Mumbai: Larsen and Toubro Ltd (L&T), the country’s largest private sector engineering and construction firm, has deferred its entry into the commercial shipbuilding business and has also decided to scale back its investment for a new shipyard at Kattupalli near Chennai, said at least two persons familiar with the development.
A note put out earlier this week by Mumbai-based brokerage IDFC–SSKI Securities Ltd, after meeting with the company’s management, said, L&T had “decided to modify its plans in the shipbuilding segment and has deferred its entry in the commercial shipbuilding business for now and (is) concentrating only on ship repair and shipbuilding for defence purposes”.
An L&T official, who asked not to be identified because he is not authorized to speak to the media, said the initial projected investment of Rs3,000 crore will be almost halved to about Rs1,600-2,000 crore, and made in two or more phases. The IDFC-SSKI note, written by Shirish Rane, Salil Desai, Ashish Desai and Nikhil Salvi, said the company has made its decision in line with “cyclical downturn in the commercial shipbuilding business”.
“It is like any other large project where one doesn’t invest a large amount in one stroke,” confirmed M.V. Kotwal, senior executive vice-president (heavy engineering) and an L&T board member, adding that the company is completing procedural formalities. “We have envisaged Rs2,000 crore for the new shipyard. We will not look at putting everything at one time; instead we will wait and watch how business evolves,” he said.
L&T, which is also building the port at Kattupalli, had initially planned to build large cargo ships at the facility. It is yet to close the financing for the project.
Under its scaled-down plans, the firm will continue to build and repair ships at its Hazira facility in Gujarat, where it has orders worth $350 million (Rs1,750 crore) to build 10 ships. The facility is used to build specialized vessels such as RoRoLoLo (roll on, roll off, load on, load off) ships, heavy handling vessels and naval vessels, including submarines, in addition to repairing ships, a business that is immune to business cycles.
The Kattupalli facility will be used for the same set of operations once it is ready.
An analyst at a domestic brokerage firm, who tracks L&T, said the management had indicated a scaling down of investment in its shipbuilding business at an analysts’ conference call held immediately after the company announced second quarter results on 15 October. The analyst declined to be identified because he is not authorized to speak to the media.
He said the move made sense in the current environment. “An individual these days would defer his plan to buy a house; likewise a company will curtail capex (capital expenditure), especially in an industry where freight rates are close to historic lows, and when buyers of ships are postponing purchases,” he said.
Earlier this week, the Baltic Dry Index, a global measure of shipping costs, fell to its lowest level since it was created in 1987. It has fallen 94% since its peak in May.
K.V. Rangaswami, president (construction) and a member of the L&T board, declined to speak on the shipbuilding project since the construction work of the project has not yet been handed over to him. “The construction work will start only after we complete a few formalities, including the financial closure of the project.”
The company has maintained that shipbuilding is a natural diversification for it and will help it leverage its strengths in fabrication and heavy engineering.
L&T entered the shipbuilding business last year when it decided to use a part of its Hazira facility for the purpose. It already has 10 orders for building specialized ships, and the first ship, a RoRoLoLo vessel, will be delivered sometime next year, said Kotwal.