The Rs.one-lakh crore conglomerate Larsen & Toubro, spread across 72 businesses, has successfully averted takeover threats in the last 17 years. More importantly, it has grown 18 times bigger in revenue and 45 times more in terms of market cap in the last 12 years under leadership of A.M. Naik, who has been with the firm for five decades now. As he prepares to hang up his boots in the next two years, The Hindu catches up with him to quiz him on the challenges he is facing now in simplifying the company’s structure and succession planning. Excerpts:
What you regret the most in your 50-year stint?
The one thing I regret is I did not give enough time as my children were growing up and possibly, they should be thinking dad should have given more time. May be, but I am not able to make up, because I did not retire early. Otherwise, I would have tried to make up. That is one. When I say children, I also mean my wife as well. And the second thing …which I really do not regret … but I feel we could have done better over the years is entrepreneurship … which I have tried to bring to transform L&T in the last fifteen years … was done thirty years ago. Then, L&T would have been much different than what it was and what it is today. I do regret. I have done that in a little way, in little areas, but unless certain initiatives are taken company-wide and not division-wise, you do not get complete results.
Nobody. It is our let us say inheritance of being professionally managed company. When you went overboard on professionally-managed management, you forget sometime that there are other stakeholders also who have to get their return, whether it is shareholders and others. So, while we built beautiful structures, very complex projects, nuclear reactor, nuclear submarines and all that. The fact is we should have done everything keeping in mind the centre point … of L&T value should go up, which is the market cap. That focus, I would say, was missing. I would not blame anyone. It was the character of the company. I changed the character of the company as much I can. One of the reasons I explained to everyone … for 17 years you were under takeover threat, because your company was very cheap. And, if you are a cheap company anybody wants to buy. Only way to save yourself is: to make yourself expensive. Only way to do it is by constantly creating value. If you have an entrepreneurial attitude or thinking with an outstanding leadership you can multi-multiply the company. That is how this company’s market cap has gone up 45 times in last 12 years.
Why L&T structure is complex?
Because let us say construction. We have five companies in construction. One looks after only water. That is now Rs.10,000 crore. Electrical, transmission and distribution and sub-station is also Rs.10,000 crore, including 40 per cent from Middle East. So, it is a separate company with a focus on electrical. Then there is a transportation infra, which includes railways and highways. Than heavy infrastructure … hydro power, nuclear power, metros, tunnelling and ports. The point is that there are too many varieties. So, it is also very diversified. Even in transportation, there are railways and roads. We are there. Now if you go to China, eight-time bigger company than L&T is only focusing on railways. One construction company is $65 billion. Do you know the top four construction companies in the world are all Chinese They built over 40 years …so much of infrastructure and they continue to do. To bring the focus they said you concentrate on railways, you concentrate on highways and even within one domain that means, let us say building, they form six companies between Beijing and Shanghai. Each one is $3 billion, $4 billion, $5 billion. The whole city is built, and now they are building more cities. They have spent $5 trillion. I can tell you they are 25 years ahead of us or more. So, you have to bring focus. For example, if there was more spend on railways … nothing has happened in India over 40 year … if there was …I will have only a railway company like China. Let the railway company become $5-6 billion, one ECC. Same highways and tunnels in one company and try to make it world class. Once the critical size is established, you keep spinning them over like Tata Steel is Steel. L&T Railways is Railways, 25 per cent given to public. However, I want to reach that stage to be able to do it. All the companies are sub-optimal today. And, it would take 3-5 years provided the government continues to spend money, continues to attract investments from Indian private sector. I hope they (private sector) recover financially, and there is tremendous amount of attractiveness to bring foreign investments. Otherwise, China is sitting on $4 trillion… they can spend $1 trillion more on infrastructure. Do you have it?
As you are gearing up for retirement, what are your priorities?
I want to make sure this succession planning is done, while simultaneously the right businesses are backed and structure is simplified. I had advantage of being associated for long and starting businesses from scratch. So that future generation will have a lot of challenges much more than me, but at least to an extent it is less complex than it is today. That will be an effort in the next two-and-a-half years. We will be launching fourth five-year strategic plan in April. And, therefore, I would be reasonably clear when the five year plan in 2021 is over what we want to achieve we will. I hope so, and I sincerely pray for that. I will be there till 2017, and the plan will be until 2021. And, the next generation will take over. Any way, I am working on the succession planning. By this year-end or beginning next year it will be done. One- and-a-half-year ahead of my time!
What are the challenges in succession planning in a professional managed company, when compared to a family owned company?
You show me a single family-owned business, which has more than 3-4 verticals. Our problem is that we have 21. Second thing is that they are all in one company unlike the Tata structure where every company is separately listed and they have there own board. And, they are focused each one. Tata Motors is automobiles, Tata Steel is steel, Tata GlobalBeverages is coffee and tea, Taj Hotels is hotels and TCS is IT. All of them in L&T are under one structure. So, the chairman has to be superlatively active, because everybody reports to him. So, the responsibility is more. In a multi-company structure, those CEOs are answerable and the group Chairman becomes more of a facilitator and guidance. That luxury neither I have nor even if I simplify the structure will the future successor have.
Is the simplification process delayed?
I don’t think we delayed. I got rid of 12 businesses like cement, ready-mix, glass and shoe factory, most of them inherited during the licence Raj. If like China opened in 74 … if we had opened in 81, 7-8 year or 10 year later, then I would have simplified the company 10 years ago. I became CEO 15 year ago, and since then, I have been doing it. The whole transformation and entrepreneurial spirit came in and that major change came in afterwards. That is how the company is 18 times bigger and 45 times more now. Had we started 5-10 years ago, our task would have been somewhat easier. And, I would have retired in 65-70 years and enjoyed at least with my children.
(This article first appeared in The Hindu dated March 30, 2015)