BackIndian capital goods firms facing tough competition in overseas orders
South Korean, European and Chinese rivals are winning market share by cutting margins to the bone, say experts
Premium(Priyanka Parashar/Mint)
Mumbai: Larsen and Toubro Ltd’s (L&T’s) shocking announcement on Monday of a decline in profit saw the stock plunge 7.5% on a day the Sensex rose 0.71%. While the sluggish economic environment at home hasn’t helped, L&T and its Indian rivals are facing an acute squeeze in the overseas engineering and construction market as well, especially in the traditional stronghold of West Asia.
South Korean, European and Chinese rivals are posing a big threat to Indian companies chasing foreign orders. Apart from L&T, Essar Projects Ltd, Punj Lloyd Ltd, Voltas Ltd and Tata Projects Ltd are some of the big Indian companies facing stiff competition from them in West Asia.
Experts and industry executives said companies from these countries are winning market share by cutting margins to the bone.
International orders are critical given India’s economic environment and rising borrowing costs, with most infrastructure projects at home having been brought to a grinding halt by delays in securing regulatory approvals and land acquisition.
Economic growth slowed to 5% in the year ended 31 March, the slowest in a decade. But just as the government has been trying to get stalled infrastructure projects going again, two high-profile exits took place just this month—South Korean steel maker Posco scrapped a $5 billion steel plant in Karnataka and ArcelorMittal said it wouldn’t go ahead with a steel plant in Orissa.
While the advantage is that the revenue is better and payments come on time, “there is definitely a challenge on margins", he said.
Arvind Mahajan, partner and national head, energy, infrastructure and government at KPMG India Pvt. Ltd, agreed that such companies have it tough as the Indian market has been drying up and West Asia is more competitive.
In a 5 July report, the brokerage unit of investment bank Espirito Santo Securities India Pvt. Ltd said the market share of South Korean companies in the West Asian construction segment has jumped to around 40% from 8% in 2001.
“In the last three years, (South) Korean companies have tried to offset the weakness in their domestic building construction market with higher orders in the Middle East," Espirito Santo’s senior analyst Aditya Bhartia wrote. While some South Korean companies get orders worth $5-10 billion annually from West Asia, it’s less than $2 billion for L&T, the report said.
On smaller projects, Indian companies are facing undercutting by Chinese companies, while the South Koreans and Europeans are bidding aggressively, according to a senior executive at Essar Projects who didn’t want to be named.
South Korean companies are quoting extremely low margins, pulling down those of Indian companies as well, he said.
These adversities reflected on L&T’s numbers, with operating profit margin narrowing in the June quarter, largely on account of the concentration of international projects, the company said.
L&T’s international order book grew 16% in the June quarter and constituted around 12% of the total. International sales in the infrastructure segment accounted for 16% of total revenue.
On 17 July, L&T announced an order worth ₹ 2,085 crore from Oman’s ministry of transport and communications for constructing the Al Batinah Expressway Package 4. Essar Projects has a total order book of $170 million from the UAE alone.
To be sure, South Korean companies are focused mostly in the hydrocarbons sector. The Espirito Santo report said almost 50% of companies engaged in hydrocarbon projects have been from South Korea in the past 12 months, citing data from MEED Media FZ Llc, a data provider for projects in West Asia.
Five South Korean firms were among the top 10 most successful engineering-procurement-construction contractors in West Asia, according to a June MEED survey of the period between June 2012 and May 2013.
Contracts won by South Korean contractors such as Samsung Engineering Co. Ltd and Daelim Industrial Co. Ltd amounted to $13.2 billion in total during the period. This was $400 million more than contracts won by European firms. Since 2009, South Korean contractors have won contracts worth more than $123 billion in the Middle East and North Africa (or Mena) region, MEED said.
European companies have also been pushing hard on margins to recover lost market share, according to experts.
In the last 12 months, Petrofac (UK) has led in hydrocarbon orders in West Asia, according to MEED. European companies won a market share of 46% in the hydrocarbon segment in the last 12 months, compared with around 30% in the year earlier.
This would mean that for companies such as L&T, for which 66% of hydrocarbon revenue comes from international projects, expanding operations in the sector will be an pressing need.
“Hydrocarbons and infrastructure have carried the day," said R. Shankar Raman, L&T chief financial officer, at an earnings briefing .
L&T is trying to tie up with some of its rivals to hedge against competition risk. The company said it will continue to focus on good prospects in various countries in West Asia and select markets in the Commonwealth of Independent States (CIS) region, Africa and South Asia.
“We are trying our best to link up with them so the total number of competitors are less. We are bidding with (South) Koreans, they are the major competitors, all big guys," L&T’s Venkataramanan said.
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