Larsen & Toubro, India’s crown jewel
Board is not doing its job
Needs change now.
This is one company all manufacturing investors watch very carefully. Over the last one year, a number of Indian funds have reduced their holding in this stock – fearing growth at diminishing margins – with bulk of the business veering towards low end contracting at sub 5% margins. The results and accompanying summary given in the press release yesterday seem to confirm the worst fears of domestic institutional shareholders:
Margins are shrinking. Investments are not keeping pace with growth. There is too much of debt indicating need for fresh capital. Growth is from EPC without the “E”. “PC” business and other services business overseas without adequate controls present both – a bad debt and legal risk – which have not been provided for. The allocation of overheads provided for inter se between the business units seems to mask an even lower profit margin in the low end PC business than has been presented. The innovation fund has done nothing of significance. Just lip service.
The hi tech mfg business seems to be starved of growth capital. Without being spun out, the low margin PC and low end services businesses acquired overseas will kill whatever sensible businesses L&T stood form
And now, L&T has announced an intent to get into low end contract manufacturing in electronics. Just too much in common with Tatas. Is there a common hand ? The safest business to pursue is almost always a negative margin business. And the surest technology to acquire is an obsolete one. You have to die to go to heaven. Search for alternates take others to heaven and you to hell.
It is increasingly getting clear that the Board is failing. The job of the board is to come up with suggestions on what to do. Not to find problems in every solution. There is no promoter here.
Board has three important roles. First is to give strategic direction and manage risk. Second to ensure adequate resources are allocated to strengthen the most important businesses. Third is to identify new leaders and induct new leadership.
The board fails on all these fronts. Plus Pramit Jhaveri has no role or reason to be there. There are enough credible bankers on the Board already to need a tainted, retired banker. Take a look at the Board additions announced yesterday. The board is not well balanced. Seems like a motley collection of people put together by mistake. Other than the working directors, the two IITians (Ajay and Santanam) and the LIC nominee – one wonders what the others are doing there. There are no foreigners and no real technology veterans.
If board selection fails, all else fails. The Board members have to be selected by due process and put to a shareholder vote. The idea of quietly doing so through the additional director route without shareholder approval smacks of poor governance and even poorer internal democracy.
It is not easy to walk the talk.