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Spotlight | February 2014

Rising ahead on overseas orders

Engineering and construction conglomerate Larsen and Toubro (L and T) has been seeking more orders from the international market as it expects domestic slowdown to impact the order inflows from local companies.

L and T [after releasing its quarterly earnings] has expected its order book to grow 15 per cent in the fiscal year ending March 2014. Its initial forecast of 20 per cent growth was later brought down due to poor investment climate. The company also indicated that demand will remain muted over the next few quarters.

´The general weakness of the macro-economic environment continues. Considering that the country is already in election mode, policy issues are still to be addressed in entirety,´ said Chief Financial Officer R Shankar Raman.

L and T, which posted a 12 per cent rise in December quarter net profit, said new orders grew 21 per cent to Rs.21,722 crore, thanks primarily to international customers, who accounted for 38 per cent of new business. Order inflows from overseas markets more than doubled, mainly due to a surge in demand in the Middle East, the company said, adding it was looking to boost its presence in select overseas markets.

Rising order book
L and T´s major contracts in this quarter includes a $ 473 million power transmission project in Qatar, a $72 million engineering project in Oman and a $110 million airport project in Bangalore, Karnataka.

India´s largest engineering and construction firm, which lays roads, builds ships, develops real estate and makes power plant equipment, reported a 13 per cent year-on-year (y-o-y) rise in the value of its order book by the end of December. During the quarter, the company reported a healthy order inflow of Rs.21,722 crore, up 21 per cent y-o-y. Infrastructure and other segments were the major contributors to revenue with a share of 85 per cent and 12 per cent respectively. For third quarter FY2014, about 38 per cent of the orders came from the international market, owing to major orders secured in the Middle East region. As of now, L and T stands tall on an order backlog of ` 171,184 crore, indicating a growth of 13 per cent. L and T´s order book is majorly dominated by infrastructure (76 per cent) and power (9 per cent) segments. Process (8 per cent) and others (7 per cent) contribute the remaining part of the order book. Given the current challenging macro environment, the company has lowered its order book growth guidance from 20 per cent to 15-20 per cent for FY2014.

Strong execution
While speaking on the comparison of L and T's quarter results to other quarters, a senior analyst from Angel Broking, a stock broking company, said,´On the top-line front, excluding the performance of the hydrocarbon business, L and T has reported revenues of Rs 14,388 crore, registering a healthy growth of 11.8 per cent y-o-y. However due to demerger of the hydrocarbon business (accounting for about 17-18 per cent of revenues), our and the street´s quarterly revenue estimates are not comparable.´ He added, ´The healthy growth in revenues was mainly driven by strong execution in the E and C and heavy engineering segments and execution pick up in international orders.´

According to Sanjeev Zarbade, Vice President Private Client Group Research, Kotak Securities, a stock broking and distribution arm of the Kotak Mahindra Group, L and T's numbers are not comparable to earlier quarter numbers since the company has presented the numbers after demerging the hydrocarbon business into a separate subsidiary. Adjusted for that revenues are in line. ´EBITDA margins for third quarter of FY14 work out to 11.6 per cent as compared to our estimate of 9.8 per cent in Q3FY13 (on a like to like basis),´ said Zarbade.

Way ahead
L and T is hopeful of getting around two boiler-turbine-generator (BTG) orders this year, which will improve the company´s capacity utilisation. More and more power utilities are realising the advantages of awarding orders on engineering, procurement and construction (EPC) basis, like in the case of Rajasthan Rajya Vidyut Utpadan Nigam Ltd (RVUNL). The company is now fully geared to execute these projects on EPC basis with capability covering boilers, turbines and full balance of plant (BoP).

The manufacturing facilities are primarily intended for the domestic market. The company has rapidly adapted to the MHI manufacturing technology and quality requirements, and has also used manufacturing facility for international orders. ´We have received export orders from MHI. We also hope to bag contracts on standalone ESPs, HRSGs and critical piping, both in the domestic and international markets,´ MV Kotwal, Whole-time Director and President Heavy Engineering, told this publication. However, in a diminished domestic market where biddings are aggressive, the pressure on margin is inevitable. But, some competitors who followed an aggressive pricing strategy have been forced to pull back as the strategy turned unsustainable, Kotwal added.

AM Naik has successfully led the company through some of its most challenging times and enabled it to emerge stronger. His broad global perspective has seen the company expanding its horizons beyond domestic frontiers, positioning itself to become a true international player. Under his able leadership, the company, which has been rated as a national company, reached at newer heights and crossed the multi-billion mark.

Management take
MV Kotwal, Whole-time Director and President Heavy Engineering Last year, demand and order booking was very slow, but now it is picking up gradually. In our heavy engineering segments, we have hydro carbons in which hydro carbon equipment from petroleum, petrochemical, fertilizer are included. The second segment includes defence, nuclear and aerospace. In the first segment, i.e., hydro carbons essentially we export between 55-60 per cent. To that extent more of the conditions outside India has impacted this business in the last three years after the economic slowdown. However, the need was always there and now that things seems to have sort of improved a lot. We can see that there are some projects coming up, which earlier were deferred. We have seen upswing in the kind of needs for our equipment mainly from the Middle East market, and other than that, US is also opening up because of shale gas. However, Europe has not yet shown visible signs of great improvement because they are still having their problems. In defence, we are very well placed in terms of investments. We have developed capabilities but substantial growth in volumes has not really occurred. However, the signs are there in the latest procurement procedures. The government is going to give greater role to entire private sector manufacturing. So, signs of change are definitely there.

Management take
SN Roy, Whole-time Director and Member of Board Corporate Affairs and Power The capital goods sector is facing huge challenges and L and T Power is no exception. We are all hoping to spot some green shoots, but customers are in hesitant mode as far as decision-making is concerned, which is the market sentiment now. Projects have not been shelved as such, discussions are on but there is uncertainty. In a scenario marked by fewer opportunities, we have started looking at newer possibilities like catering to the market for standalone ESPs, HRSGs, critical piping, etc. In a sluggish market, we have focused on reducing the cost of production and project schedule in order to benefit the customer. Our emphasis was also on rapid indigenisation of technology and component manufacturing, and today with over 90 per cent of the total power generation EPC value coming from our in-house capabilities, we have better control on costs and schedules.

Analyst take

  • During the quarter, pursuant of approval from court, the company has demerged its hydrocarbon business and transferred all the asset and liabilities of the business to its wholly owned subsidiary, L and T Hydrocarbon Engineering.
  • Net working capital (NWC) continues to remain weak at 21.3 per cent of sales compared to 15.4 per cent in March 2013.
  • Given the current macro environment, L and T´s management has revised its order inflow guidance from 20 per cent to 15-20 per cent growth and maintained its revenue growth guidance of 15 per cent for FY2014.
  • Despite heightened competitive intensity, the management has clarified that it has enough levers at its disposal to ensure that the current EBITDA margin (+/-50bp) is maintained for FY2014.
  • L and T has also infused equity investments of Rs.6,700 crore into subsidiaries and developmental projects and would require an additional equity investment of Rs. 6,900 crore for its under construction projects.

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