Indian engineering and construction firm Larsen & Toubro is mapping new growth

This interview is part of the Inside the Mind of the CEO series, which explores a wide range of critical decisions faced by chief executives around the world.

In the late 1950s, Larsen & Toubro (L&T) had a Hollywood moment. The company, founded in India by two Danish engineer expats two decades earlier, was contracted to construct the bridge for the Academy Award–winning film The Bridge on the River Kwai. The story goes that the crew didn’t know the bridge was supposed to be leveled in the movie’s climactic scene; it withstood the first blast and had to be reengineered to be destroyed. Today, led by CEO and Managing Director S.N. Subrahmanyan, L&T is a multinational conglomerate based in Mumbai, serving customers in more than 30 countries in the engineering, procurement, construction (EPC); high-tech manufacturing; and financial-services and technology sectors.

L&T, with recorded revenues of INR 135,979 crore (Cr) (US$18.32 billion) in FY20–21, has established itself as an infrastructure leader with high-profile projects such as Gujarat’s Statue of Unity, which, at 182 meters, is the world’s tallest statue; the Dhubri-Phulbari bridge over the Brahmaputra River, which, at 19 kilometers, will be India’s longest bridge when completed; and a major section of the proposed high-speed-rail corridor between Mumbai and Ahmedabad, the first of its kind in India. The company is also building one of the world’s largest solar photovoltaic installations—with a capacity of 1.5 gigawatts—in Riyadh, Saudi Arabia. The last project, which Subrahmanyan announced in April 2021, reflects L&T’s recent moves into the renewable energy space.

After earning a degree in civil engineering from the Regional Engineering College, Kurukshetra (now called the National Institute of Technology, Kurukshetra) and an MBA from the Symbiosis Institute of Business Management in Pune, Subrahmanyan began his career at L&T in the early 1980s as a project planning engineer. Later, as deputy managing director and president, Subrahmanyan was vital in growing L&T’s infrastructure business both domestically and globally. Since his appointment as CEO in July 2017, he has expanded the company’s portfolio; annual revenue for its five-year-old IT business tripled from INR 9116.62 Cr ($1.40 billion) in FY16 to INR 25,618.76 Cr ($3.45 billion) in FY21. Subrahmanyan recently spoke with strategy+business from his office in Mumbai about his focus on building out the company’s services business as a vehicle for growth alongside the 84-year-old EPC business.

S+B: What is your outlook on near-term economic prospects?
SUBRAHMANYAN: Alongside the pandemic and a worrisome geopolitical situation, raw materials that were never considered important—lithium, nickel, cadmium—have suddenly come into the spotlight, and people are becoming protective of them. The chip shortage is a result of this trend. And a huge increase in polysilicon prices has impacted solar module prices.

Amid these complexities, and to stimulate growth, India has announced various infrastructure-focused initiatives. For example, it has set up a National Infrastructure Pipeline, a first-of-its-kind government exercise to provide world-class infrastructure to its citizens; the National Hydrogen Mission, which aims to make India a green hydrogen hub; the Gati Shakti scheme to establish multimodal connectivity for more than 1,200 industrial clusters; and the Bharatmala Pariyojana, a network of economic corridors with feeder routes for facilitating freight traffic.

Although we go through competitive bidding for such opportunities, our company has the required depth in engineering and project management experience, particularly for large and complex projects. We are looking to invest in digitization or transforming ourselves digitally where necessary to improve our productivity and our products, and to strengthen customer channel outreach along with speed of execution. With all this in place, we expect to capture several emerging opportunities to achieve healthy growth over the next five years.

S+B: What are some of the challenges you’ve confronted across your businesses?
SUBRAHMANYAN: We operate in three main areas. Our EPC infrastructure and projects business is our largest business, and makes up about 70% of the company; it is followed by manufacturing, which includes precision engineering and defense, and makes up 10% of the company; and then a services business, at 15%, that includes three IT companies as well as financial services. The remaining businesses, including Hyderabad Metro and Nabha Power, make up the last 5%. In times to come, our EPC projects will continue to grow, while IT services will grow faster. Manufacturing will remain more or less at the same level, while some of the new initiatives will also go up by 5% or so.

During the pandemic, our EPC projects and manufacturing work were impacted the most, because they are highly dependent on labor. In the first phase of the pandemic, our 280,000-strong labor force was down to 70,000. With active outreach, we were able to bring many laborers back to our worksites. But then the next wave of the pandemic hit, and our numbers dipped again—and we had to again convince people to come back to work, assuring them of their safety and well-being. We implemented new standard operating procedures and digital solutions to enable social distancing. For instance, at a worksite, there would be five people handling a job instead of ten. All these changes resulted in project delays and a decrease in productivity.

On the workforce front, we gave promotions but had to freeze salary increases and bonuses, and we had to resort to cost-cutting measures. Nevertheless, we were still able to declare a profit. That is because our IT and TS [technology services] business peaked, quickly adapting to the work-from-home scenario. Productivity went up, clients were happy, and I think that has made a huge difference in terms of how we look at ourselves today—as more of a services provider than in the past.

S+B: What types of new businesses have you developed during the pandemic?
SUBRAHMANYAN: We have started two platforms. The first, L&T EduTech, offers several training courses: engineering e-learning led by our own engineers, following an application-oriented engineering curriculum; high-end professional coding training for IT companies; and vocational training in welding, masonry, and electrical work.

Developing new skill sets is important to be future-fit, because the economy is changing and people are becoming more service-oriented. Despite being headquartered in a nation of 1.3 billion, our company does not always have access to the requisite skill sets.

The second new platform, L&T SuFin, is an integrated B2B marketplace for buying and selling industrial and construction products and services to help small and medium businesses. This is being developed on the back of our strong relationship with suppliers and SMEs [small and medium-sized enterprises] in our ecosystem.

These two platforms will create new revenue streams as part of our focus on the services business. We also plan to set up data centers in Chennai and Mumbai, but that is still a work in progress.

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S+B: Alongside its pursuit of new revenue streams, L&T has committed to become carbon neutral by 2040 and to achieve water neutrality by 2035. What initiatives and specific steps are you taking to achieve these goals?
SUBRAHMANYAN: There are two ways to look at sustainability: either be perplexed and stay away or be excited and take action. We chose the latter. Our company is deeply rooted in the power sector. We have construction and mining equipment, such as excavators, trucks, and motor graders. We also make power boilers and steam turbines in our factories in Hazira [a port city in Gujarat]. We own the largest EPC hydrocarbon business in this part of the world, and we provide integrated “design to build” solutions to large and complex offshore and onshore hydrocarbon projects both domestically and internationally. In sum: the concept of power is part of our vertebral column.

So, it is natural for us to look for a new source of fuel—green hydrogen, for instance. And in fact, we are looking at green hydrogen not only as a fuel of the future, but also as a business to invest in and develop. We have a partnership agreement with ReNew Power [one of the largest renewable energy companies in India] to tap the emerging green hydrogen business in India. ReNew will provide the green power, which comes from wind and solar, and we will work together to develop and operate green hydrogen projects in India. In addition, L&T is setting up a pilot green hydrogen plant in Hazira, and we are installing EV charging stations on all our campuses.

In addition, with our expertise in different solar technologies, we have emerged as a global technology player for setting up solar plants. Last year, we were awarded a turnkey EPC contract to design and build Saudi Arabia’s largest solar plant, Sudair Solar PV, a project that has a capacity of 1.5 gigawatts. At full capacity, this plant is expected to generate enough electricity for 185,000 homes and offset up to 2.9 million tonnes of carbon emissions a year.

Internally, we have instituted a task force to review all sustainability and green initiatives. We have looked at our buildings, our ways of working, our stakeholders. We’ve studied what we are doing right now, and what we need to do in the future. One more step that we will take is to include sustainability in our tender criteria. That will impact the ecosystem, as some of our suppliers—cement and steel companies, MSMEs [micro, small, and medium-sized enterprises]—will also be forced to adopt green measures.

S+B: Could you tell us more about your business plans for green hydrogen?
SUBRAHMANYAN: We would like to start manufacturing some of the key elements for green hydrogen, focusing on electrolysis [the process used to extract elements] and grid batteries. Both batteries and electrolyzers are modular technologies suited for mass manufacturing. The progress of battery technology is more advanced than that of electrolyzers, with the cost of lithium-ion batteries having decreased owing to higher production volumes. The scale-up of electrolyzer manufacturing is still in a nascent stage, but that makes its scope for significant near-term cost reductions even larger. We also analyzed solar modules and polysilicon, but our plans to manufacture those are on hold for now.

S+B: If green hydrogen is the fuel of the future, do you think it can be made affordable in India?
SUBRAHMANYAN: Not right now, because it costs upwards of $4 per kilogram. To be affordable, the price needs to be below a dollar. But there is hope. If you look at solar panels, when we started the business 15 years back, it was $6 per watt. Today it is 19 cents. Grid battery prices, too, have declined by 70% over the last three years. So, it is a matter of time and continuous research. Wonderful startups are coming up in this space, and I am sure there will be a way to tap into the alternative sources of energy they are scaling. We are also investing in some of these startups through our L&T innovation fund, alongside our own R&D center, where we have committed funds to researching energy alternatives.

S+B: Over the years, L&T has evolved, innovated, and expanded. What has guided these changes?
SUBRAHMANYAN: It is important to change before somebody else forces us to change or before we disappear altogether. Change is a constant theme, and innovation is needed for it to play out. Let me give you an example. In the past, when we built hospitals, we would do the columns, the beams, the slabs; that is, only parts of them. Then we thought of taking up hospital turnkey projects. Subsequently, we went a step further and decided to do design and build. When the competition caught up, we went beyond generic design and build to focus on hospital architecture. Doing that required specialists, so we recruited them. To our clients’ surprise, they simply needed to specify their requirements, and we’d deliver ready-to-use facilities.

But there, too, the competition caught up, so we decided to supply medical equipment, and to train the nurses and technicians to use it. Clients would give us land, share their requirements, and disappear, and we’d complete the entire project, end to end. But that too didn’t keep us satisfied for long. We decided to enter the patient management software, hospital management software, and connected devices spaces in hospitals. That is how we metamorphosed to survive and to keep pace with the changing times.

In all of this, it is our enterprising employees who play a key role. They take the lead and ownership, and that is how we also develop leadership skills. In fact, I constantly tell our people: please keep thinking about the business, observe what the competition does, what the world does, and stay ahead of the times. It is important to offer clients something that the competition doesn’t offer as an extra service. It could be a small value addition, but clients often see a large proposition in it. It is also imperative to always keep listening to one’s client and get feedback. For me, if a client makes a complaint, I go bonkers—and the client is always right. My people can provide 150 justifications, but they will be overruled by the client’s point of view. This needs to be ingrained in each employee, down to the last person in the organization. When you act on this priority, your clients recognize it—strengthening the trust quotient.

S+B: How have you embraced emerging technology as part of your evolution?
SUBRAHMANYAN: If you look at our Hazira facility, it has come a long way; today, we could label it Factory 4.0 or 5.0. In the past, workers would come in to work at the site under the scorching sun at 9 in the morning, go for lunch at 1, come back to work at 3 in the afternoon, and wind up work at 5 in the evening. Today, three welding jobs are handled by a single welding expert sitting in a small, air-conditioned cubicle. The worker controls the workstation, monitoring everything on the computer screen. This work can be carried out from anywhere because it is an IOT [internet of things] station.

In manufacturing, today in Hazira, all products—vessels, pipes, thick plates—are made on time or ahead of time. Everything, including cutting and bending, is computerized. Most of the engineering for construction projects is based on advanced building information modeling [BIM] at level 4 or 5, which allows designers to create 3D models using a digital representation of both the physical and functional characteristics of a structure.

Furthermore, in the infrastructure space, more than 13,000 pieces of our equipment, used at various project sites, are connected to provide real-time visibility into the operations. Quality and safety checks are on apps, along with details of our workers, their skill sets, and their villages and home addresses. Our entire site topography is mapped through drones and light detection and ranging [LiDAR] sensors that use light energy, emitted from a laser, to scan the ground and measure variable distances. The end result is a rich set of elevation data that can be used to produce high-resolution maps and 3D models of natural and man-made objects.

In addition, safety measures for workers are taught through augmented and virtual reality. When a worker climbs a transmission line tower, he or she wears a HoloLens [mixed-reality headset]. Using multiple sensors, advanced optics, and holographic processing that melds seamlessly with its environment, these holograms display information, blend with the real world, or even simulate a virtual world and show the worker how to go about the task safely. We also use drones in place of people in work related to our transmission lines.

There are other benefits of incorporating technology. We worked on a Singapore-based refinery project here in India, in modular fashion. Everything was constructed at our site in India using controlled plant conditions before being transported by barge and assembled at the final location. In fact, we use modular construction in many of our engagements, including an oil field compression plant in Algeria, for which all construction was carried out in a yard in Hazira and taken in trailers to the Algiers site—1,200 kilometers into the Sahara desert. This lift-and-shift approach makes a significant difference. When we work this way, productivity increases, quality improves, safety goes up, and work is done faster and more immaculately.

S+B: How has the use of digital technology impacted profitability?
SUBRAHMANYAN: Here’s an example: we were doing a huge water project in Madhya Pradesh, to source water and transfer it through pipes to three or four districts. The client had provided us with their desired route, and, based on their request, we had calculated the tonnage of steel required. We also did a helicopter LiDAR survey and a drone survey through which we mapped the entire area with precision—every ravine, pit, waterfall, river, rivulet, temple, and stone—spanning 5,000 to 6,000 square kilometers. Through this process, we discovered an alternative route and saved 6,000 tonnes of steel. The profit was immense, and that was possible only because of the advanced technology we used.