Largecap Infra cos to benefit most: R Shankar Raman, L&T

In a chat with ET Now, R Shankar Raman, Whole-time Director & Chief Financial Officer, L&T, says sectors which are going to be or continuing to be under stress would be the thermal power generation as will be areas around minerals and metal. Edited excerpts

ET Now: We have had conflicting views from experts. Some say that enough has been done on infrastructure spend and others say that capex should have been as high as 20 per cent but a mere 5-7 per cent has been committed which is not sufficient to kick-start the investment cycle. What did you make of it?

R Shankar Raman: It's a case of glass half full or half empty. The sector has received the attention and allocation from the budget. Between roads and railways, Rs 2.2 lakh crore is significant but if you view it in the context of what the government wants to do in terms of its own balance sheet as well as on the balance sheet of the other entities through PPP or any such format, then maybe it is not as insignificant.

ET Now: But how are you seeing it? Are you seeing it half full or half empty or do you believe there has been enough done in order to increase order books of not just a premier company but the others as well? I am asking for a sectoral view right now.

R Shankar Raman: I think we need to count what the government’s plan is and hence I would like to see it as half full. There is always scope for something else to happen but there is no point worrying about that. From a sectoral perspective, 10,000 km of National Highway and may be 50,000 km of roads in the rural areas plus the electrification in the rural areas, plus affordable housing, gives a fair bit of interesting opportunities for the sector. What is more important is how many of these companies are financially in a position to take advantage of these opportunities and move forward. My sense is that large companies obviously are better placed and would look at this opportunity very closely and with a lot of interest. Along the way, there could be some medium-sized companies which will begin to see the benefit of this revival.




ET Now: But if I just look at the absolute government capex which was announced in the last budget versus this budget, the number is radically down which just tells you that the government expenditure will be under control. Private sector does not have the appetite balance sheet or the wherewithal to start capital expenditure. Government expenditure is coming down, so indirectly who is going to do the spending or the heavy lifting?

R Shankar Raman: I think the PSUs would also be participating in the capex. I had mentioned earlier in another programme that the cash/cash equivalent of PSUs and the funds that they have in the balance sheet is pretty significant and that can be used for investment. The government once again is attempting to look at divestment as a source and if they are able to be more successful this year as compared to last year, there could be some funds available. But even if you go from the capital expenditure point of view, the growth is about 2-3 per cent over the revised estimate of the previous year. Consuming that is also a fairly significant effort to just keep the momentum going. We should not forget that we are coming from a very tepid and lacklustre investment momentum. Now what is important is in one budget it cannot completely turn the cycle. What is important is that direction is set, the projects which are stalled where the capex of the previous year have partly been committed are commissioned. A significant amount of both bank funds and sponsors' equity are locked up in projects which are half complete. You also need to take that into account when you talk about capital expenditure because those capacities will get commissioned as well.

ET Now: Up until now, the general belief is that the government capex is only coming in for very specific sectors of infrastructure – railways as well as roads. A large conglomerate like L&T is present in various sectors, be it infrastructure, roads, rails, you work with all dimensions, defence as well. Where is it that you think the government thrust is going to move after roads as well as railways? Do you think defence is going to be the it sector come next?

R Shankar Raman: Transmission lines and sub-stations could be the next big one because the power that gets generated needs to be connected to the various markets and today there is bit of an imbalance in the transmission infrastructure when you link it to the generation capacities in the country. So my belief is that transmission distribution sector will see some investments. I also do believe water would see some investments both because some of the large states are going the election way and also the fact that India is water stressed. There are many parts of the country that are reeling under water shortage. The government, as part of this rural thrust, would also start spending through the state budgets on the water and the policies enabling that also is expected to come in. Defence has always been a major ticket transaction waiting to happen and that is also lot of policy making outside of the budget. So we continue to remain hopeful but it is very difficult to predict the timing and the thinking of the government around the timing. We hope that what did not happen last year could happen in defence this year because that will be a good and large opportunity for companies which are prepared to take advantage of it but it is also a geopolitical issue where countries are involved, country to country arrangements involved, technology is involved and, of course, the FDI around the defence capital is concerned. So there are several layers there which needs to be dealt with when it comes to defence. But there are several other low hanging fruits I thought.

ET Now: Let us say talk about the trajectory of L&T for the next 12 to 18 months. During this period, out of the three or four large business verticals you are present in, which business verticals are you most optimistic about and which business verticals are you really concerned about?

R Shankar Raman: I am optimistic about transportation infrastructure. Obviously, it has been receiving a lot of attention from the government as well and the funding agencies. We talk about transportation infrastructure including roads as well as railways and when I talk about railways, I include dedicated freight corridors as well as the metro and urban transportation solutions. As I mentioned, I am also optimistic about the power sector in terms of transmission distribution not as much on generation with the additional cess on coal, power is going to get that much more costlier, thermal power especially. Nuclear power has been on the fringes for a while now but there are deep issues like the civil liability and stuff like that. So until those are sorted out, I think nuclear will be on the slow burner. I am also equally bullish about the efforts that are being done to revitalise some of the tier II, tier III cities on the back of both the smart city initiatives as well as the low-cost affordable housing. So those are sectors which I think will do well. Sectors which are going to be or continuing to be under stress would be the thermal power generation. The areas around minerals and metals because of the soft commodity prices, I think there is enough motivation to maximise output so capacity utilisation in those areas are going to be a concern. Hydrocarbon upstream is going to be a bit under weather considering the soft oil prices. Maybe we will see some investment in mid and downstream industries, particularly around the clean fuel programme and downstream fertiliser projects. But in all, hydrocarbon would be modest. I am not very confident about power generation and minerals and metals and the equipment that are for hydrocarbon upstream. These are three sectors that I do not see revival in a 6- to 12-month period.

ET Now: I cannot help but talk about what the situation now is in the Middle East because I remember we were chatting with your colleagues post your earnings and that was the really alarming factor. At the end of Q3, have things stabilised there? Are you seeing an uptick now? What is the real situation?

R Shankar Raman: Middle East has slowed down. Without doubt, the oil prices have taken its toll in terms of demand for new projects. So the opportunities have come down. The good news, however, is those projects which are in the infrastructure space and power transmission, distribution space they are moving forward. I mean there has not been cancellations around those projects but very clearly the oil and gas sector has taken a pause. We are not seeing that many number of opportunities we used to see, let us say, three years ago. So consequently Middle East at the moment is a mixed bag but we do hope that by the time Middle East completes its infrastructure investment which is largely in the area of rail transportation and some of the city--urban infrastructure development in Middle East, by the time that program runs out its course we hope India would pick up and provide the counter balance that would be required.

ET Now: When we connected with you last was along with your quarterly numbers and that is about 30 days ago. 30 days is a lot of time in today’s environment -- both locally and globally. Has anything changed in your forward guidance or you would like to stick to the same?

R Shankar Raman: No, I do not think anything significantly has changed. As we get into the new fiscal, we hope that the direction provided the budget will translate into opportunities at ground level because all these programmes will have to be finally put in terms of bids and put out for competitive bidding and that entire machinery which works on this takes anywhere between zero and six months for all of this to get converted. As a result of the investment thrust, I expect the benefits to start coming in the second half of the next fiscal. So consequently, in the immediate zero to six months I do not see any significant change on the ground.

ET Now: Your stated policy is that you want to monetise the value of your subsidiaries. L&T Infotech could soon see light of the day, I know the groundwork has been done, when will your subsidiary monetisation go off the block? Given the market conditions, are you committed to do that this year?

R Shankar Raman: See I think we are committed to do that for the simple reason that it has a strategic angle to it. It is just not the question of monetising value and capturing whatever is available. If that was the perspective, then it can be completely market timed alone. Market is a factor. I think it is very important that the company gets listed well and trades well. So sentiment is important. Having said that, the larger purpose of listing the subsidiaries is to enable them to function with autonomy and provide an opportunity for the entire group to manage its pieces more efficiently than what it is currently being done. Of course, it is an important means to attract talent. So considering all these larger causes, the plan remains on board. The timing is something that we will have to tackle with care.