Mumbai: India’s largest engineering and construction company, Larsen and Toubro Ltd (L&T), is banking on overseas markets to fuel growth as it braces for tapering order inflows, “deferment of capital expenditure and fresh investment decisions” in the domestic markets—a weakness that both analysts and company say will likely persist in the near term.
Diversification has to be the way forward for the engineering conglomerate and the overseas business could “emerge as a surprise package”, analysts said.
The builder of power networks and infrastructure projects, which announced quarterly earnings that exceeded estimates, announced on Monday that it is targeting 15-20% growth in 2012-13 and will focus on west Asian markets such as Saudi Arabia, the United Arab Emirates (UAE), Qatar, Kuwait and Oman in the current fiscal. It is also in the “exploratory stage” in several other markets which it will enter in the next couple of years, chairman A.M. Naik told reporters in a press briefing.
Mitigating risks: L&T chairman A.M. Naik at a press conference in Mumbai on Monday. Naik says Saudi Arabia is an ocean of opportunities that alone can potentially yield $1 billion in revenue. Dhiraj Singh/Bloomberg
“We are doing well in UAE and Oman. We will improve our market share in Qatar, Kuwait and Saudi Arabia, which has tremendous potential,” said Naik, adding that L&T was also looking to enter Iraq and Indonesia. The company has opened an office in Brazil to get “exposure to the upstream oil and gas exploration” business and is “seeding its business in the CIS (Commonwealth of Independent States) countries” with an office in Turkey. However, all forays other than those in western Asia will be in 2013-14.
“We haven’t done much in infrastructure (sector) in the Gulf. We are seriously looking at that now. We believed India was enough (to offer growth in the segment), but we are looking to mitigate that risk,” explained Naik who called Saudi Arabia an “ocean” of opportunities that alone can potentially yield $1 billion (around Rs 5,370 crore today) in revenue.
L&T said it also expects growth in the US where investments in shale gas have led to increased production of natural gas liquids and, hence, a greater demand for creating downstream facilities that the company can help build.
“Diversification is what this is all about,” said Rajeev Desai, sector analyst with Mumbai-based brokerage IFCI Financial Services Ltd.
“They have worked with foresight and been at it for two years. Now it is becoming more concrete. And they haven’t gone ahead and bid for a $5 billion project competing against the Koreans. They are going ahead with a lot of technical collaborations” with domestic players in these countries, he added.
In a 20 April note to clients, Emkay Global Financial Services Ltd had taken “cognizance of L&T’s endeavour to increase presence in overseas markets (especially Middle East) over the past three years” with the order inflows increasing from 4% in FY10 to 15% in the first nine months of FY12. “We have factored conservative growth of 7% in overseas business in view of tough competition...overseas business can emerge as surprise package.”
Naik criticized “newcomers” in the Indian market who lower prices to get contracts. “We have lost many orders in the last few years to newcomers whose background abilities don’t match ours,” he said, adding that he was looking at a “competition of equals” in the global markets. A 5 April JPMorgan report by Shilpa Krishnan and two other analysts had said that “L&T appears to have shunned less profitable jobs”, but called it “a good strategy when the capex cycle is muted and the company has order book comfort”.
L&T reported a net profit of Rs 1,920.41 crore for the March quarter, clocking an increase of 14%. Sales rose 21% to Rs 18,461 crore.
The L&T stock gained 1.84% to Rs 1,159.8 on BSE. The benchmark Sensex lost 0.47% to close at 16,215.84 points.
Chief financial officer R. Shankar Raman said the order deferments had come mostly from power plants, fertilizer units and infrastructure projects such as airports among others. He expects the company to maintain stand-alone operating profit margins of 11.8% in FY13, but said “we should factor 50 basis points volatility in the margins” given commodity and foreign exchange volatility. One basis point is one-hundredth of a percentage point.
L&T did not meet its lowered outlook for 5% growth in new orders for FY12. These fell 12% to Rs 70,574 crore from Rs 80,362 crore last year.
The company invested Rs 1,730 crore in capital expenditure in FY12 and expects to spend a similar amount in the current fiscal.
Reuters contributed to this story.