Larsen and Toubro Ltd (L&T) on Friday said it is in the process of creating a global conglomerate by consolidating its international operations by replicating its success in West Asia.
India’s largest engineering and construction company is moving decisively towards consolidating its international operations through a replication in the Middle East of its domestic structure and systems, said A.M. Naik, group executive chairman of L&T.
“While the prime focus is the Gulf Cooperation Council (GCC) countries, the international outreach also extends to South-East Asia, CIS (Commonwealth of Independent States), and select African nations," Naik told shareholders during the firm’s 69th annual general meeting on Friday.
GCC countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates while CIS countries formed after the break up of the Soviet Union.
The consolidated order book of L&T, a corporate proxy for the larger economy, rose 13% from a year earlier to ₹ 195,392 crore on 30 June while orders from outside India accounted for 26% of the total.
“International talent and experience is essential to achieve our goals, and we are strengthening our multi-cultural leadership base, with the induction of professionals possessing rich domain experience and local customer insight. The thrust on international markets is yielding gratifying results," Naik said.
International orders represent 33% of the total inflows during the year under review, and showcase remarkable success in winning major new orders in the infrastructure sector, Naik said.
West Asia is centre for hydrocarbon market. South Korean, European and Chinese companies are active in chasing foreign orders in West Asia. Apart from L&T, Essar Projects Ltd, Punj Lloyd Ltd, Voltas Ltd and Tata Projects Ltd are some of the big Indian companies working in West Asia.
In a note dated 4 August, international brokerage Espirito Santo Securities India Pvt. Ltd cautioned that competition is intense in the Middle East while projects are large and complex and typically awarded on a fixed price basis.
It noted that a number of South Korean construction companies have suffered losses.
“Worryingly, in most cases, losses are spread over multiple quarters, thanks to repeated extensions to project completion deadlines. Management teams have also found it difficult to correctly predict the completion timelines, resulting in additional cost overrun provisions, downward revision in their margin guidance and consensus earnings downgrades," the brokerage said.
L&T suffered an Ebitda (earnings before interest, tax, depreciation and amortization), or operating loss of ₹ 900 crore in its hydrocarbon business in first quarter of current fiscal year. “We caution investors against brushing off these cost overruns as one-offs," the brokerage said.
However, L&T is not stopping its international plans.
Naik said his company is increasingly pursuing opportunities through alliances with the leading global EPC (engineering, procurement and construction) companies.
“This has necessitated putting in place a multinational organization with a cross-cultural team possessing local knowledge and domain expertise," Naik said.
The company has plans to leverage its position in the hydrocarbon sector by developing semi-submersible rigs and floating liquified natural gas platforms, opportunities emerging from oil and gas exploration and production in deep offshore fields.
He said this pursuing further international opportunities in thermal power and power transmission and distribution.
L&T is also chasing international orders in building roads. Naik said his company will continue to target upcoming road projects in the Gulf countries, where the company won significant orders in the last fiscal year.
On its railway business, Naik said his company is “also exploring international markets, especially the Gulf countries where several projects are coming up."
On the domestic front, Naik said L&T has recently started realty business by using its own land and in joint ventures with other developers and this has already started yielding good results.
“The market has received our entry in this business with enthusiasm. With the help of L&T’s brand, its construction capability and marketing reach, this business is poised to deliver profitable growth in the coming years," he said.