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Interview

with K. VENKATARAMANAN, Member of the Board & President, Larsen & Toubro Limited (L&T)

11.05.2011 / Energyboardroom

You are in charge of Larsen & Toubro’s engineering and construction division, which is responsible for projects in critical sectors including oil and gas. However, the company has undergone a restructuring, splitting the company into nine virtual businesses, of which hydrocarbons is one. Can you explain to our readers how this organisation now works?

L&T has always been a very innovative company – in its organisational changes and also in terms of how we restructure as we grow. We are almost an $11 billion USD company, and our project business currently forms 80% of that. Every five years, we take a long hard look at the next five years. We take a macro and micro view and we challenge all our assumptions. We also rope in consultants to provide an independent perspective. This year, both McKinsey and Bains helped us determine the course of action going forward. .
Larsen & Toubro is a conglomerate. Our early phase of growth occurred in the licence Raj when the likelihood of securing licences shaped a company’s growth directions. Today we have many diverse businesses. Over the last five to six years we have been trying to exit from our non-core businesses and focus in greater depth on the internationalization of our prime businesses.

Since we grow at a topline rate of over 20% and do well on the bottom line also, we felt that to manage a company that will be worth an estimated $20 billion USD by 2015, we should divide the company internally, before eventually separating the different business areas. Today, these businesses operate like virtual companies. They are not listed, but all they operate in the very same way a listed company would in terms of corporate governance and strategy.
Having done this, we are in a position today where if some of these companies start to scale up, L&T could list them and more value can be unlocked. The other advantage is that it provides our talent with hitherto unmatched opportunities for growth and invests a great deal of responsibility on them.
Today the hydrocarbon Independent Company covers upstream, mid and downstream, pipelines and construction.

Hydrocarbons has been a major part of L&T’s business in the past, accounting for as much as 30% of the company’s revenues. How will the company look to grow this business now?

For the last few years, L&T has been largely a domestic company. India has been growing and we have been building our track record here. We have reached the point now where we would definitely like to become an international player, initially in the GCC areas, parts of Africa and South East Asian markets.

In the hydrocarbon sector, international projects currently account for 10% of L&T’s business. Over a period of time and in a profitable way, we would like to grow this share to 30% and more in the next five years.

We have, therefore, embarked upon the journey to strengthen our positioning in the Gulf. If L&T wants to grow internationally then we have to create a multicultural organisation. So we have categorized the Gulf as two clusters – Cluster One headquartered in Abu Dhabi covering UAE, Oman and Qatar, and Cluster Two, headquartered in Al Khobar covering Saudi Arabia, Bahrain and Kuwait. In both places we have inducted experienced professionals to lead the business who belong to that part of the world. They know the nuances of the culture well and will be well networked locally. .

We have also invested in and built a large manufacturing complex in Sohar, Oman for manufacturing heavy equipment and large platforms & floating systems. Recently we loaded out two 13,500 ton jackets for Bombay High from there, the largest structures ever made in the Gulf. We have tried to replicate our India operations in the Gulf. We established manufacturing and construction facilities, set up plant and machinery, and put in place integrated strategic business units, which cover both upstream and downstream. It is also important to have, as I said, cultural diversity and a good demographic mix for sustained growth. .

We have appointed a senior marketing person in Houston and one in London to network with important customers in the hydrocarbon space. In Singapore, we now have an expert covering floating systems and drilling rigs. We will soon fill in a slot in Perth. As for Malaysia, we have been active there for some time now, and we already have a person in KL. This way we are creating a marketing satellite network and a proper organisation at the Gulf. These businesses can be a little more independent in all their resources and have their own manufacturing, thereby building a sustainable business portfolio. We will focus on the GCC and parts of South East Asia for big-ticket contracts, whilst equipment supply will continue to be carried out on a global basis.

How important will the domestic market remain for you? Is there a challenge of balancing work in India with this internationalization process?

India has opened up to the world. Some of our entry barriers were so low that competition is extreme. But Larsen & Toubro has held its own and reached a high level of recognition in India. We have the competitiveness, skill sets and resources to be an international player. I believe a healthy balance of 40% in hydrocarbon turnover should come from international operations.

Our pace of growth in India has not slackened. We have doubled our capacities at Hazira, and we have built a new integrated facility having a shipyard, an offshore yard and our own port in Kattupalli, near Chennai. It is designed to service the east coast, on which E&P companies are now starting to focus. Anticipating that, we planned this facility about three years ago, and the first platform for GSPL will be loaded out from there this month.

It seems as though in India at the moment, in both upstream and downstream there is a lot of infrastructure to be put in place in order to realise the ambitions of both the government and the private sector. What has Larsen & Toubro indentified in the home market as the most promising prospects?

Over the next few years, there will be many pipeline grids being put in place as city gas distribution becomes a focus. Larsen & Toubro undertook one of the biggest pipeline projects done in an EPC way recently for Cairn. At 680 kilometres, it was the longest heated and insulated pipeline in the world.

Secondly we are gearing up for the deepwater play off the east coast. It is still early days because the E&P companies are now just beginning to drill. Reliance is already producing from the KG-D6 basin. Whilst L&T did not have the competencies at the time to win the tender for that work except for the onshore terminal, we do not want to miss out on a second opportunity. Right now L&T is building a shallow water platform for GSPCL. We have invested around $165 million USD and have our own pipe lay and installation vessel, which is today working at Bombay High installing huge 13,500-ton jackets. We are also working on two FPSOs. We are currently in the gearing up phase, and we are doing the first deepwater drilling project for ONGC along with our engineering partner from Houston.

When you move into these new competencies like deep water, what is your strategy for building the skill sets that the company needs in order to bid for the projects?

We recognize that we need to recruit a good amount of talent laterally. Around that incoming talent, you need to have a good number of your own home-grown people. These are people who will work with the lateral recruits, get trained with our joint venture partners and build up their experience. Right now, for these FPSOs and deepwater projects we have been able to attract some good lateral recruits. For business development we have people at London, Houston and Singapore.

Does being such a large and well-known player in India help you to compete for projects here, even if you do not have previous experience?

Oil companies are very conservative, and therefore the qualification process is very tough. Initially, they will insist on segregation of work – this part to be done by our overseas partner etc. This is understandable – after all we are dealing with a very sensitive product. But our good work wins acceptance rapidly. And behind us of course is our excellent track record in the field, and our record of service. So we are in much more advantageous position than say if we were a start up attempting to launch a brand from scratch.

How do you find the perception of the company abroad? Is it generally well regarded?

We have been working hard to build brand image. Larsen & Toubro is well regarded in equipment space because that is where we are best known around the world. As a fully integrated EPC player, we are enlarging our circle of recognition. Companies might consider us for a $1 billion USD project, but we need to get into the consideration set right up to $2.5 billion USD, and for a wider range of services.

That is where superior execution combined with a better management profile will be an advantage. Once people see our credentials, the first question they ask is why are we not already present internationally? We tell them that we have been building our track record in India and now we believe that we have a sufficient number of references to internationalize. We have achieved that critical mass.

Larsen & Toubro employs a vast number of people and you have been instrumental as a company in helping India meet its infrastructural challenges. How do you feel about the role the company plays in India today?

We recently celebrated 70 years of L&T, and India’s leading industrialists and politicians attended the celebration. Many spoke eloquently about what L&T has done for this country. We are committed as a company and as people to build a very strong and powerful India. In fact, we had a slogan that said ‘we make things that make India proud’. This is not just our perception, but is the perception of many in high places. Our Home Minister once described L&T as a company that did not belong to the public or private sectors but was part of the ‘national sector’. The country’s leading financial daily The Economic Times presented us the ‘Company of the Year Award’ and said we were ‘building the India of the 21st Century’.

Additionally, we are a highly ethical and value-oriented company. We are known for high integrity and competence. L&T-ites work hard because they know that merit prevails. It is unique in at least two ways. It is neither a typical family-owned company, nor is it government-owned. 15% of our shares are held by an employee trust, another 36% with the financial institutions, and about 13-14% with foreign investors. The balance is widely held, and right from the chairman downwards everybody has worked hard for this company. The thought in our core value system is that an employee gets transformed into an L&T-ite when he works with passion, dedication and a sense of pride and ownership.

L&T has been involved in some of India’s flagship projects, from the Jamnagar refinery built in 24 months to the world’s highest viaduct, helping India reach the moon, to nuclear submarines. For you, having had such a long time in the company, having seen all these achievements, what do you still have to achieve?

I was deeply involved in many of the projects you just mentioned, along with my Chairman who at that time was the General Manager who started the Defence Division, which finally culminated in the construction of a nuclear submarine. The whole offshore story is something that we started together from scratch.

While there are a host of achievements that we have notched up, we cannot bask in past glories. We are looking ahead. The legacy that some of us want to leave behind is a very strong leadership pipeline. Now as we are looking at the last phase of our careers, everyone from the Chairman downwards lays major emphasis on developing a leadership pool. Tomorrow’s challenges are going to be a lot tougher than today’s and so we would need leadership who can really rise to the occasion. Therefore, since 1999 we have placed a great deal of emphasis on identifying top talent. These hot shots are given greater responsibilities for fast track growth, and are compensated commensurately. At the same time, that top layer is not permanent. Performance – sheer performance – keeps the churn going.

We also focused on internationalising the business, and maintaining a strong technological presence in the new areas like deepwater and FPSOs

When we joined L&T after coming back from abroad, the excitement was that India was in a self-reliant mode. We were not just importing everything. We had to build up technology and capability on our own. IT does not only stand for information technology, it also stands for India Today and Indian Talent.

What keeps you motivated after so many years in the company?

I am motivated by the fact that we are always doing something different and new. L&T never stood still – it has always been trying to do something more and new. I have been part of that growth story, and of this I am very proud.

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