Larsen & Toubro chief warns of India investment crunch

November 13, 2013 3:41 am

Larsen & Toubro chief warns of India investment crunch

By James Crabtree in Mumbai

AM Naik, the head of Larsen & Toubro, India’s largest infrastructure company by sales, is a man with a warning – that his country’s struggling economy faces a sustained investment crunch that will continue to force major industrial groups to seek growth abroad. Over the past decade, L&T has cemented its reputation as India’s premier engineering and construction conglomerate, earning $14bn in revenues during the past financial year with operations ranging from roads and port construction to power equipment and shipbuilding.But while the company prospered as Indian infrastructure spending boomed prior to the global financial crisis, its sector is now experiencing a growth crisis, Mr Naik told the Financial Times. This is forcing leading players to offload assets in the face of severe project delays and mounting debts.

As a result there is now “very little chance” that India can meet a government target to invest $1tn in infrastructure by 2017, roughly half of which is meant to come from the commercial sector.

“No one in the private sector has money to invest; all are stretched. It is wishful thinking,” the veteran industrialist says.

L&T has performed better than many domestic rivals during the slowdown, producing an above-forecast quarterly net profit of Rs9.8bn ($158m) earlier this month, partly because of a marked increase in international revenues.

The company has expanded foreign operations aggressively, especially in the Middle East, Mr Naik says, to offset declining domestic spending – a trend that will mean that one-third of the group’s sales should come from outside India during this financial year, up from about 15 per cent the year before.

“Today I am forced to go and build in other countries,” he says. “If I hadn’t done all of this we would have had negative growth in India. The Indian economy has not helped me grow.”

Numerous prominent Indian industrial conglomerates, including EssarGVK andGMR, invested heavily in building assets from power stations to road projects over the past decade, but have struggled more recently with project delays and mounting debts, amid tighter credit conditions.

The gross debts of the 10 largest heavily indebted Indian industrial groups crossed $100bn in the past financial year, according to research from Credit Suisse, raising fears about the potential knock-on effects of non-performing assets on India’s banking system.

L&T has been less severely affected by these financial troubles, and it stands out against its peers in other ways. Founded in the 1930s by two Danish engineers, it is owned by a diverse range of institutional shareholders, one-fifth of whom are foreign investors, in contrast to the family-owned groups that dominate Indian heavy industry.

It is also known for its good corporate governance, in spite of operating in sectors where corruption remains commonplace, as well as for developing profitable offshoots in areas including financial services and IT outsourcing.

Mr Naik joined the company as a junior engineer in 1965, rising to become chief executive in 1999. He earned a reputation for plain speaking and obsessive attention to deal, and claims to have taken barely a day off work in nearly five decades.

One of the longest serving business heads in India’s Sensex index of leading companies, he admits L&T has made mistakes during his tenure, in part by bidding too enthusiastically for contracts and funding more projects on its own balance sheets, building up gross debts of roughly $1.9bn as of September.

“Some of our infrastructure and power projects I should never have taken forward,” he says, in spite of having increased the company’s revenues roughly 10-fold since 1999. “We have become far more cautious … we are going to be extraordinarily selective before we bid for projects.”

Along with other Indian infrastructure groups, L&T now plans to reduce debts by selling assets – including a possible listing of its toll-road division in Singapore next year that could raise at least $500m – while also slimming down its dozens of separate business units.

Mr Naik is critical of India’s government for doing too little to help restart infrastructure projects stalled by bureaucratic delays, and for rules that he argues give Chinese importers in areas such as power equipment an unfair advantage over domestic competitors. “Government policies allow everything to come from China,” he says.

The past two years will count as a missed opportunity, he says, although a decisive outcome in next year’s national elections, followed by a concerted effort from whoever holds power to restart delayed projects, can begin to turn the country’s faltering industrial economy round.

“India had the best possible chance to get all of the investment we wanted, if our political equations were right,” he says. “I can make a base case perhaps that things can’t get any worse… [and] depending on the outcome of the election, things can improve again.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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