‘This is a great time for course correction’

Mr Subramanian Sarma,
CEO & Managing Director L&T Hydrocarbon Engineering
"For the 'Make-in-India' campaign to be a real success, the government has to find a way to create a level playing field by ironing out anomalies in the taxation structure and taking some steps to implement a 'Preferential Pricing' mechanism which will maximize the utilization of the domestic manufacturing base, provide further encouragement to Indian suppliers and service providers and aid employment generation in the country," said Mr Subramanian Sarma, CEO & Managing Director L&T Hydrocarbon Engineering in an interview with Mittravinda Ranjan.

What is the market sentiment across the EPC industry currently?
The general sentiment across the EPC industry, in both domestic and international markets, is more bearish since there is a general slowdown in capital expenditure and markets have shrunk across the board.
Most of the companies, who have belief in this industry and have managed their businesses reasonably well, see it as a great oppor tunity to reset their cost base and enhance their efficiency levels. Many organizations are spending a good amount of time & energy to introspect and reflect on their past practices as ever yone; producers, ser vice providers & suppliers; had built up inefficiencies when the oil prices were high. The industry is now trying to become more agile, efficient and cost effective.

How do you compare the market turbulence in 2008 with the current situation when there have been massive swings in oil prices and when do you see the oil prices stabilizing?
Yes, the oil industry did go through turbulent times in 2008 and is going through a similar phase now but the underlying reasons are entirely different.

The financial crisis of 2008 was triggered by the downfall of Lehman Brothers which shook the confidence of the global financial system. Fur ther, the world economy was highly leveraged and interconnected which amplified the crisis and lead to an economic recession. Oil prices, along with all other commodities corrected sharply.

But the basic economic drivers, consumer behaviour, and supply/ demand were not severely impacted and the global sentiment reversed completely once Governments around the world took concer ted ac tion to aid the recovery. The oil prices also recovered sharply as the drop was never governed by the fundamentals of the oil industry, in the first place.

However, today, the fundamental issue is the significant gap between supply and demand in the global oil market and in my view, we are not likely to see a spike in the oil prices that was obser ved last time. There has been a significant demand erosion due to the economic slowdown in Europe & China, and even the United States is yet to fully recover. In the past, such shifts in demand were handled to a cer tain extent by managing supply but this is no longer the case today and hence the recovery in oil prices will be much slower

Having said that, I believe that the oil prices will stabilize in a time frame of around 18 - 24 months at around USD 55-60 per barrel. The emergence of viable alternative energy sources and the reduction in Breakeven Point achieved by Shale Oil producers should provide fur ther support at this pricing level. I would say that this price range is not bad for the industry, as it benefits consumers and oil importing countries like India.

Can you point out some of the inefficiencies that the organizations have built up over the past few years which they are now trying to address?
During boom periods, there is always a tendency to build up large organizations, with multiple locations and work centers because manpower cost is seen as a small fraction of the total cost base. But in the current scenario, organizations are striving to become leaner and evaluating options like outsourcing to reduce their fixed costs and increase their variable costs.

Secondly, with commodity prices having corrected sharply, the focus is now to extract maximum value from the supply chain, which remains the biggest area of expenditure of any organization.

Service providers like LTHE are also taking a fresh look at all our procedures, processes, and systems to identify improvements. Existing work practices are being challenged to ensure that value is being added at every step and if not are being overhauled to remove inefficiencies.

Please share some of the key measures that LTHE is taking towards improving overall efficiency?
LTHE does not need to outsource as we are already located in an efficient cost base unlike Australia, United States or Europe.

However, we have also taken several measures including the closure of smaller offices in India which were not adding much value, reducing fixed costs in our International locations and by consolidating offshore operations at Mumbai and onshore operations at Vadodara respectively.

In terms of developing capability, we have a bespoke International Execution Capability Development Program underway. This program was designed in-house by pooling the knowledge gained by our people, including my personal experiences, over the years. We will now be putting our staff through these training modules, using the facilities of L&Ts Institute for Project Management at Vadodara, to better prepare the organization for the future.

We are also running an 'Operational Excellence Program' to enhance our processes for sourcing of materials and ser vices and our systems to manage receivables and working capital. Greater application of technology - digitalization - is being looked at to improve productivity and simplify processes.

We have enough headroom to easily grow our business by at least another fifty percent without adding too many resources and are just waiting for the market to open up. At this point, we are critically examining every aspect of our business and taking appropriate actions. Hopefully, we will emerge out stronger!!

Please talk about some of the major ongoing business of LTHE in India and Overseas?
In India, the biggest offshore project we are executing for ONGC is the USD 420 million Bassein Development Project, which is located off the Mumbai coast and involves a gas processing platform, wellheads, and subsea pipelines. The project is expected to be commissioned by December 2017. In partnership with McDermott, we are also executing the S1 Vashishta deep-water development for ONGC off the East Coast of India. In the Onshore business segment, we are executing the Melamine project for Gujarat State Fer tilizers & Chemicals Limited (GSFC) at Vadodara and a Coke Drum System package for Indian Oil Corporation Limited (IOCL), at IOCL's Haldia Refiner y.

On the international front, we are executing the USD 780 million GC 30 Oil Gathering Centre for Kuwait Oil Company (KOC) in Kuwait. Recently, in consor tium with our par tner EMAS Chiyoda Subsea, we won the USD 1.6 billion Hasbah-II Project from Saudi Aramco, which is a ver y large offshore gas development project in Saudi Arabia. In Oman, we are executing two gas depletion compressor projects (SNDC2 & KDC2) for Petroleum Development Oman (PDO).

What kind of opportunities do you see for LTHE in India?
In the offshore space, ONGC will definitely continue to invest, regardless of the oil prices, because India has a strategic requirement to increase the domestic production of oil & gas. That being said, ONGC has also managed to declare pretty good results recently and they have also reduced their cost of production. We are expecting ONGC to move ahead with the KG basin 98/2 deep-water field development sometime in the four th quar ter of this financial year, which will be the major oppor tunity for us along with smaller projects like Neelam Redevelopment etc.

In the onshore mid & downstream segment, we expect almost INR 10,000 to 15,000 Cr wor th of Pipeline projects, for product transpor tation & distribution, to come up over the near term. We do not see much scope for us in the refinery upgrades, which have been announced, as the PSUs will be utilizing EIL to execute the projects via conventional route. However, we are hopeful to par ticipate in the development of new grass root refineries which may come up in the near future.

Now that GST bill has been cleared, how do you see the impact on EPC companies?
It is too early to comment on the impact as a lot of the minutiae are yet to be revealed. However going by basic principles, any simplification is always good for the industry and the country as a whole as it improves efficiency and cuts red tape.

Such simplification may also help international EPC contractors in India, as they will no longer need to navigate the maze of direct and indirect taxes in each state. Overall, I think it will be beneficial for International and Domestic contractors as GST should make it easier to carry out business across the country.

How does 'Make in India' help L&T and other private players of the country to take advantage of this situation?
L&T has invested significant amounts of capital in setting up world-class facilities for hydrocarbon, power, heavy engineering, shipbuilding anddefence sectors. But it is a source of frustration for us that the utilization factors of these assets are less than ideal.

We would be extremely happy if we are able to put these 'national' assets to productive use through the ‘Make-in-India' campaign. But at this point of time, in most sectors, L&T is competing openly with foreign players in what is essentially an uneven playing field, as our cost and taxation structures are quite different compared to our foreign peers. Fur ther, there is no doubt that individual customers will prefer open competition in order to access the best solution.

Hence for the 'Make-in-India' campaign to be a real success, the government has to find a way to create a level playing field by ironing out anomalies in the taxation structure and taking some steps to implement a 'Preferential Pricing' mechanism which will maximize the utilization of the domestic manufacturing base, provide fur ther encouragement to Indian suppliers and service providers and aid employment generation in the country.

Ultimately, I believe everyone should take along- term national view and not restrict ourselves to an individual or company level. I think we are going through this transition process and we need to see how it will pan out.

You have extensive experience of executing international projects. In your view, what are the gaps that the Indian EPC companies need to address to be successful in other geographies?
As an EPC contractor, when you target a par ticular project or geography, you need to carefully assess your gaps in terms of technical capability, local domain knowledge, and the financial wherewithal to execute the project and then address them either in-house or through collaboration. I must also emphasize that 'International' is a ver y wide term and you need tailor made plans for each country and region as what works in a par ticular country may not work in another, even within the same region. Evolving into an international contractor has to be a gradual process and every organization has to necessarily traverse this learning cur ve.

Coming specifically to the Indian context, technical skills is not really an issue as India has the largest technical resource pool in the world. Indian Contrac tors need a better understanding of international market dynamics, financing and above all they need to get their execution strategy right.

What will be your message to the industry?
It is a great opportunity to reflect, introspect and to implement new ideas which could not be done in the past – This is a great time for course correction.