Larsen and Toubro Chairman's Speech > Engineering - Heavy > Chairman's Speech from Larsen and Toubro - BSE: 500510, NSE: LT
Larsen and Toubro
BSE: 500510|NSE: LT|ISIN: INE018A01030|SECTOR: Infrastructure - General
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« Mar 14
Chairman's Speech (Larsen and Toubro) Year : Mar '15
Dear Shareholders,
 A year after a new political dispensation came to power, I believe the
 Government has achieved creditable success on multiple fronts in
 rebooting the economy, despite the constraints and complexities
 involved. A number of macro-level decisions taken in the last year have
 resulted in improved economic indicators.  These measures include a
 steady cutback in subsidies, higher allocation of budgetary resources
 towards infrastructure, steps to rein in high levels of inflation,
 reduction in the backlog of environmental clearances for infrastructure
 projects and a transparent allocation of telecom and coal resources at
 market- determined prices. The economy has also benefitted from the
 fortuitous decrease in international crude oil prices. This has helped
 reduce the oil subsidy burden and has had a salutary effect on the
 Current Account. GDP growth has meanwhile moved up to 7.3% from 6.9% a
 year ago and the prevailing low inflation levels are conducive to
 reduction in interest rates. It is now up to the Government to add pace
 to reform measures and build further on the foundations laid so far.
 Your Company''s capability profile is convergent with the needs of the
 nation. The Government''s recent emphasis on developing infrastructure,
 creating Smart Cities and the ''Make in India'' thrust opens up an
 exciting canvas of opportunity for L&T''s businesses.  Our engagement
 with key national projects gives a topical resonance to the Company''s
 slogan, ''We Make the Things That Make India Proud''.
 Performance Overview
 Notwithstanding the uncertainties of the economic environment and the
 execution blips encountered from time to time, your Company has turned
 in a laudable performance on most key performance parameters for
 Order Inflows, which are the lifeblood of your Company''s integrated
 Engineering Procurement & Construction (EPC) business model, clocked in
 at V 155,367 crores at the Group level, which represents a strong
 growth of 22% over the corresponding inflows of the Previous Year. The
 unexecuted Order Book stood at an all-time high of V 232,649 crores and
 represents a 28% growth over the Order Book at the end of the Previous
 Year. Considering that several execution challenges were encountered,
 such as ''Right of Way'', land availability and other issues, Group
 Revenues for the year, which stood at V 92,762 crores, grew by 8% over
 the Previous Year. Profit after Tax at the Group level stood at V 4,765
 crores and represents a decline of 2.8%, caused by losses incurred in
 some challenging Hydrocarbon projects in the Middle East as well as
 under-recoveries in the investment-constrained segments of Power,
 Metallurgical & Material Handling and Heavy Engineering.
 It gives me pleasure to announce that your Company has recommended a
 Dividend of V 16.25 per equity share on a face value of V 2 per share
 for the year. The corresponding dividend during the previous fiscal was
 at V 14.25 per equity share.
 Your company views internationalisation as more than merely extending
 domestic operations overseas, to actually building a multi-cultural
 leadership team and workforce drawn from the local milieu. The Company
 is already seeing the positive outcomes of earlier internalisation
 efforts, primarily in the Middle East. The unexecuted international
 Order Book stood at over V 60,000 crores at the end of 2014-15. This
 largely comprises orders from diverse infrastructure areas such as
 metro rail, power transmission & distribution, road & expressways and
 hydrocarbon sectors.
 If the expected growth in the domestic market happens, this may result
 in a marginal decline in the share of international business for the
 Company over the next few years. We intend to retain our geographical
 diversification as a bulwark against single-country dependency and to
 enable cross-learning of best practices in international project
 Talent Management
 The businesses that your Company engages in are primarily
 people-driven. Accordingly, our HR policies are centred around the
 creation of an environment that attracts, nurtures and rewards
 high-calibre talent. Young engineers also gain the opportunity to
 operate on the frontlines of technology and associate with projects of
 unprecedented scale and complexity. A structured seven-stage leadership
 development programme, conducted in collaboration with the world''s
 finest management institutes, has helped to build a robust talent
 pipeline at all levels.
 Our HR organisation is well-geared towards attraction and retention of
 engineering talent in an ecosystem that provides long-cycle
 professional development opportunities in almost all forms of
 engineering disciplines and caters to career building aspirations of
 talent at all levels.
 Sustainable Development
 At the heart of your Company''s approach to business is a sustainable
 model of development. It is built on the pillars of inclusive growth
 and a commitment to environment conservation, where expediency does not
 compromise long-term interests. Our apex level CSR committee,
 comprising Board Members, has decided to focus on a unifying theme -
 ''Building Social Infrastructure''. This covers water conservation,
 education, skill-building and healthcare.
 The total spends on CSR initiatives in 2014-15 by your Company amounted
 to V 76.54 crores under eligible items as defined in the Companies Act
 and another V 20.92 crores in CSR activities not specifically covered
 under the Companies Act.
 While private sector investments in industrial capex are yet to take
 off, spends by the public sector in core infrastructure have been
 improving. Funding from increased budgetary allocation by the Central
 Government, increased level of ordering by healthy public sector
 undertakings and a steady inflow of soft loans from external
 multilateral lending agencies have contributed to a perceptible rise in
 the core infrastructure investment momentum.  This has considerably
 enhanced potential business opportunities for your Company.
 Segments that hold promise in FY16 include:
 1) Infrastructure
 a) Roads: This segment has seen a shift from the earlier focus on the
 PPP (Public Private Partnership) model to EPC contracts in FY15. It is
 likely that this trend will continue and we expect significant
 construction contracts to be awarded
 by the National Highways Authority of India. This opportunity basket is
 likely to be augmented by orders for tunnels and special bridges as
 well as orders from state governments for expressways. We will continue
 to selectively target road construction prospects in the Middle East,
 where we have an impressive track record.
 b) Railways: In FY15, your Company has won some significant contracts
 for segments of the Dedicated Freight Corridor.  Substantial ordering
 of more jobs under this program is expected in FY16 and provides good
 prospects. FY16 is also likely to see the commencement of awards for
 new railway lines in the Middle East, where L&T intends to participate.
 c) Metro Rail: Your Company has successfully executed metro rail
 projects in multiple cities across the country, since most State-level
 urban development authorities view metro rail as the most viable
 solution for urban traffic decongestion. Continuing spends are likely
 in this segment, providing robust business potential for your Company
 Execution of two large metro rail projects in the Middle East won in
 FY14 is progressing satisfactorily
 d) Urban Infrastructure: This segment encompasses multiple areas such
 as residential buildings, IT & office complexes, hospitals, educational
 institutions and shopping malls.  Collectively, they represent
 substantial opportunities for L&T.
 e) Smart Cities and Communication Infrastructure: This is a new segment
 that has opened up over the last year, and includes city surveillance
 systems, basic infrastructure for proposed smart cities and telecom
 infrastructure. The segment holds good business potential.
 f) Water infrastructure: Falling water tables across the country,
 coupled with the new Government''s drive towards sanitation, Ganga
 Action Plan and irrigation programs, will result in increased business
 prospects for your Company.  Opportunities targeted by this business
 segment include bulk transmission & treatment of water, waste water
 treatment, effluent treatment plants and lift irrigation programmes.
 2) Thermal Power Generation
 The sector has been hampered by a number of constraints including fuel
 shortages, tardy environment clearances, intense competition from power
 equipment manufacturers, paucity of long-term funding, and slow
 progress in raising end-user tariffs in line with power production
 costs. Some of these constraints have been mitigated in the last one
 year, and thermal power investment programmes saw a much needed
 improvement in FY15. Your Company bagged some significantly large
 orders in the last fiscal arising from the larger opportunity base. The
 increased investment momentum, driven by Central and State Power
 Generation Utilities, continues to gather pace and your Company expects
 to garner business arising from such investments. In the meantime, L&T
 continues to focus on cost-competitiveness through cost reduction and
 operational efficiency measures.
 3) Power Transmission & Distribution
 This sector has seen increasing investment trends and your Company has
 benefited from such investments by way of sustained and increased Order
 Inflows. The momentum is likely to continue by way of grid augmentation
 by Central and State Transmission Utilities.
 We continue to be a significant player in this space in the Gulf
 Region. Increased T&D investments in countries like Saudi Arabia,
 Qatar, Oman, UAE and Kuwait continue to offer good business potential.
 We are also targeting business in select African countries in FY16.
 4) Hydrocarbon
 On the domestic front, reduced prices of crude oil in the international
 markets has relieved domestic oil producers and retailers from the
 onerous subsidy burden that they have traditionally been saddled with.
 Coupled with the hike in the administered price of gas as well as the
 introduction of the new urea investment policy, the investment momentum
 of hydrocarbon investments in the country is likely to increase and
 your Company is ideally poised to tap this growth.
 In Middle East markets, the drop in oil prices has led to a reduction
 in Upstream capex. However, Mid and Downstream investments, for the
 time-being, are not affected and your Company proposes to bid for such
 opportunities as and when they enter the tendering stage.
 5) Defence Sector
 Over the years, the Company has built significant capabilities in the
 manufacture of defence equipment, primarily for the Indian Navy and the
 Army. These capabilities have been built internally as well as in
 combination with foreign technology providers.  The Company''s new
 shipbuilding facility at Kattupalli, built primarily for defence
 warships has, however, seen significant under-utilisation due to
 non-involvement of the private sector in defence equipment
 manufacturing in any meaningful manner.  The new Government has taken
 substantial steps to involve the private sector in defence equipment
 manufacturing and this is at the heart of its ''Make in India''
 initiative. Your Company now sees opportunities in this sector that it
 can tap. The bids for some major naval craft and artillery guns have
 been submitted.
 6) Heavy Engineering
 This segment has been adversely affected by the global shrinkage in
 ordering of Hydrocarbon equipment, arising out of a decline in oil
 prices as well as the contraction of investments in Coal Gasifiers and
 Nuclear Power plants. The new steel-making and heavy forgings facility
 at Hazira (Gujarat) remains heavily under- utilised. We are, however,
 seeing a revival in the building of new nuclear power plants over the
 next year or so.
 7) Metallurgical & Material Handling
 Investments in the metals space in India have been severely affected by
 the Supreme Court ban on iron ore mining in the States of Karnataka,
 Goa and Odisha over the last few years.  This had led to a significant
 depletion of the Order Book of this segment. Lifting of the ban in some
 select areas and for captive steel producers has now led to an uptick
 in investments for capacity addition in the ferrous metals sector. The
 business has recently bagged a few orders which is expected to improve
 revenue streams in FY16.
 The Material Handling business has also been adversely affected by
 lacklustre Industrial capex for a prolonged period. Outlook for this
 business is expected to improve once Industrial capex picks up.
 8) Electrical & Automation (E&A)
 The Electrical and Automation business continues to maintain its
 leadership position in LV switchgear. During the course of 2014- 15,
 E&A has increased its operating margin and also improved its market
 share in the domestic market. Product Development in both LV and MV
 switchgear continues to forge ahead and the business continues to be at
 the forefront of technology through the launch of its in-house designed
 products. With the slowdown in the Oil & Gas market, the Business has
 enhanced its focus towards the Infrastructure sector by increasing the
 offering of dedicated products specifically designed to meet the needs
 of the Infrastructure sector market.
 9) Realty
 This business, which was recently started by L&T, continues to grow in
 terms of revenue and profits. The business develops and sells real
 estate, either by developing its own land parcels or through Joint
 Ventures with select real estate developers.  The business is likely to
 further expand in Mumbai as well as in Chennai and Bengaluru during
 2015-16. During 2014-15, the Group level revenues of this business
 stood at V 1,929 crores, which represents an increase of 45% over the
 revenues of the Previous Year. EBITDA for FY15 at V 1,065 crores
 registered an increase of 41% over the EBITDA of the Previous Year,
 thus making a meaningful contribution to the Company''s overall
 10) Information Technology and Technology Services (IT&TS)
 The IT&TS business has been growing steadily and revenues clocked in at
 V 7,659 crores in FY15, representing a 19% growth over the Previous
 Year. The business is focusing on increasing its presence in the
 Americas, Europe, Gulf countries and the Far East.  We intend to unlock
 the value of the Business. We are evaluating various options, subject
 to various factors, to discover the value of this business.
 11) Financial Services
 This business was listed in 2011 and continues to expand. It had a loan
 book of over V 47,000 crores at the end of FY15 and its Assets Under
 Management have grown to over V 21,000 crores.  The business has
 successfully integrated its earlier acquisitions in the Mutual Funds
 and Housing Finance areas and has a positive growth outlook for FY16
 12) Developmental Projects
 During FY15, L&T IDPL, an intermediate holding company with step-down
 subsidiaries (Special Purpose Vehicles) primarily developing
 transportation infrastructure, received a V 1,000 crores capital
 infusion from a large Canadian Pension Fund and the second tranche of
 equal amount is expected to be received in December 2015. The
 Developmental Projects business has profitably monetized its stake in
 Dhamra Port. Such value monetisation initiatives have reduced the
 dependency on your Company''s balance sheet. The construction of the
 Hyderabad Metro is progressing in full swing and the project is
 expected to become a showcased ''Transit Oriented Development'' model
 when operational. The slowdown in the economy in the past few years has
 adversely affected revenues and profitability of several PPP
 infrastructure projects in the country and your Company has been making
 concerted efforts to find solutions to the challenges faced in this
 space. It will continue to monetize mature assets from time-to-time and
 may selectively bid for value-accretive projects in the roads and
 transmission line businesses.
 Nabha Power Limited which houses investments in a 2x700 MW coal fired
 power plant in Rajpura, Punjab is also part of the business portfolio
 and the plant went fully operational in FY15. The operations are
 expected to stabilise in FY16 and your Company will look for selective
 value monetisation as and when the opportunity arises.
 In conclusion, I would like to thank my fellow Board Members, L&T-ites,
 customers, vendors and other stakeholders who have collectively enabled
 sustainable and profitable growth in business year after year.
 Thank You
 A. M. Naik
 Group Executive Chairman
Source : Dion Global Solutions Limited
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