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Larsen and Toubro
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« Mar 13
Chairman's Speech (Larsen and Toubro) Year : Mar '14
Dear Shareholders,
 
 In May 2014, the country rang in a decisive mandate for change.  It is
 now up to the new political dispensation to deliver on its agenda and
 accelerate the process of renewed growth. It would need to act
 decisively on a number of reform measures that will drive development,
 including reducing subsidies, streamlining approval processes,
 professionalising the public sector and privatising natural resources
 under a transparent and stable policy regime.
 
 Looking back, fiscal 2013-14 continued to witness the constraints that
 have hampered the economy in the last couple of years.  GDP growth last
 year was lacklustre at 4.7% and Fiscal Deficit continued to be high.
 Feeble industrial production for the third
 
 straight year, meant that FY14 ended in negative growth. New
 investments, particularly in the private sector were muted as many
 projects remained mired in uncertainty. While the Government managed to
 contain Fiscal Deficit within budgeted numbers by cutting back on
 expenditure, the burden from the triad of subsidies continued unabated.
 
 On the positive side, the Current Account Deficit was narrowed down
 through a restriction on gold imports, aided by stagnant imports of
 petroleum products as well as capital goods thanks to the industrial
 slowdown. Wholesale inflation also contracted, leading to a benign
 commodity pricing environment. There was intermittent progress in key
 reforms such as expediting and streamlining approval processes, SEB
 regulations, diesel/LPG price hikes, and establishing policy certainty
 in areas such as power purchase tariffs and toll-based highway
 concessions.
 
 In the international arena, FY14 was marked by encouraging developments
 such as a booming infrastructure sector in the Middle East, with a
 number of landmark projects in transportation and power transmission &
 distribution being ordered, and other multi-year opportunities in the
 pipeline. The Hydrocarbon sector in the region also continues to be
 vibrant, and attracts a large number of global E&C companies, giving
 rise to stiff competition.
 
 Performance Overview
 
 Against the backdrop of this challenging environment, your Company has
 turned in a commendable performance on most key performance parameters.
 
 Order Inflows, which are the mainstay of any company engaged
 predominantly in Engineering & Construction business, clocked in at ?
 94,108 Cr., representing a robust 15% growth over the previous year.
 The unexecuted Order Book at the year-end stands at ? 162,952 Cr., thus
 providing a healthy revenue and margin visibility over the next few
 years. Despite severe execution challenges in the domestic market, your
 Company managed to keep project execution largely on track, and helped
 by robust growth in overseas revenues, registered a 10% growth in Gross
 Revenues at ? 57,164 Cr. Profit after Tax registered ? 5,493 Cr which
 translates to a growth of 25% over the previous year on a like-to-like
 basis.
 
 At the Group level, Gross Revenues displayed a growth of 14% and stood
 at ? 85,889 Cr for the year under review. PAT, at ? 4,902 Cr represents
 a decline of 6% over the previous year, caused by capacity
 underutilisation in two new subsidiaries, viz.  L&T Shipbuilding Ltd.
 and L&T Special Steels & Heavy Forgings Pvt. Ltd, as well as execution
 challenges faced in the Hydrocarbon business.
 
 It gives me pleasure to announce that your Company has recommended
 dividend of ? 14.25 per equity share on a face value of ? 2 per share
 for the year. The corresponding dividend during the previous fiscal was
 at ? 12.33 per equity share.
 
 Internationalisation
 
 Your Company is moving decisively towards consolidating its
 nternational operations through a replication in the Middle East of its
 domestic structure and systems. While the prime focus is the Gulf
 Cooperation Council countries, the international outreach also extends
 to South East Asia, CIS, and select African nations.  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.
 International Order Inflows represent 33% of the total inflows during
 the year under review, and showcase remarkable success in winning major
 new orders in the infrastructure sector.
 
 Talent Management
 
 In an age of increasing technological parity, high calibre talent, with
 the requisite training and exposure creates a key differentiator
 between companies and represents a competitive edge. Your company
 therefore places continuing emphasis on identification and induction of
 talent at various levels and across multiple functions. Systems are in
 place to ensure that a multi- cultural leadership team is rapidly
 integrated into the mainstream and embedded with the values, ethos and
 philosophy of L&T.
 
 We recognise that the career preferences of the youth today are biased
 towards jobs in the new economy, making the task of attracting and
 retaining young talent more difficult. As a counter- weight, your
 company promotes and projects the opportunity of working on critical
 projects that would make a tangible difference to nation, society and
 community.
 
 Sustainable Development
 
 Inclusive growth that takes into account the interests of all
 stakeholders is at the heart of your Company’s value system. These
 values have helped us empower communities and accelerate their
 development. Right from inception, we have been involved in community
 engagement programmes ranging from health, education to skill building.
 The Company’s contribution to CSR has been widely recognized. Early in
 2014, L&T received the prestigious The Economic Times ‘Corporate
 Citizen of the Year – 2013’ award.
 
 The mandatory spending of 2% of profits on CSR initiatives under the
 newly introduced provisions of the Companies Act, 2013, is in line with
 L&T’s policy on CSR. We are also using this window of opportunity to
 extend our social and environmental outreach. A CSR committee with
 Board-level representation has been constituted to drive projects
 across the organization in a more robust manner. We have also expanded
 the sustainability organizational structure and formulated a
 Sustainability & Corporate Social Responsibility (SCSR) team.
 
 Thrust areas on the sustainability front include augmenting efforts at
 energy conservation, climate change, water conservation and material
 management.
 
 Outlook
 
 Despite the continuing slowdown, the macro environment has shown early
 signs of recovery, and with the dawn of a stable government, promises
 to improve gradually during FY15. Your Company has identified specific
 opportunities for growth within India and internationally, which it is
 targeting effectively.  Segments that hold promise in FY15 include –
 
 1) Infrastructure –
 
 a) Roads – This segment is expected to pick up in FY15 through ordering
 of more than 2,300 km of new projects on Engineering, Procurement &
 Construction (EPC) mode, and 3,000 km in PPP mode.  Apart from this,
 there are several upcoming opportunities in building Expressways and
 Elevated Corridors. Being the distinct leader in the segment, we will
 selectively participate in these EPC bids where the prospects meet our
 internal viability benchmarks.  We will also continue to target
 upcoming road projects in the Gulf countries, where we have had
 significant order wins during FY14.
 
 b) Metro and Mono Rails – The Company has been involved in the
 execution of metro rail projects in cities across the country and in
 India’s first monorail in Mumbai (Phase I commissioned in FY14). This
 enables the Company to exploit opportunities to secure contracts in
 India, where multiple cities are initiating metro rail projects. We
 have also won two major, prestigious contracts in the Middle East, for
 Riyadh and Doha Metro projects during FY14, contributing significantly
 to the order inflow growth during the year. We are participating in
 bidding for further such prospects in the region.
 
 c) Railways Business – The thrust on strengthening the rail network
 across the country holds good prospects for our Railways business. We
 have already secured an initial order in consortium with a Japanese
 company for a major section of the Dedicated Freight Corridor, and are
 bidding for more packages. We are also exploring international markets,
 especially the Gulf countries where several projects are coming up.
 
 d) Water & Renewable Energy – The sector has seen a strong growth in
 investments over the last two years, with growing focus from the
 Government sector in improving access to water and preventing pollution
 of its sources. In FY14, your Company has been able to achieve
 significant order inflow growth in this segment, backed by strong
 project execution capabilities and operational excellence. With a
 healthy Order Backlog and growing order prospects, the business from
 these sectors is expected to see an upswing in FY15.
 
 e) Urban Infrastructure – Opportunities in residential buildings,
 office space, hospitals, hotels, educational institutions, shopping
 complexes and factories continue to provide a large canvas of business
 potential. Your Company has become the EPC contractor of choice for
 major developers and this is driving profitable growth. Projects in
 Mass and Affordable Housing, Healthcare and Educational Institutions
 hold additional promise in FY15.
 
 f) Airports – Increasing passenger and cargo traffic over the last
 decade has sustained growth in aviation industry. The Government plans
 to modernise a number of Tier II City airports and build a few
 Greenfield airports as well. Similarly, a number of nations in the
 Asian region are modernising and expanding their airport
 infrastructure. On the back of our excellent track record in this
 sector, we are well-positioned for airport projects within and outside
 India.
 
 2) Heavy Engineering & Shipbuilding -
 
 We have the capability to meet the requirements for high technology
 critical equipment and systems. In the process plant equipment segment,
 the international market looks promising in the medium term. The
 domestic nuclear segment is expected to see ordering activity in FY15.
 However, the setback that the international nuclear power sector
 experienced with the natural disaster at Fukushima, Japan, will
 continue to affect demand in this segment, and impinge on volumes in
 our new forging unit.
 
 During the last few years, the defence sector had been adversely
 impacted by a slow pace of decision making resulting in deferral of
 contract awards. However, recent initiatives to involve the private
 sector in defence equipment manufacturing and the stated intentions of
 the present stable political establishment augur well for your Company.
 
 The shipyard at Kattupalli, which was commissioned in FY13, is capable
 of building warships, submarines and specialized commercial ships. It
 is equipped with a state-of-the-art ship-lift that enables it to
 undertake simultaneous new build, repair & refits. While the global
 commercial shipbuilding trend remains subdued, we envisage that the
 Indian defence sector is likely to open up and provide opportunities
 for building defence ships.
 
 Apart from this, we are looking at addressing the growing demand for
 specialised ships such as LNG and Ethane carriers, and Chemical tankers
 through technical collaborations. We are also looking to leverage our
 position in the hydrocarbon sector by developing semi-submersible rigs
 and floating LNG platforms, opportunities emerging from oil & gas
 exploration and production in deep offshore fields.
 
 3) Hydrocarbon –
 
 On the domestic front, Exploration & Production (E&P) spends in
 upstream hydrocarbon segment are expected to sustain during FY15. The
 decision to move towards market driven pricing in both Diesel and
 Natural Gas is expected to spur upstream capex.  Opportunities in LNG
 regasification terminals and integrated refinery and petrochemical
 projects should open up in the year ahead. Implementation of
 re-development projects should provide a fillip to the onshore gas
 processing segment. Investments are also expected in cross-country
 pipeline projects.
 
 In the upstream sector, the Company’s capabilities extend to the
 repair, rebuild and construction of new Jack-up Rigs and FPSO topsides.
 The business is well placed to leverage its multi- locational Modular
 Fabrication Facilities to respond to global trends towards
 modularization of onshore gas processing plants.
 
 Several large and prestigious international orders have bolstered our
 presence in select geographies. We are increasingly pursuing
 opportunities overseas through alliances with the leading global EPC
 companies. This has necessitated putting in place a multi- national
 organization, with a cross-cultural team possessing local knowledge and
 domain expertise.
 
 The Company has transferred its Hydrocarbon Business to a wholly owned
 subsidiary in FY14, to enable greater autonomy and formulation of HR
 policies in line with industry practices so as to attract the best
 talent.
 
 4) Thermal Power -
 
 Policy paralysis, negative market sentiments and procedural bottlenecks
 have adversely affected the domestic Power sector in the last couple of
 years. Pressing concerns with respect to land, fuel, financing and
 statutory approvals have shrunk the order pipeline, putting pressure on
 the Company’s capacity utilization.
 
 Some welcome steps such as raising distribution tariffs, imposing
 anti-dumping duties on imported equipment, and fast tracking of Fuel
 Supply Agreements and other clearances have been taken.  However, in
 view of the large backlog of projects which are stuck due to various
 constraints, revival in the sector is still some time away.
 
 Under the circumstances, we are doing our best to be competitive
 through cost reduction, design optimisation and smart sourcing.
 
 We are also placing emphasis on expanding our spectrum of services to
 select Gulf countries and the Southeast Asia for gas based power
 plants, and have recently achieved breakthrough orders in Bangladesh.
 
 5) Power Transmission & Distribution -
 
 Government policies lay stress on investments in strengthening the
 power grid and the power distribution system through central and
 multilateral funding agencies. We have demonstrated a steady growth in
 order book position in domestic and international markets.
 
 The emphasis on strengthening of transmission grids in Gulf countries
 will continue to provide significant business opportunities for power
 transmission and distribution business in the coming years.
 
 6) Metallurgical and Material Handling -
 
 The outlook in this area continues to be challenging, due to a myriad
 factors including sector slowdown, mining bans imposed by the
 judiciary, prevailing complexities of policies governing mining, land
 acquisition as well as the dearth of new investments. Efforts are
 underway to resolve these issues through various government proposals,
 legislations and policies. As the economy grows, demand for metals
 particularly steel, aluminium and copper will necessitate expansion of
 capacity. We are well positioned to benefit from the confidence we
 enjoy because of our track record and timely completion of projects.
 Material Handling prospects in areas of steel, mines, power, ports and
 long distance conveyors for bulk ores are likely to grow in line with
 economic growth.
 
 7) Electrical & Automation -
 
 The Electrical & Automation business continues to maintain its
 leadership position in LV Switchgear. It has also made a mark in the MV
 segment through an acquisition of an international company a few years
 ago. Product development in both LV and MV Switchgear continues to
 forge ahead. The project business has enhanced its focus on
 international markets. The coming year should see an upward momentum.
 The Company has also acquired three companies which will bridge
 technology gaps in one case, enhance product range in the second and
 augment market reach through the third.
 
 8) Machinery & Industrial Products -
 
 The Construction Machinery business was able to register flattish
 growth despite shrinkage in construction equipment market and entry of
 new competitors. Your Company acquired the stake of the JV partner
 Komatsu in Construction Machinery business.
 
 The Company also acquired the stake of JV partner Flowserve in the
 Valves business. The reported revenues in Valves and Cutting Tools
 businesses were lower for the Standalone entity, as the businesses were
 transferred to subsidiaries during FY14. However, the Valves business
 as a whole continued to grow due to Oil & Gas and Power sector
 investments in India and overseas. Fresh infusion of investment in
 these sectors in the US, the Middle East and other countries is
 expanding the potential for our international operations.
 
 9) Realty –
 
 L&T has recently started realty business by using its own land parcels
 and in joint ventures with other developers and this has already
 started yielding good results. 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.
 
 10) Information Technology & Integrated Engineering Services Business -
 
 In USD terms, L&T Infotech, a wholly owned subsidiary, grew at 18%
 Y-o-Y on a consolidated, like-to-like basis. Profit after Tax grew by
 4%, due to the impact of prior period adjustment.  L&T Infotech has
 embarked on building a strong sales and marketing team globally with
 emphasis on the Americas,
 
 Europe, Gulf countries and the Far East. The Company has also
 undertaken certain major initiatives intended to enhance the
 visibility, profile and sharpen its distinction through the
 differentiated solutions it offers in multiple domains.
 
 Technology Services, a Strategic Business Unit of L&T, is being formed
 into a subsidiary. This will result in consolidation of all engineering
 services business of L&T and L&T Infotech. This subsidiary will provide
 autonomous functioning in line with ndustry practices.
 
 11) Financial Services -
 
 This business, which was listed in 2011, continues to grow profitably
 with a loan book in excess of Rs 40,000 Cr at the end of FY14. Net
 Interest Margins at 5.5% reflect the healthy interest spreads that the
 business earns. The business has successfully concluded acquisitions in
 mutual funds business and housing finance.
 
 12) Developmental Projects -
 
 Development projects undertaken by the Company in roads, ports, metro
 rail and power continue to progress satisfactorily, with some of these
 projects currently operational. The Company has opened up alternate
 funding lines to enable commissioning of the upcoming projects and
 reduce dependencies on your Company’s balance sheet, and advanced on
 monetising the value of matured assets
 
 Before I conclude, I would like to extend my thanks to Team L&T,
 Government, customers, vendors and other stakeholders, without whom our
 continued growth momentum would not have been possible. I would also
 like to thank my fellow Board Members for their unstinted support and
 encouragement.
 
 Thank You
 
 A. M. Naik
 
 Group Executive Chairman
 
 Mumbai, May 30, 2014
Source : Dion Global Solutions Limited
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