For Larsen & Toubro’s feisty 70-year-old Chairman & Managing Director, A.M. Naik, size begets size. So much so, that the engineering and construction conglomerate has been either selling its small businesses or shutting them down.
“I am not interested in small companies, they are distracting me, I want to do big things,” he declared in an interview to Business Line . “Over the next few years we will close (or sell) businesses which don’t have revenues of Rs 1,000 crore,” he emphasises.
He says the threshold limit for now is Rs 500-600 crore. If revenues are less then that, businesses will be disposed of. “I have been saying we have to get out of our smaller businesses. We sold cement, we sold ready-mix, bottles and petrol pumps, we are selling the plastics machinery business now, medical also; we’ve closed many businesses, they are all tiny,” explains Naik.
Last month, L&T signed a share sale and purchase agreement with Toshiba Machine Company Ltd, Japan, to sell its entire stake in L&T Plastics Machinery Ltd, which makes injection moulding machines. The company recorded sales of Rs 206 crore and profit after tax of Rs 11 crore for FY March 2012.
In tune with this strategy of scale and size, Naik says the company no longer participates in any contracts that have a ticket size of less than Rs 50 crore.
On a visit a few years ago to IIT-Bombay, where L&T was executing a Rs 12-crore hostel project, he found that it had overrun its costs. “We found that in many small jobs we were losing money.”
“Only bigger projects were making money and smaller ones were eating into the profits. Now, I’ve made it Rs 100 crore (as the threshold),” says Naik. For each business it’s a different limit for minimum project size. For electrical projects, such as sub-stations, it is Rs 100 crore; in building factories, a minimum of Rs 150-Rs 200 crore.
“And if it’s an isolated place and I don’t have 3-4 other projects within drivable distance, that will be Rs 250 crore. Hydro power, not less than Rs 1,000 crore, because they are in remote destinations and it takes five years to build,” he explains.
Referring to recent road projects worth Rs 4,000 crore which L&T bagged, Naik follows the same principle. “If we are going to bid for a project of 200 km, where there are 20 bidders, then I am not in. I won’t waste my time. But the moment the bid size is large, then there will only be four or five bidders; that is something we will look at, provided it is viable.”