Sucheta Dalal :AM Naik - A rare interview to MoneyLIFE
Sucheta Dalal

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AM Naik - A rare interview to MoneyLIFE  

September 15, 2008

By 2010, we will hopefully come to the take-off point to becoming a true Indian multinational in our sector

He came from a family of teachers, but was essentially a kid from a village in south Gujarat who, by his own admission, was poor in English because he used to think in Gujarati and then translate his thoughts. But language was no barrier to Anil Manibhai Naik, 65, in rising to the top slot in Larsen & Toubro, an engineering and construction giant, or putting it on the path to being a multinational entity and creating enormous value for shareholders. He achieved this through sheer hard work and through what he calls “devotion beyond dedication”. He is the first professional to head the blue-chip company set up by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro with financial help from the father of NM Desai (another former L&T chairman). As the executive chairman of Larsen & Toubro, Naik has steered the company through some of its most turbulent times. Under him, L&T has recorded probably the most robust performance and the scrip has had the fastest rise in its history. His prime concern now is attracting and retaining talent for L&T, his biggest pride is in being “partners in nation building” and his big regret is that he has been such a workaholic that he did not spend enough time with his family

ML: Would you start by telling us something about your background?
My upbringing has a lot to do with who I am today. Our family was called the ‘teacher’s family’ - ‘Master Kutumb’ in Gujarati -- as my grandfather was the headmaster of the Gurukul school. My father, a MSc and MEd in those days, came to Mumbai in 1944 and was a senior teacher at Hansraj Morarjee Public School at Andheri, one of the best schools in those days. He had participated in the Quit India Movement in 1942. But, in 1952, he left Mumbai to go back to our village to serve the community. He became the Principal of a new high school that was being started there. By then, my sister had finished her SSC exams. My father strongly believed that girls should study and, in spite of great opposition, he got my sister to be the first doctor and MD in our community. Anyway, after spending my early childhood in Mumbai, in 1952,
I suddenly found myself in a small village school, sitting on the floor after
having come from a city where schools had benches. To cut a long story short, I went to Vallabh Vidyanagar from where I graduated as an engineer and came back to Mumbai in 1963. I was an engineer but my English was poor. When I came to Mumbai, my father gave me a note introducing me to Viren Shah of Mukand. I went to see him at his Kurla office. I gave him my father’s letter and he sent me to his personnel manager who gave me a form to fill up. Being poor in English, I had made seven-eight mistakes in filling the form. I would have got a job at Mukand because of Mr Shah, but I decied to wait a while and joined a small company called Nestor Boilers. Those days, Larsen & Toubro (L&T) only hired from the IITs and that too only the top 10 people got the job. So I knew I could not get into L&T. I did very well at Nestor and moved up fast. In contrast to college, where I hardly attended any lectures, at work, I never took a day off in the first 21 years of my working life.

ML: What brought about the change?
I became serious. I thought to myself that my student life is over; let me build my career. I had joined the company at Rs350 a month, although I could have got Rs400 at Mukand. But here, I got Rs500 on confirmation and then I became a workshop in-charge by the time I turned 22. After that, I decided to apply for other jobs, including L&T, which was my dream company. After several months, I got a call from L&T. I went for an interview and met one Mr Baker.  Mr Baker asked me a few questions on design and, after some discussions, offered me Rs760 for the job of an assistant engineer, a supervisory, grade-B post. I agreed because I wanted to get into L&T. He then took me to meet the boss, Mr Hanson at the corporate office at Powai. As I mentioned earlier, my English was weak -- I used to think in Gujarati and translate it into English. Sometimes, this led to misunderstanding. Mr Hanson was stern, serious and never laughed. He asked me the organisational structure of Nestor and the number of people who reported to me. When I said 350, he remarked - “Oh that is a lot. You will not get that kind of responsibility in L&T for a long time”. I did my translation and said: “Who knows, time will tell”. When we left the office, Mr Baker had a long face. He took me to his cabin and kept mumbling all the way. Finally, he sat me down and said, “Sonny boy, the old man thinks you are overconfident, so I am afraid I can only offer you the job of junior engineer, starting at Rs670 which is a grade lower than assistant engineer which is supervisory B. I told Mr Baker not to worry. It was my dream to join L&T and I will take it.

As I was getting up he said, “If you do a good job, I will give you what I promised on your confirmation.” I joined L&T on March 15, 1965, got the promotion I was promised in six months and, in April 1966, I was promoted a grade higher to the supervisory level. Suddenly, in 1966, I got the entire workshop as my responsibility and I became the workshop incharge within 18 months after joining. Some 800 people reported to me and I was not yet 25. In 1968, I became covenanted which was very prestigious. I used to come to work every morning before the shift started and work all through. I did not take any leave except once when my leg got jammed in a battery-operated vehicle. For three days, I did not come to work but, on the fourth day, I came to office on crutches. My office was shifted from the first floor to the ground because I could not climb up. Since phones were not readily available, I used to tell my wife while leaving for work that if I am not back by midnight, I would be back the next morning.

Worker discipline was an issue in L&T. The workers would go catch fish from the Powai Lake to fry and eat. I was told not to go to Powai after seven in the evening. Six months before I joined, a foreman was knifed by a worker.
I used to go to the factory at 8 pm, 9 pm and even at midnight. I used to stand at the attendance punching machine to watch when people leave. Until I did that, they used to leave at 11 pm. when the shift was due to end at 11.55. I would switch off the engine of my car when it entered the gate to avoid making my presence felt.  Initially, the workers opposed my disciplinary actions, but soon they realised that I knew each worker personally -- their family, their difficulties, where they came from and everything about them. I was firm but I built a relationship with them. I also got a lot of sympathy because they could see that I worked from 7.30 in the morning until late into the night.

ML: Did you think that you would rise so fast?
When I graduated, our expectations used to be very low. If asked what do you think you would be paid at the end of your career, I would say I would get a four-figure salary. And if somebody had asked me in 1968 how far I would go in L&T, I would have said I would become a general manager because that was my benchmark. I became the youngest production manager, and the youngest deputy general manager. Then, a new story began -- on 1st April 1974.
There was a change in L&T’s management. The Europeans went away and senior Indian managers became directors. All of a sudden, seniority and not merit became the criteria. I then spent the longest ever stint in the history of L&T in one grade -- six years as a deputy general manager. In November 1979, I became a joint general manager and remained there for seven years. So, until 1974, I had the fastest rise ever in L&T and, from 1974-1986, I was the slowest ever to be promoted.

ML: In these 12 years, were you not tempted to leave?
I was frustrated but I was too devoted to the organisation.

ML: But why at L&T?
It may sound strange but, at L&T, I got the best opportunity to exploit my skills as an engineer and also work for what is good for the country. I don’t think there was any other company which could provide me that kind of a platform. I had an opportunity to leave, but I didn’t even go for the interview.

ML: Didn’t you want to join the public sector? Those days, public sector companies were called the temples of modern India and were into nation building.
L&T was providing that. In 1965, we were chosen as partners for building nuclear reactors. In 1971, we delivered India’s first nuclear reactor and set up nuclear steel generators. BHEL (Bharat Heavy Electricals Limited) was the only other company selected.  In 1972, India launched its space programme. Once again, L&T was invited to participate and we did. I was the one responsible for taking the programme further. I was already in-charge of the whole manufacturing and then from SLV (space launch vehicles) to advanced SLV to PSLV (Polar Satellite Launch Vehicle) to GSLV (Geosynchronous Satellite Launch Vehicle) and now to advanced GSLV. Most of L&T’s expertise has been built from scratch. Therefore, it is easy for me to relate to any situation. If someone tells me today about nuclear reactors, I know exactly what he is talking about.
If these challenges and freedom of work, action and empowerment were not there in L&T, would I have stayed? Possibly not. L&T provides tremendous freedom. We do make mistakes but we learn from them. This company gives you the feeling of ownership over what you do. I never felt that this company did not belong to me, although our salary got frozen during the socialistic regime for years together and when it was finally removed, our children started earning more than us, especially in the IT industry. In 1989, I became a director on the board and, in 1999, I became the CEO. But if I look back at what made me stick on, it was great excitement, feeling of owning the company, empowerment and environment. Of course, it was a hard decision.

ML: What happened during the time the Ambanis came into L&T? How did you feel about that?
Frankly, it was a matter of concern to all. But what discussion chairman NM Desai had with the Ambanis none of us knew. They came in as protectors against the Chhabrias who had acquired 4%, but I was away from the inner circle at that time to really know what was going on.

ML: But weren’t you worried that it would no longer be a professionally run company?
I never understood what was going on in the inner group of five-six people. I was one step away from it, till I entered the board in 1989. In 1988, I was the one who took Dhirubhai and Mukesh on a shop-floor tour of our Powai works. They never interfered. They understood that I am my own man and I always had an arms’ length relationship but, at the same time, they respected me as a professional. They used to take my advice on petrochemical plants, particularly reactors, even before they came in. In 1986, Mukesh requested me to look into the leakage in the Patalganga plant, which L&T had built.

After the 1990s, the management was always very united and all the employees stood by it to keep the professionally managed character intact. We never realised that we were not owners, till we were taken over. This was uppermost in my mind when, in 1999, I decided to bring in employee ownership. After all, Mr Larsen and Mr Toubro were basically employees; they were not businessmen. They came to India for installing the ACC plant and running it for three years. Then, the Second World War broke out; they got stranded in India and started Larsen & Toubro to do ship repairs. They didn’t have the money; they borrowed it from Mr Desai’s father and that’s how NM Desai became one of the co-founders and a director at 32. Interestingly, L&T had no chairman since 1991 till December 2003 when I became the chairman.

ML: What do you rate as your most significant contribution as the CEO?
I had made an action programme of 90 days when I took over on April 20, 1999 and put forth my vision for the next five years. The first thing I did was to bring back the merit-based system. I said our biggest task was to attract the younger generation, knowing that it is going to be a very serious problem for this company to attract even one engineer, unless we change our way of rewarding them. Even today, I say L&T is a vehicle which is run by four wheels -- the front two wheels are training and HR and the rear two wheels are technology and IT and the spare wheel, is sheer devotion. This is what takes L&T forward -- driven by values, culture and tradition. The first two years of transformation were very painful, because the economy was in a horrible shape. I wanted our strategic plans to be accepted by all the employees, so I started a large-scale interactive process.

I also had P Subramanyam, then chairman of UTI (Unit Trust of India), the CEO of Morgan Stanley and stockbroker Anand Rathi to give a frank opinion about L&T -- what people in the stock market feel. Until then, if you talked about the stock price or shareholder value, it was considered not in the interest of the employees. They would speak about the beautiful bridges that we have built, temples that we have built… shareholder value was not a great word. That is why, for 10-15 years prior to 1999, L&T’s share price had remained stagnant except during Harshad Mehta’s time. When I took over, it was Rs160 and Kumar Mangalam Birla actually made an open offer in February 2002 at Rs190, including the cement division. I started saying we have to create shareholder value. Everybody said, L&T is a great company technically but what is your market cap? Even today, I ask, do you want to remain independent or do you want to be taken over and the reply is we want to remain independent. I ask: can we have a low market value and still be independent, when someone can sign a four to five hundred million dollar cheque to take us over? This has gone deep into every manager’s mind. If you want an independent professional company, you have got to make it valuable; you have to make it so expensive that people stay away from you. We got a trust formed and we took over the Birla stake in that and then a stock option scheme was launched in the first 90 days, which has created a lot of value for the top management. Otherwise, I would have lost all my senior managers. Stock options are the reason we have a fairly stable top management for the last seven years.

This changed the whole company’s attitude. Today, my junior manager looks up L&T’s share price on the Internet since he has 500 shares. This is how shareholder value begins to get created in the minds of people. But the most important thing is that I touched their soft spot -- you want to be independent or one day be a part of somebody? Make the market cap Rs75,000 crore and very few people can sign billions of dollars needed to take you over.

ML: What about the period when Kumar Mangalam Birla acquired a stake? Did his move take you by surprise?
Yes. I was in America and I got a call first from one of my colleagues saying that Ambanis are looking for me to tell me that they have sold their shares. Later, Mr Birla called me saying that we have a long history together - “you knew my grandfather and my father had high praise for you. So, let’s work together…” and all that.

ML: What was your reaction?
I was very innocent still. I knew the Birla group and its three generations but when the open offer was made, I slowly got the feeling that possibly there is more than what meets the eye… I don’t want to get into all that because they are all my excellent customers. We have just signed a contract to build a 30 million tonnes refinery for Reliance -- the largest again. So, as far as I am concerned, L&T exists because of its customers and well-wishers. In any case, L&T is so unique that nobody has fully understood what it is doing. Some people think it is a construction company. Until it was in cement, people knew L&T as only manufacturing cement but the fact is that we are now building nuclear reactors. We are now participating in fast-breeder reactors. Another major transformation was from being foreign-technology dependent. For this, you need to have pride in yourself. Of course, we still have a long way to go because technology advancement continues every day. But the fact is we are able to stand up with our own products in switchgear and we are still No. 1 in India. We have a 42% market share and we are competing against the No. 1 company - Siemens -- which has been in India for 30 years, No. 2 in the world -- ABB, and No. 3 in the world -- GE. All these are $50-60 billion companies. GE is a $200 billion company and we are one tiny little L&T in the global arena, fighting them all with our own products and winning awards at international exhibitions.

ML: What is the biggest change you have seen from the time you started your career?
Opportunities are abundant today. There are so many choices. Secondly, all over the world, the younger generation has begun to grow faster and more independently than us. We accepted and valued what our parents told us but today’s generation thinks that it has grown up and can decide what it wants. Thirdly, there was tremendous amount of energy bottled up in India. Earlier, if you wanted to go outside India, you had to get an invitation letter. There were no head-hunters, no electronic media. Till 2000, there was no analyst community; the press was not that inquisitive. In India, L&T was people’s dream company for engineering. Now, GE is offering a starting salary of $75,000 a year. A head-hunter from Hong Kong or London will call up and ask you to come over in any of the 11 flights a day to London. You use a credit card to buy the ticket; you are there the whole day and, in the evening, you collect your appointment letter, return the next day to office by 11.45, and nobody knows where you were yesterday.

ML: Has that really been happening?
These are the possibilities and opportunities of today. Young people come and ask me to increase their salary after comparing it with other companies. I have increased salaries by two and a half times in four years but, beyond a point, I will lose business because I have to compete with the Chinese. Manufacturing has to compete with the Chinese; construction has to compete with many large-size companies. If I have to go to the Gulf, I have the whole world to compete with. In switchgears, I have to compete with products of multinationals made in China. Remember software companies do not have all these problems, because China is not breathing down their necks. They are deeply engaged in building a powerful China. Don’t think they don’t have IT professionals. They have millions of them but the only problem is that they don’t speak English.

The president of China is not worried about not having software exports. He says automate the government departments first and then the provincial government. Some 30% of IT spend in America is on government automation. How much is it in India? Please tell me how much capacity of the Indian IT industry is being spent to automate India’s medical science, health ministry, hospitals, government, etc. We sell our bodies. Infosys and Wipro do not lose engineers to the Gulf. I lose them to the Gulf; I lose them to IT; I lose them to multinational engineering companies; I lose them to Australia, Canada, New Zealand, FMCG, investment banks… everywhere. Simultaneously, I should fill in the void.

People ask why I don’t pay more, but my margin is 5%. All my competitors around the world pay less than 5% which is the industry margin. Construction business all over the world works on 2%. The IT Industry earns 30% margins.
India is only adding 4% of value in the product cycle. Every year, foreign companies come here for designing and I know, within three months, I will lose 20 more guys because they can pay two to three times more. Foreigners get their design done here. We add 4% of the value. China adds 45%-50% value by manufacturing it too.

ML: What about the future of L&T? What are the challenges?
In Hazira, which is the pride of India, we are doubling our capacity. We have entered shipbuilding. A lot has been done in taking L&T to the next level in infrastructure building with the help of engineering, project management and other skills that we are building up, even in the middle of all this turmoil of talent loss. L&T would have grown faster if we had no turmoil on talent; that’s our only limitation, not the market place. I am not taking orders or quoting for new jobs because I don’t know how to deliver in the middle of all these people going away for lucrative jobs all over the world. Some 70% of the best Indian talent goes out of India. Out of the balance 30%, 25% goes to non-infrastructure, non-manufacturing-oriented job opportunities. So, only 5% of the talent is available to us. L&T grabs the best ones and then, after a year or two, with a golden stamp of L&T, seven out of the 10 leave. So, within three years, we are back to square one. All I have to do is training and more training.

I am sure that not many people knew that we were sitting on Rs2,500 crore in value of project development. Below that, we are now creating a property development company. L&T transportation infrastructure is all bridges, roads, metros, airports, seaports and, now, we are going to start L&T power development where we will have hydropower and in future nuclear power development. The board has just approved of L&T project finance company, which will participate in a consortium with banks to finance our infrastructure projects. Be it in financial services or taking manufacturing to the next level, becoming more sustainable in engineering and technology and going outside India to China and the Gulf and all over the world, we have a long way to go. Therefore, I always say we are 50% to 60% into our transformation journey. By 2010, hopefully, we will really be at the take-off point to become a true Indian multinational in our sector. I am sure we have hard work to do. My single biggest challenge is I don’t know how to connect with the younger generation and make them feel for L&T as we feel for the company.

-- Sucheta Dalal