Interview with D.K. Sen: “A strong recovery has occurred in the construction sector”

“A strong recovery has occurred in the construction sector”

D.K. SenThe Covid-19 pandemic has had a serious impact on the construction sector. Nevertheless, the sector is expected to witness a strong recovery, primarily on the back of the government’s timely intervention and a robust project pipeline. In an interview with Indian Infrastructure, D.K. Sen, Whole Time Director, Senior Executive Vice-President and Head Development Projects, L&T & Chief Executive Officer & Managing Director, L&T IDPL, talks about the impact of Covid-19 on construction sector, some of the biggest achievements of L&T, the company’s expectations from government, its key priority and focus areas in the coming years, and the outlook for sector. Excerpts…

How has the construction sector paved its way out of the pandemic-led disruptions?

The construction sector was one of the worst-affected sectors in the pandemic. Workers migrated back to their home towns. Since infrastructure projects are direct drivers of economic growth, the government allowed operations and maintenance to continue, and construction activities were resumed under the essential services category from June 2020 itself, albeit with a lot of restrictions. However, remobilising workers posed the biggest challenge to improving construction speed and productivity.

The construction industry worked very hard to get back to 95 per cent of the pre-Covid worker strength by November 2020 by deputing task force teams to villages to convince, persuade, incentivise and transport the migrant workers back to sites; upskilling locally available workers near worksites; capturing incoming workers embarking on Vande Bharat flights from the Gulf countries, etc.

Import substitutions with local sourcing along with the extensive use of digital technology such as internet of things (IoT), augmented reality, artificial intelligence, virtual intelligence, geospatial surveying helped reduce the dependence on manual interventions. Also, support and stimulus from the government was very crucial in the recovery of the construction sector.

What has been the level of growth in the company’s projects and how has the business environment evolved in the last two years?

The last year was difficult, with two quarters being wiped out due to lockdowns. However, with consistent efforts in the last two quarters, we managed to recover our construction activities and reach almost 90 per cent of our pre-Covid status by November-December 2020. With the government’s timely implementation of a huge economic stimulus and a very courageous budget, our domestic order inflow could reach the previous year’s level in the financial year 2021, although at a consolidated level, L&T’s order inflow and revenue declined by 6-7 per cent compared to pre-Covid year.

Since 2016, L&T has placed a special emphasis on digitalisation and innovation and has made massive progress across all businesses.

What have been L&T’s biggest achievements in 2020-21?

There have been quite a few achievements in financial year 2021, but perhaps the biggest of them all would be securing the largest ever engineering, procurement and construction (EPC) order of nearly Rs 330 billion for the high speed rail project, which helped us end the year with the highest ever order book of Rs 3.3 trillion.

Other major achievements during the year include securing the largest solar EPC order in the Kingdom of Saudi Arabia in the power transmission and distribution business, and major refinery orders in the hydrocarbon business, including the largest refinery EPC contract. Our metals business was able to secure its first order in Africa, and has been riding high with a Rs 400 billion project pipeline due to the ongoing super cycle in metal prices.

In the manufacturing segment, L&T took a major step under the Make in India/Atmanirbhar initiative by taking up manufacturing of complex high capacity construction equipment and high speed rail cranes for the first time in India with in-house design. During the year, we also secured the largest order for our construction equipment business and successfully delivered the world’s heaviest LC-Max reactors, and cryostat for the world’s largest nuclear fusion reactor. The 100th K9 Vajra flag-off marked the completion of its deliverables. We also managed to close a commercial tower sale in Powai, and launched Seawoods Phase 2 in the realty business.

As for development projects, we successfully completed the divestment of our electrical business during the year, and opened the final stretch of the Hyderabad metro to traffic after successful commissioning in February 2020. Other achievements include successful commissioning of L&T’s Singoli Bhatwari hydel power plant in Uttarakhand and the Nabha thermal power plant being judged one of the best power plants in the country by the Ministry of Power, apart from securing a long-pending major legacy payment. At L&T IDPL, we successfully implemented 96 per cent FASTag tolling.

What is the outlook for the construction sector in the medium to long term? Which areas need more attention? What is the scope and potential for technological upgradation?

We feel a strong recovery has occurred in the construction sector, with our year-to-date achievements in order inflow and revenue being substantially higher than the previous year. However, we are yet to reach pre-Covid levels. We strongly believe that this year will set the tone of National Infrastructure Pipeline spending in the upcoming two to three years. We see a strong infrastructure prospect pipeline of approximately Rs 9 trillion for the rest of financial year 2022, and we expect to meet our budgeted targets for the year in all areas.

In terms of technology upgradation, construction productivity has remained mostly static over the past three decades. However, with a huge focus on digitalisation across all functions, L&T has achieved substantial progress in the areas of remote inspections, virtual progress monitoring and virtual reality for safety training, productivity monitoring through IoT, data analytics for decision-making, stockyard management, and geospatial surveillance through extensive use of drones, lidar, radar, etc. We also made good progress in the implementation of building information modelling, with 35-40 per cent of projects currently implemented, also in 3D printing in concrete.

As a contractor, what are L&T’s expectations from the government?

We have seen some major announcements from the government over the past 12 months, to boost the economy – fiscal stimulus measures, the Atmanirbhar Bharat initiative and subsequent implementation of production-linked incentive schemes, an aggressive budget, the announcement of the setting up of financing institutions such as the Development Financial Institution and bad banks, the National Hydrogen Mission, the National Monetisation Pipeline, and so on. All these initiatives are surely a means to generate more employment opportunities and move the country towards becoming a $5 trillion economy, and the infrastructure spending of $1.5 trillion is a major enabler for this.

As a contractor, we expect the following from the government:

  • To speed up the capex spending through fast-track award of mega infrastructure projects. This will have a cascading effect on downstream industries like MSMEs, steel and cement, and obviously create employment opportunities for workers.
  • To assign national importance to infrastructure projects and give overriding priority to the removal of all roadblocks, including environment and forest clearances, land acquisition, utility clearance, and further dispute resolution through a fast-track special court.
  •  To bring out a policy that will prohibit states from scrapping an awarded project and ensure state support for all infrastructure projects, with proper compensation for the concessionaire/contractor in the event of a mutually agreed foreclosure of a project.
  • To implement a policy for fast-tracking dispute resolution with regard to time extension, change of scope, escalation and claim settlement.
  • To bring out a policy to help concessionaires/ contractors who have shown satisfactory performance during the liquidity crisis by allowing one-time payment of cash gaps between actual and milestone progress.
  • To limit the existing total bank guarantee (BG) exposure of contractors to 10 per cent of the contract value from the current levels of 20-25 per cent, and enforcing BG return strictly on the commercial operation date.
  • To award projects sector-wise and size-wise, purely based on developer/contractor credentials and capability. Strict penalty/Disqualification of a contractor may be enforced for failure to complete a project.
  •  To link the environmental, social and governance rating of a contractor/developer with its qualification criteria in order to strengthen the government’s drive to improve sustainability and reduce carbon emissions.

What are the company’s key priorities and focus areas for the coming two to three years?

Our primary focus has been on shareholder value creation through divestment of non-core assets and on making the company asset-light. We completed the divestment process of our electrical business in the recent past, and this year we have successfully completed the divestment of a hydel power plant. Also, we have initiated the divestment process of L&T IDPL, the Nabha power plant and Hyderabad Metro Rail Limited, and the next couple of years will be crucial.

At L&T, we pursue a triple bottom line – people, planet and profit – which emphasises our commitment as an organisation towards building a sustainable business. Green and clean technologies will be a part of our main offering. L&T is exploring opportunities for the acquisition of integrated capabilities in the area of green hydrogen, as we expect it to play a big part as a fuel, a power source and an industrial resource. In terms of growth, we have a roadmap for doubling our revenue in the next five years while maintaining profitability. We are bullish about growth in IT services and digital platforms, while our EPC business will continue to be the major contributor. We will continue geographical expansion, albeit cautiously, mainly on an engineering, procurement, construction and management basis.

Our other focus areas include leveraging digital technology to improve productivity gains, developing a pool of skilled workers, and building resilience through effective working capital management and resource management, along with a bolstered supply chain and governance structure.