L&T’s Tech Avatar

WHEN THE LARGE wall-mounted digital screen switches on at the command centre of Larsen and Toubro (L&T), chairman and managing director S.N. Subrahmanyan takes a break from his reading and glances through data from one corner to the other. The screen is connected to around 14,000 devices and machines such as heavy-lifting cranes, road rollers, earth-moving machines and AI cameras through Internet of Things (IoT) for real-time updates from project sites of the engineering and construction giant.

The command centre, next to the CMD’s cabin on the second floor of the Landmark building at Andheri East in Mumbai, gives him a complete perspective and granular view of L&T’s on-ground activities. If an unknown person enters the project site, everyone, from the project in-charge to Subrahmanyan, is alerted. If somebody moves around without a helmet on site, an alert is issued. Again, they will know, if a crane hired for a project is not fully utilised.

Subrahmanyan, who took over from A.M. Naik as chairman last year, has been driving the transition at L&T. Since the scope of improving margins is limited in the flagship engineering and construction (E&C) business — thanks to L1 or tender-based nature of business, escalating input costs, complex machines and construction equipment — L&T aimed to improve margins with higher efficiency through an asset-light model and better utilisation of machines and manpower, besides ensuring workers’ safety.

If Naik built the construction vertical and founded new businesses, including IT and financial services, Subrahmanyan is consolidating core businesses and finding opportunities in emerging ones by using cash flow from the construction business, pivoting the firm into a technology led engineering and services conglomerate.

Chief digital officer Mahesh A. Chikodi shares an example of how digitisation is changing the company. L&T’s construction division was facing challenges in efficiently extracting accurate insights from the company’s rapidly growing structured and unstructured internal data assets. Manually reviewing extensive documentation such as complex contracts to identify important clauses was becoming a tedious job for contract teams. L&T Cognitive Services leveraged Natural Language Processing (NLP) and Generative AI-based on Azure OpenAI to solve these challenges. Azure OpenAI identified crucial clauses in contracts, pulled out technical deliverable details from emails and reports, and contextualised insights from across projects. “Now, executives don’t have to go through huge data manually to get the insights,” says Chikodi. About 14,000 connected devices are being monitored through Asset Insight Solutions across construction sites through AI and IoT, helping reduce downtime of equipment and leading to higher operational efficiencies.

The results are showing in the numbers as well. The infrastructure segment saw a 19.4% YoY growth in revenues to ₹87,823 crore in FY23. In the energy vertical, revenues were up 5.2% and operating margins were higher at 9.1% (from 7.8% in FY22). In the hydrocarbon business, where large predictive analytics, robotic process automation and AI-driven decision-making are being implemented, operating margins grew from 8.7% to 9.9%. Similarly, operating margin improved to 6.5% from 3.9% in the power business. In case of defence engineering, margins have been around 20% for the last two years.

The services business comprising LTIMindtree, LT Technology Services and L&T Financial Services has a global market. The IT and technology services business contributed 22% to the group’s revenue and 36% to profit in FY23. Subrahmanyan believes services can potentially be among the top three in revenue and market capitalisation in India. “Why can’t L&T own an IT company like TCS for the Tatas?” he muses.

L&T Group has seen a 42.1% growth in profit and 53.8% in revenue since FY18. The company’s order-book is expected to touch ₹5 lakh crore — of which 41% will be from international markets (mainly West Asia and parts of Africa). Because of the sheer size and scale, E&C will continue as a large piece in L&T, with IT services not far behind.

Meanwhile, L&T searches for new businesses. It recently decided to enter fabless semiconductor manufacturing, data centre construction, e-commerce and other digital businesses, and electrolyser manufacturing. Analysts see it as the Tata model of finding opportunities in areas, including SuperApp, 5G, medical equipment manufacturing and precision engineering. L&T’s services-focused transition also has some parallels with Reliance Industries, which derisked the traditional petroleum business with the launch of consumer businesses such as retail and telecom.

What’s On Plate

Sipping a cold coffee, 81-year-old Naik smiles in fulfilment. The aesthetically furnished conference hall in his home, High Trees, in Pali Hill in Bandra has two flags in different sizes and numbers — the National Flag and the flag of L&T.

“Though L&T might evolve further, it will not deviate much from the platforms already created for growth,” Naik tells Fortune India. L&T’s business will mainly be in three buckets — EPC & projects, (mainly construction and energy), manufacturing (heavy and precision engineering such as defence including shipbuilding), and the services sector, which includes LTI Mindtree, L&T Technology Services (LTTS) and financial services. It will continue to exit non-core businesses. These may include construction equipment, EPC power and transmission, boilers and generator JVs and industrial valves or rubber processing machinery.

Subrahmanyan agrees with Naik that L&T will not change after divestments, and that the verticalisation is complete. As of December 2023, 42% of L&T’s revenue comes from global markets.

If earlier L&T was into run-of-the-mill infra creation which came its way such as toll roads, hotels and real estate projects, plant construction EPC and the like, the focus is now on hi-tech engineering and technology projects. For example, when most companies got into metro construction, L&T shifted its focus to the next level — on bagging most of the work for India’s first bullet train project and India’s first coastal road built under the sea. The change is visible across all its construction, hi-tech and heavy engineering projects. Last year, L&T built the country’s first 3D-printed government building, a post office at Ulsoor in Bengaluru for less than ₹25 lakh in 43 days. If it requires six-eight months and 30-40 labourers to construct such a facility conventionally, the 3D-printed building needed only five labourers and the concrete mix was of superior quality.

The company also bagged orders for making 100 K-9 Vajra guns, the Indian Army’s new self-propelled howitzer jointly developed by L&T and South Korean defence manufacturer Hanwha Defence that can replace old Bofors guns. Manufacturing was done with industry 4.0 standards and automation such as predictive analytics, Robotic Process Automation and AI-driven decision-making. If it took 100 hours to make the first hull, it took only one-third the time for L&T to make the 20th gun.

In March 2022, L&T set a record by constructing a 7-storey, Flight Control System (FCS) Integration Facility for the Defence Research and Development Organisation (DRDO) in Bengaluru in just 45 days using Integrated Hybrid Modular Construction Technology. Similarly, an entire refinery was pre-fabricated in its yards in India and was shipped to West Asia. According to L&T sources, the biggest technology achievement for the company so far has been its selection for the International Thermo-nuclear Experimental Reactor (ITER) coming up in France, an experiment to make energy from nuclear fusion. It is a collaboration of seven member entities — China, the EU, India, Japan, South Korea, Russia and the U.S.A. L&T Heavy Engineering was entrusted to make Cryostat, a 30 meter stainless steel high-vacuum pressure chamber, to keep very high temperatures in the ITER fusion reactor core. It is the largest in the world and the single-largest component of the ITER machine. By March 2022, L&T engineers had completed the Top Lid, the most complex and final assembly of Cryostat at the project site in Cadarache in France. The fusion reactor, set to take off in a few years, will help generate new form of energy.

Subrahmanyan is readying for the future by foraying into new energy forms such as green hydrogen. The company is investing in next-generation engineering, which will transform L&T into a new hi-tech engineering and construction multinational, says Subrahmanyan.

Leveraging IT

In among his earliest moves, Subrahmanyan digitised the infra business — in material supply chain, workmen management, recruitment, quality management, predictive maintenance, safety apps for workers, material pilferages, and project progress. “Construction was the area where I grew up and when I look back, I could implement one of the largest digital programmes anywhere in this space in the world,” he says. L&T employs over five lakh, including two lakh engineers and 3.6 lakh contract workers, of which 60,000 engineers work for the flagship company, which executes 800-1,000 projects at a time on an average.

With a click of the mouse, Subrahmanyan explains the progress of each of these projects on the ground and how real-time data is useful to improve productivity and optimise and manage resources, machines and equipment at each project site. “In a way, we became an IT company doing construction,” he says.

For L&T, the great hope lies in IT and technology services. In traditional E&C business, the scope for margin improvement is limited, maximum 1-2%. The reason is huge expenses on materials and complex and expensive machines and construction equipment. “You can’t charge a client more than 20% of the profits for the equipment you buy. Without equipment you won’t get the job,” explains Subrahmanyan.

L&T believes IT and technology will be a major profit centre in the future. In Q32024, out of the ₹39,305 crore net revenue for total projects in infra, energy and hi-tech manufacturing, EBITDA margin was only 7.6%. As against this, EBITDA was 20.7% in IT & technology services, 25% in financial services and 16.2% in developmental projects out of net revenues worth ₹15,823 crore.

L&T had forayed into IT in 1996 with L&T Information Technology to retain talented software engineers. It became L&T Infotech in FY02 and was rebranded as LTI in 2017, which clocked $2.1 billion in revenue in FY22. The company works in BFSI, manufacturing and energy sectors and employs over 45,000 people. In 2019, L&T acquired 61% stake in Bangalore-based Mindtree in a hostile takeover. The firm has strength in areas such as media and communication, CPG, retail and manufacturing, with revenues worth $1.4 billion in FY22. Both have now been merged to create LTIMindtree, an over $4.3 billion IT technology services company, the fifth-largest IT firm by market cap and sixth largest in terms of revenue in India. “The merger will help derive synergies worth 200 basis points within four-five years, which will have an EBITDA of 18-20%,” says Debashis Chatterjee, CEO and MD, LTIMindtree. For the first three quarters of FY24, IT & technology services posted revenues worth ₹33,230 crore, 9% higher over the previous year. Of this, ₹26,320 crore came from LTIMindtree.

However, L&T’s engineering research and development (ER&D) capability face around the globe is LTTS, which generated ₹8,223 crore in revenues in FY23. It is the largest in that space in India and within the top 10 globally. The ER&D services company focuses on high-growth sectors such as EVs, semiconductors and AI-related technologies.

“We are hiring engineers, mainly to cater to the EV engineering opportunity,” says Amit Chadha, CEO, LTTS. Chadha recalls the time when he wanted to acquire a 5G-focused firm and identified three candidates — two in the U.S. and the third, L&T’s Smart World & Communication (SWC) business. He approached Subrahmanyan, who, within a week, agreed to sell SWC to LTTS for ₹800 crore. The company is now foraying into fabless semiconductor chip design and will establish a subsidiary with an investment of ₹830 crore, says R. Shankar Raman, chief financial officer, L&T. However, there are no plans to merge LTIMindtree and LTTS since both operate in different domains, adds Subrahmanyan.

A New Financial Play

L&T Finance Holding (LTFH) shifted its focus to retail lending to improve margins and return on equity. Retail now constitutes 91.4%% of its ₹81,780 crore loan book as of December 2023. LTFH reported revenues worth ₹9,510 crore in 9MFY24. The company reported a 41% YoY growth in rural financing and a 52% increase in consolidated PAT in FY23. “Our portfolio was majorly wholesale with a small portion contributed by retail. By the end of this year, Retail will be more than 90%,” says Subrahmanyan.

The group is eyeing a select retail lending strategy with digital-led financing in farm equipment, homes, and consumer loans. The aim is to get to a 25% CAGR in retail by 2026. As part of the transition, LTFH sold off its mutual fund business to HSBC Asset Management (India) for $425 million in 2021 and the wealth management business worth over ₹24,000 crore to IIFL Wealth in 2019. It is currently in the process of merging some of its subsidiaries such as L&T Finance and Infra Credit with itself.

With that kind of momentum in profits from IT and financial services, Subrahmanyan hopes to increase group profits. “By 2025 or 2026, 50% of the profits may come from the services side from the current 35%, and the remaining 50% may come from the E&C side,” he says.

Transitioning Era

L&T’s early momentum was provided by Naik though. He had joined L&T in 1965 and rose through the ranks to become the CEO in 1999 and led many battles from the front before passing on the baton to Subrahmanyan in September 2023. In the last two decades of his career, L&T witnessed exponential growth — revenues rose from ₹5,000 crore in FY99 to ₹1.83 lakh crore in FY23, while market cap went up from around ₹4,000 crore to ₹3.74 lakh crore.

Other than the reputation of creating a huge engineering business, Naik is credited with warding off two hostile takeover attempts by Reliance Industries and the Aditya Birla Group in the early 2000s. It led to the formation of the L&T Employees Trust, now owns 14% of the firm, and by being the single-largest shareholder has ring-fenced L&T against takeover attempts to a great extent. The engineering major also created millionaires out of employees — a single share worth ₹33 around 20 years ago is ₹3,670 (as of March 26).

When Subrahmanyan, a civil engineer specialised in construction, took over the responsibilities of MD and CEO in July 2017, L&T was operating in over 80 businesses through 21 companies, with revenues over `1 lakh crore. The management regrouped them into 10-12 verticals by FY16 with the concept of ICs or independently operated companies. Consolidated revenues grew from ₹1.19 lakh crore in FY18 to ₹1.83 lakh crore in FY23 despite the pandemic blues, while net profit rose to ₹10,471 crore from ₹7,370 crore. While L&T’s order-book of ₹4.70 lakh crore (as of December 31, 2023) is the highest in its history, market capitalisation stood at around ₹5.04 lakh crore (as on March 26, 2024).

The change, however, had begun years ago. L&T initiated a heavy infra and construction focus in 2006, boosting revenues and profits by 20 times and 45 times, respectively. Currently, 68% of the ₹4.70 lakh crore order-book comes from infrastructure and 24% from the energy vertical. Hi-tech manufacturing and other businesses contribute 8%.

In infra business, average global margins are just 1-2%, though L&T manages to garner 5-6%, says Subrahmanyan, better known as SNS in the corporate world. Overall group profits are also meagre — PAT as a percentage of net revenue from operations was just 7.10% at the group level in FY23 and 7.8% in FY22. The last 10-year CAGR in net sales and net profit was 9.42% and 7.2%, respectively, extremely low for a company now approaching nearly ₹2 lakh crore per year in turnover. Many of the huge facilities created to tap the power sector, aerospace, defence and shipbuilding remain underutilised due to lack of orders, though orders started coming in the last two-three years due to government initiatives such as Make in India.

L&T launched Lakshya 2026 in April 2022, with plans to double turnover to ₹2.7 lakh crore and generate an order inflow of ₹3.4 lakh crore by 2026 — a CAGR of 15% and 14%, respectively. While the first still has some way to go (FY23 revenues were ₹1.83 lakh crore), the second has already been achieved. “I am not going to speculate but may end up between ₹2 lakh crore and ₹2.15 lakh crore this fiscal. Lakshya 2026 targets ₹2.7 lakh crore in revenue. It is achievable and could even exceed that,” says Subrahmanyan.

Analysts see it as a positive. “L&T is well-placed to benefit in the long run with strong tender prospects, better order conversion in the domestic market, significant traction in hydrocarbon and renewable energy orders from international markets such as Saudi Arabia and expected uptick in private capex in the domestic market,” say Amit Anwani and Nilesh Soni, analysts with Prabhudas Lilladher. They estimate revenues worth ₹2.19 lakh crore in FY24, ₹2.43 lakh crore in FY25 and ₹2.68 lakh crore in FY26.

Another target is return on equity (RoE) of over 18% by FY26 (from RoE of 10% in FY21 and 11% in FY22). To enhance margins, the company has decided to improve efficiency in every department, says Shankar Raman. Similar projects such as in buildings and factories, water or EPC are now being grouped. Vertical heads have been asked to go cash-focused rather than focusing on timelines, or the historical trend of availing funds from group headquarters.

Subrahmanyan has been with L&T for 40 years and knows the DNA of the company. He is now tasked with re-inventing L&T into an IT and technology driven futuristic company. “We are building the company of the future,” he says.

Infra Push & Issues

During the infra boom in FY12, the L&T leadership brainstormed to leverage the construction frenzy, especially in power and transportation. It aggressively bid and won many big-ticket EPC concession projects such as ports, roads, Hyderabad metro and Nabha power. But once that frenzy receded, L&T, like most others, was left cash-strapped. Debt rose from ₹3,359 crore in FY03 to ₹18,339 crore in FY23.

The management reckoned such run-of-the-mill long-term construction play would continue to suck liquidity and strain balance sheets. It built the Kattupalli port and shipyard between 2007 and 2011. Following India’s civil nuclear agreement (123 agreements) with the U.S., L&T set up a big nuclear forging facility at Hazira in 2012. Once the thermal power sector started booming, it formed two joint ventures with Mitsubishi Hitachi Power Systems (MHPS) to manufacture supercritical boilers and turbines, besides starting its 1,400MW supercritical power plant at Nabha. Huge facilities were created at Hazira, Surat and Coimbatore to tap defence manufacturing opportunities.

According to sources, overall, around ₹25,000 crore was invested in just five years anticipating big-ticket orders, but a big flow of orders remained elusive. If the return on capital employed (RoCE) for L&T was nearly 30% in 2007-09, it fell to 12% once those huge infra projects got operationalised. “We are known for our EPC capabilities and that is why marquee global investors come to us. They look at short-term exits with good margins. In a long-term infra play, only pension funds or companies such as LIC can afford to stay invested that long and wait for 20–30 years to get their returns,” says Shankar Raman.

By the time Subrahmanyan took over, L&T’s margins had fallen to less than 10%, mainly due to bleeding hydrocarbon projects in West Asia, loss-making nuclear forging shops, boiler turbine units and shipyards. It prompted the company to change its course. In 2016, the management launched a five-year plan, Lakshya 2021, for ‘profitable growth’, releasing locked capital, turning around struggling assets, better-working capital management in core assets, optimising costs and shedding non-core assets.

Re-inventing the Giant

Before Subrahmanyan took over, L&T hived off the Kattupalli port in Tamil Nadu and its 50% stake in the JV port with Tata Steel at Dhamra to Adani Ports & SEZ in FY16. In the last five years, it divested some of its main non-core assets, including the electrical & automation vertical to Schneider Electric for ₹14,000 crore in 2018. Two years later, it sold its small marine automation business — Servowatch Systems in the U.K. — to Rolls-Royce for an undisclosed amount. The 99MW hydroelectric plant in Uttaranchal, meanwhile, was sold to Renew Power for ₹985 crore in 2021.

L&T divested its roads concessions business and sold the entire 51% stake in L&T Infrastructure Development Projects (L&T IDPL) to an infrastructure fund managed by Edelweiss Alternatives. L&T Infrastructure Engineering (LTIEL), a provider of standalone engineering consultancy services for the infrastructure sector, was recently divested to a subsidiary of Assystem SA of France.

More are on the cards, reveals Subrahmanyan. The company is trying to sell its construction equipment business and is taking a serious look at the future of the EPC power business. It is also in talks with Mitsubishi on the fate of its bleeding joint ventures for boilers and generators. In the power transmission business, L&T has stopped taking up projects in industrial electrification and small sub-stations. The company may also scout for buyers in non-core assets such as industrial valves or rubber processing machinery.

International business will also undergo a sea change, says Subrahmanyan. If earlier L&T was trying to tap the West Asian markets, the focus is now restricted to hydrocarbon, power transmission and water businesses. Currently, 36% of international orders are from West Asia, 0.4% from the U.S. and Europe and 3% from the rest of the world. All that is set to change.

L&T has also reworked its group composition, straight jacketing businesses with lean and focussed verticals under seven segments — infrastructure, energy, hi-tech manufacturing, IT & technology services (IT&TS), financial services, development projects and ‘other’ businesses, including realty, industrial valves, construction equipment, mining machinery and rubber processing machinery. “All these efforts are bringing in a reasonable amount of focus. Focus brings objectives and that brings results,” says Subrahmanyan.

Though Naik has retired from executive positions, his passionate association with L&T continues. He is chairman of the L&T Employees Trust, the single-largest shareholder. Naik also continues to mentor top executive talent.

More for Future

L&T is moving fast into new business areas and technologies. Revenue from new and emerging businesses was ₹8,178 crore in FY23. It has already set up a 2MW data centre in Panvel and a 20MW centre in Kanchipuram. On March 1, L&T commissioned its first indigenously manufactured electrolyser at the green hydrogen plant at its heavy engineering complex in Hazira. Defence is another area where L&T is showing its prowess in platform technologies.

The company has teamed up with IOC and ReNew to set up green hydrogen projects. It has also tied up with French technology company McPhy Energy to make electrolysers for splitting hydrogen. “Green hydrogen, ammonia plants and related EPC can be a big area for us in future,” says Subrahmanyan. “In green hydrogen, L&T and its partners will invest over $4 billion in the next three to five years,” adds Naik.

New start-ups are also being incubated. After internally digitising the assets of the E&C business, Subrahmanyan incubated a strategic futuristic business unit named L&T Next, with a focus on Artificial Intelligence (AI), Internet of Things (IoT), Virtual Reality (VR), Augmented Reality (AR), geospatial enterprises, and cyber security. It is currently housed under LTI-Mindtree and has generated over $150 million in revenues in a year. Two diversifications have also been initiated, into e-commerce and edutech.

L&T Edutech has been launched to teach youngsters the basics of engineering. “Already 3,50,000 students have enrolled, but the revenue will take some time to come,” says Subrahmanyan. The second start-up is an e-commerce platform, L&T SuFin, a foray into retailing of engineering goods, from safety shoes to cables and wires. The company generated gross merchandise value worth ₹1,000 crore in FY23 and is expected to cross ₹1,800 crore in FY24. Another is the formation of Cloudfiniti, offering technology solutions through data centres and Cloud infrastructure.

While he jokes that defence and aerospace will be “perennial start-up for us for many years”, Subrahmanyan sees big business from the sector. Heavy engineering, aerospace, water and hi-tech manufacturing are other areas where L&T will leverage further in the future.

Subrahmanyan’s plate is full. He visits project sites at least once a week. While he speaks, the Embraer 650 is refuelling for another flight. Subrahmanyan says he is a ‘boring CEO’ of a ‘boring company’ which has nothing else to say except large projects. For now, the ‘boring CEO’ is also trying moves powered by technology to brand L&T in the hearts of youngsters.