`We have a difficult year ahead' -- Mr. A. M. Naik, CEO and MD, Larsen & Toubro

Abhijit S. Basu

N. K. Kurup

Larsen & Toubro has in a short span of time emerged as a major player in the cement industry by creating greenfield capacities and making acquisitions.

It has moved to top the table in terms of capacity, much of which is contemporary. The company's Managing Director and CEO, Mr. A. M. Naik, discussed with Business Line a range of issues relating to the industry and his company.

Excerpts of the interview:

Overview of the industry trends:

Cement operations in 1999-2000 turned out much worse than expected. Here, our estimations may have somewhat faltered. But it was out-of-control largely because international players coming in with ulterior motives. Their idea is to make cement companies sick to buy them cheap. So, in the east, the price went down to all time low. When this happened, they started pushing it to the west. The markets bordering Madhya Pradesh, that is Hirmi and Raipur, which are not far from Vidarbha, are where they started putting pressure. In that region, the prices went down. Only the north remained isolated.

Our Gujarat unit had expected to export 2 million tonnes. But export prices have declined from $ 42 dollars to $ 19 because of the huge surplus in Far Eastern economies as well as in the West Asian economies. The prices have not improved because of the drought. The drought is affecting seven States and all construction work has been stopped because there is no water.

At the industry level, the first quarter saw a negative growth on 1.5 per cent from 14 per cent. There is more supply than demand and as a result, prices have crashed. Even private companies cannot do anything because of the drought. So, we have a difficult year ahead of us. But I still believe that if the monsoon comes on time and is good, then perhaps things will pick up. But you must understand that now money is going for people's survival...lots of money of the government is being spent on that.

On cement business restructuring:

Larsen & Toubro is to restructure its cement business to optimally participate in the cement business. The key is assets waiting. Existing plants have room for low-cost expansion; 10 million tonnes was last April L&T's plant capacity, today it is 12.75 million tonnes and early next year it will be 13.5-14.5 million tonnes. The capital expenditure has been approved and my aggregate cost is coming below 20-25 per tonne. Now, let us assume that the capacity will be 14.5-15 million tonnes; which is what the capacity will be by next June.

Let us say that right now I go in for the restructuring because everybody wanted it. Then they will say that the valuation is $1.5 billions or $ 1.4 billions, in case they give me a value at $120 a tonne, because our capacities are new compared to where the valuation is taking place at $100 per tonne, which are for plants older than 20 years. The bulk of our capacity was created in the last three-four years. Now, if I raise the capacity to 14.5 million tonnes, which means 2 million tones more than now, I have a differential gain of $100 -- $20 is the cost and $120 is the valuation. Should I lose $200 millions? This is only if I shift the restructuring by one year.

The subsidiary for the cement business will take its own time but in less than a year and half it is likely to happen. Latest by December 2001. The institutions did not stop us from restructuring. The management was concerned about valuation. Institutions will not tell us not do that, only do this. Finally the management of the company has to answer, not just to institutions but to all its other shareholders. I am not going to up give up my mid/long-term value creation to meet needs of quarterly reporting.

On sale of cement business:

There would be no sell off. We will always have 51 per cent. The correct story on cement which has never been put in the right perspective is that the management has right now initiated a tremendous amount of value creation. Last year, the profit margins of cement was six per cent. Now, the year which has ended, it is 16 per cent, in spite of price not having gone up or down. Let this management get the time to create the value which we have said in one year. We have improved by 10 per cent.

This year our target is 20 per cent. In spite of the drought, we are not lowering the target which we had fixed before the drought. The following year, by March 2002, our plan is to take it to 23-24 per cent. Up to 18-19 per cent, we want it happen without any price increase, which means cost reduction. We have explained this position to our major shareholders who have agreed to wait for the right time, which is next eighteen months. I want to improve our profit margins to a minimum of 23-24 per cent and enhance capacity to at least 15 million tonnes.

Outlook for next year:

The next year, 2001, will be good as we expect about Rs. 1,000 crores orders from the power sector over the next seven-eight months. First time we will have activity in power and incidentally some of it outside India. We have already signed an MoU with BHEL where our part is Rs. 250 crores. We are reasonably well placed in a Rs. 250-crore project at Sri Lanka. We might also get a Rs. 600-crore order from the Oman Government.