Government’s capex push and L&T’s engineering prowess prove a winning formula | Mint

Government’s capex push and L&T’s engineering prowess prove a winning formula

The next three to five years could see L&T clock a 16% compound annual growth rate (CAGR) in revenues
The next three to five years could see L&T clock a 16% compound annual growth rate (CAGR) in revenues

Summary

  • L&T has become the top player in practically every sector in which it operates, and should hit new heights if the government continues to push for more infrastructure

When Jack Welch was CEO of General Electric in the 1980s, he ruthlessly implemented a strategy that earned him the nickname “Neutron Jack" (after the neutron bomb that was then in development). Welch reviewed GE’s divisions and verticals and exited businesses in which it was not the market leader or number two.

An Indian heavy-engineering conglomerate has managed this feat, becoming the top player in practically every sector in which it operates. Larsen & Toubro, (L&T) has rarely failed to achieve market leadership, and is also unique in the Indian context as it doesn’t have promoters.

Whenever there is an engineering problem, especially a large one, L&T is likely to step in with solutions. It undertakes turnkey projects across sectors and it has been a big beneficiary of the policy thrust to create infrastructural capacity. Apart from a bulging domestic order book, it is increasingly finding opportunities abroad. It is focussed on improving earnings and return on capital even as it looks to accelerate revenue growth.

L&T builds roads, dams, power plants, metros, port terminals, mining facilities, airports, data centres, and much more. It designs and manufactures aerospace and space components, defence equipment, EV charging systems, and transmission & distribution gear.

It is finding new opportunities across the clean-energy space such as green hydrogen, and examining areas such as artificial intelligence and machine learning for potential opportunities. It also has listed, profitable subsidiaries in the finance industry (L&T Finance) and the IT sector (LTIMindtree Limited and the unlisted L&T Technology Services) – another point of similarity with GE.

Over the past five years, L&T has focused on huge projects. It has improved return on capital with smart deployment of resources, better working-capital management, and higher internal efficiencies.

It has bounced back from covid and is now in the process of selling assets, such as the Hyderabad Metro and the Nabha Power Plant in Punjab, which don’t meet its return-on-investment targets. These divestments will improve its balance sheet, cutting debt and releasing cash, which can be used to further reduce working capital needs and invested for higher returns.

The next three to five years could see L&T clock a 16% compound annual growth rate (CAGR) in revenues, meaning it could double revenues in five years. That’s an incredible rate of growth given the huge base – consolidated revenue stood at 1.84 trillion in FY23.

The consolidated order book is at 8.8 trillion, led by large hydrocarbon-related projects abroad and strong capex from the industrial sector as well as GCC-related projects. The International business is growing at more than 24% year-on-year. The book indicates there is clear revenue visibility for the next three years already.

Overall order inflow continues to grow in the high teens (around 16-17% compounded). Core engineering and construction earnings could compound at 24% thanks to margin improvements, implying that profits may double between FY23 and FY26. This is commendable for a huge, capital-intensive company.

The drivers of this are capex recovery in the private sector and central government policy, which has pushed for investments in infrastructure across sectors such as water, urban infra, T&D, railways, defence, and renewable energy. Assuming the recent assembly election results signal policy continuity, these investments should continue to flow.

In the Middle East, L&T is picking up orders in the hydrocarbon industry, in T&D and in urban infra spaces. Energy transition is also a source of opportunities. While L&T has investments in thermal power, it has also invested in the green-hydrogen supply chain, and in electrolysers and data centres, in line with a strategic growth plan it calls Lakshya 2026. It has a memorandum of understanding (MoU) with Norway’s HydrogenPro to set up a joint venture for gigawatt-scale manufacturing of electrolysers for green hydrogen. A second MoU is with Norway’s H2Carrier to develop green ammonia.

L&T’s presence across the heavy-engineering space has similarities with Korean chaebols (large industrial conglomerates run and controlled by an individual or family) and Japanese conglomerates, while its strategic thrust could be compared to that of GE in the 1980s and 1990s. But L&T has better financial management and less opaque operating structures than the East Asian firms, and has impressively exploited opportunities for growth to become a one-stop shop for engineering solutions in the world’s fastest-growing large economy.

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