

And that’s in keeping with the turnover of Rs 30,000-crore the company aspires to achieve by March 2010. Restructuring at L&T is on in full swing. It’s all about sniffing new pastures, grooming new talent and projecting the new company credo — ‘It’s All About Imagineering’. That’s just about how L&T is kissing the good old economy good-bye.

For one, IPOs are planned as the company is poised to unlock shareholder value across a gamut of businesses. In just four years, the stock price of the company has zoomed more than 12 times, creating multi-millionaires across the stakeholder fraternity. L&T now is heavily into branding, which until recently, seemed like a distant dream. The construction of an IT firm is also high on people and grooming young leadership is the buzzword within.

To gauge just how L&T is transforming itself, standalone instances won’t suffice. It’s worth the while to take a walk down memory lane, revisit change agent Naik’s role in the overhaul, take a peek at the organisation after it divested from its significant cement business in 2003 and analyse the emergence of the first Indian old economy MNC.

In the late nineties, the macro environment was not very inspiring with stagnant revenues and low margins and L&T’s core strength, its engineers, were being constantly weaned away by the fast-growing software sector. So the general comment around the bourses was about the credibility of the company: L&T is a good company but its stock price, for some reason or the other, is fixed at the Rs 140-210 band. So the company had to change by keeping its core intact.

As a senior executive remarks: “L&T was perceived to be un-sexy and we had to create a new buzz around the campuses.” The metamorphosis must echo through a whimper, not a bang. Even before the company divested its cement business in 2003, which accounted for 25% of its total sales, there were years of incremental and low visibility organisational moves towards a new L&T.

At a 52-week high of Rs 2,735, the L&T scrip today looks dapper, a far cry from the nineties when the stock price was in a state of flux. Much of the change started as a ripple way back in 1999 when Naik took over as the CEO. He visited employees at all levels across the organisation and asked them what it took to transform the company.

The insights were mapped and implemented. “None of our employees thought we build shareholder value. They thought we build monuments,” the chairman reminisces. The focus on people became stronger and formed the basis of the restructuring. It became the first old economy company to provide stock options to its employees.

When Naik came to the helm, he set upon himself a 90-day transformational agenda. Portfolios were reviewed and a vision clearly chalked out. He drew up a simple brief — L&T has to be a multinational company and it has to deliver shareholder value at any cost. At the end of 90 days, between July 22 and July 24, 1999, the company launched Project Blue Chip, which essentially fast-tracked projects.


The moot point was to complete all projects by February of the new millennium. Strategy formation teams were formed, portfolios reviewed and structures were optimised. Young leadership was brought to the fore and the business streamlining process kicked in.

Notwithstanding the promise Blue Chip came with, it also presented some glitches. From 2001, the economy took a nosedive and the company hardly received any new orders. “I wrote off a large number of bad debts and had to clean up the balancesheet completely,” says Naik. The investor landscape had changed too with far more analysts in the system. Alongside, there was the additional challenge of pushing an HR policy that prodded young leadership to bloom, and an ageing employee base had its reservations here.

But first things first. From 1999-2001, L&T went about de-bottlenecking its cement plants. They were modernised and capacities were raised from 12 million tonnes to 16 million tonnes annually, with minimum costs. The mantra really was to grow the business and then divest it as cement fell in the non-core category.

So in September 2003, L&T sold its cement business to the Aditya Birla Group, which resulted in the company’s Economic Value Add (EVA), an important indicator of the financial health of the company, swinging from a negative Rs 350-crore to a positive Rs 50-crore immediately. The move also enabled L&T to reduce its debt-equity ratio from 1:1 to 0.2:1. Analysts took a positive view of the demerger and re-rated L&T as AAA from AA+ in 2004.

From then on, followed L&T’s transformation into a lean and mean machine. In 2004, the company envisaged a growth curve for the next five years. This marked the beginning of Project Lakshya, which was centred around people, operations, capabilities and new ventures. The company set out with over 300 initiatives in hand, and also placed a rigorous risk management system. For instance, any project above Rs 1,000-crore needed the signature of the chairman. Project Lakshya is known for targeting and selecting the right projects.

By now, the Indian economy had started witnessing unprecedented boom and despite divesting the cement business, the L&T turnover scaled the Rs 10,000-crore mark. Alongside, the lucrative Middle East market was beckoning and L&T forayed into six countries in the Gulf with joint ventures. “The idea was to develop a mini-L&T in the region,” observes a senior company executive. The company also set up manufacturing facilities in China to leverage the cost structure. Exports in 2007 constituted 18% of net sales. With soaring revenues and operating margins, L&T started benchmarking itself with the best in the world. Suddenly, the notion of an Indian MNC became a reality.

But L&T had to tackle the next big challenge of identifying its next line of leaders. The company recently increased the retirement age for CMD from 65 to 70 years, and from 62 to 67 years for the other directors. Experience is necessary but grooming young leaders is critical if the company were to make any impression in emerging businesses. So it is now getting in tune with the mindset of its young people. “If young professionals are given challenging roles, they get excited.

Today, it takes six-seven years for an employee to become a manager, unlike 11-12 years earlier. Further, in our treasury department, the average age bracket is 23-32 years,” says YM Deosthalee, CFO of L&T. It has taken both internal and external initiatives to carry out succession planning. The company collaborated with the US-based Hay Consulting to chart out a clear succession plan. Says Barbara Darling, practice leader, Hay Group, “We need to identify the mission critical and key roles and form a pool of talent.”

The issue of managing 62-odd businesses of the company is looming large too. The plan is to unlock value by listing L&T subsidiaries over a 5-10 year horizon. ET learns that L&T Infotech will be the first to go on the bourses by the second half of 2008, and then it will be the turn of L&T Infrastructure Finance as well as L&T Power. “If we list an entity, it has to be robust, and there has to be a clear focus on revenues and profits. So at the moment, we will keep significant shareholding in each subsidiary until independent business models are strong enough to deliver on their own,” says Deosthalee.

The huge infrastructure potential that India holds has actually gone in favour of L&T, which has amassed an order book of 48% to nearly Rs 37,000 crore. Alongside, emerging opportunities in nuclear power, defence equipment and railways are being considered. The company is also further segmenting its two key businesses — power equipment and ship-building. “We are following an integrated approach to India’s infrastructure requirements with a combination of construction, development and project finance routes,” says Deosthalee.

L&T is now in the process of building a perspective plan for 2015, which will align its mission with national interest. It will also address the issues of succession planning and weathering an economic downturn.