L&T set to exploit full potential after business restructuring

The restructuring of larsen & toubro (l&t) into nine independent businesses is essentially focused on reducing the burden on the chairman and the board. But it will also create opportunity for 80 old hands in the company to join the board of the nine new entities.



At present, chairman and MD A.M. Naik is working almost 24X7. His day meetings start from his house at Pali Hills in Bandra, Mumbai, and may end in some other country, says an L&T executive. Naik is involved in each and every business decision of the company. In the new setup, he will not have to look into minute issues. "He will get feedback from sectoral heads to take final decisions," says the executive.



Management consultants McKinsey and Bain have knitted the new structure for L&T to achieve four-fold growth in a decade. If the target is achieved, L&T will have a revenue of around Rs 2 lakh crore by 2020, about Rs 35,000 crore less than Reliance Industries' income in 2009-10. Profit may rise to Rs 3,800 crore. If similar growth is assumed in its stock valuation, L&T's share price would reach around Rs 6,600 — it is hovering around Rs 1,608 now (see 'Negative Reaction').



Four-fold growth implies a compound annual growth rate (CAGR) of over 16 per cent, which is lower than the 22 per cent CAGR in revenues recorded in the past eight years. "In the past five years, L&T has grown three-fold, and some senior executives are retiring in the next three years. The new structure will help in an effective management transition," says director J.P. Nayak, who retires on 31 March 2011.



L&T's board is one of the oldest in the country, like Tata Sons. Four out of its eight directors will retire by 2012-13. Of the two retiring by 2015, chief financial officer Y.M. Deosthalee will leave L&T to head L&T Finance Holdings, which is looking to list when the market stabilises. L&T has about 10,000 executives. At the executive level, from manager to director, promotion is not as easy as in other private sector firms. The new structure will allow people to move up the ladder, and a few to the crucial decision-making level, says another analyst.



L&T operates in 152 businesses, including nuclear reactors, power equipment, airports, oil and gas pipelines, roads and financial services. The new boards will have nine members — a chairman, business head, three members from the business unit, three non-executive directors and a representative from L&T's board. The boards will have independent management powers and freedom to make investment decisions. However, the treasury management will remain with the parent board, says Nayak.



The nine independent companies are: heavy engineering, hydrocarbon, machinery and industrial products, water, power equipment, infrastructure, metals and minerals, electrical and automation, and mechanical and industrial products. In addition, large subsidiaries such as L&T Finance and L&T Infotech will also have independent boards of directors. "The growth of independent verticals will create an opportunity for unlocking value in future," says an executive with an international bank. The company has already sounded in favour of listing some of the newly carved businesses such as L&T Infotech and L&T Power.



For ensuring revenue for the parent, L&T is looking to put in place a payment system. Brand usage and communication activities will be paid services from the beginning. "We may even charge for corporate strategy in future," says Nayak. With the restructuring, the platform is ready for the next chairman.



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