The chief financial officer of India’s largest engineering firm, Larsen and Toubro Ltd (L&T), Y.M. Deosthalee, spoke in an interview about the latest happenings in his company and its future strategies. Edited excerpts:
Acquisition strategy: L&T chief financial officer Y.M. Deosthalee. Kedar Bhat / Mint
How are you looking at the entire capital expenditure cycle? Has the cycle turned back?
To some extent, yes. We have seen lot of activity in the automobile sector. We have seen activity in some parts of infrastructure like power for example. Many projects, today, are in various stages of implementation; some are reaching financial closure and some are under implementation. There is lot of activity there. In some areas, there is still excess capacity, and therefore, people are cautious in terms of adding capacity. So it’s a mixed bag. In the hydrocarbon sector, there is activity in India as well as in the Gulf region, but overall I don’t think the capex cycle has returned back fully.
We will have to wait and watch for (a) few more months. It is also reflected in the very poor credit offtake in the recent past from the banking sector. It is another matter that people have raised money from capital markets. But at the same time, many sectors are not drawing money from the banking sector, and therefore, I don’t think we have seen very robust capex movement in the market today from the industrial front.
When you declared your first half results, you saw problems of some projects not being able to achieve financial closure, which was being reflected in the revenue. How do you think the second half will pan out? You will have to do at least 45% revenue to get to your yearly target. Do you think it’s possible?
Let me first explain what we had said. We had said that there are two reasons for the subdued growth in sales. On the industrial front, that is the industrial equipment side, last six months of last year was a disaster and the momentum is picking up very slowly. Therefore, as compared with the previous year, the first six months of last year were extremely good for industrial equipment like construction equipment or equipment we manufacture for the petrochemical industry or the hydrocarbon industry. It was an excellent period—April to September, and October to December was a complete contrast. So based on that, our first six months of the year were subdued because the recovery has been slow.
Secondly, some of the projects, which we received last year, there was a delay in financial closure. As a result of which, conversion of those orders into revenue is taking little longer.
But having said that, one point we need to understand is that L&T carries an order book of Rs90,000 crore and this order book has to be converted into revenues. We are not carrying dead orders in this order book. It is different matter that some of these orders are executed over a period of three to three-and-a-half years but they will get converted into revenues. Therefore, in any case, the second half should be better than the first half and we have indicated that for the year as a whole, we will have a growth of 15% or so in our revenues. That is based on our budgeting exercise and our current outlook as far as the execution is concerned. In terms of order book, we have revised our guidance and outlook. We are saying that for the year, our order inflow growth will be in excess of 30%.
We understand that you did some roadshows for L&T Infotech a few weeks back. What is your game plan?
I don’t know from where you got this information that we did some roadshows. We did not do any roadshows for L&T Infotech. L&T Infotech, along with the engineering services business, which is housed in the parent company, today, is about half a billion dollars, which is probably in the tier II segment, today, in the information technology business.
We definitely need to reach the billion-dollar mark at the earliest because that is the critical mass which is required for you to be called for bigger jobs, for you to be invited for bids for larger contracts. So that is very critical. Whether we will do one acquisition or two acquisitions is something which we haven’t finalized but there are possibilities. There could be some synergetic options. There is a possibility that if we come across any opportunity for a company with $150-200 million (Rs695-926 crore), which is very synergetic to what L&T does, we will look at that because ultimately, growth is very important for this company.