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Larsen & Toubro

BSE: 500510|NSE: LT|ISIN: INE018A01030|SECTOR: Infrastructure - General
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Mar 15
Chairman's Speech (Larsen & Toubro) Year : Mar '16
Dear Shareholders,
 
 The year 2015-16 saw the Indian economy charting a measured course
 towards objectives set out by the Government two years ago. While
 investment momentum is still muted in some sectors, the positives to
 have emerged are the incremental but important steps taken by the
 Government in fiscal correction, inflation containment, subsidy
 reduction, efforts to reinvigorate tax administration and a thrust on
 increased investment in key infrastructure sectors. Private sector and
 industrial capex, however, remains subdued on account of paucity of
 funds in the private sector.
 
 The global scenario offers less cause for cheer. The world economy
 encountered challenges at many levels last year. These include
 significant volatility, Eurozone instability, depression in crude oil
 and commodity prices, currency depreciation in emerging markets, and a
 lingering slowdown in China. India''s GDP growth - 7.6% as compared to
 7.2% in the previous year - and reduced fiscal deficit of 3.9% sends
 out encouraging signals for the future.
 
 I believe that the forthcoming year holds promise of improvement as far
 as investment momentum is concerned. The Government''s focus on a slew
 of recent initiatives places your company in a favourable position.
 Our capabilities in high-tech design and manufacture are unmatched in
 industry. This enables us to extend the ''Make in India'' theme to the
 upper end of the technological spectrum, as well as to the strategic
 sectors of defence, nuclear power and aerospace. Our three-decade long
 association with national defence organisations ensures that we have
 the credentials to partner with them in the design and manufacture of
 defence equipment. We also possess in-house capabilities to design,
 equip and build the habitats of the future - Smart Cities.
 
 Performance Overview
 
 While new order acquisitions have been muted due to your Company''s
 focus on disciplined bidding on infrastructure projects, the financial
 performance, as a whole, has been encouraging and has been lauded by
 Capital Markets.  Order Inflows, which are the mainstay of your
 Company''s dominance in the project business, clocked in at Rs. 136,858
 crores at the Group level, which represents a decline of 12% over the
 corresponding inflows of the Previous Year. The muted inflows were the
 outcome of increased competitive price pressures in the power
 generation and hydrocarbon sectors.
 
 The unexecuted Order Book stood at an all-time high of Rs. 249,949
 crores and represents a 7% growth over the Order Book at the end of the
 Previous Year. This robust Order Book position provides your Company
 with multi- year forward visibility on Revenues and Margins. The
 Company grew revenues in 2015-16 to Rs. 102,632 crores, despite
 challenges faced in project execution in the form of delayed clearances
 and tardy progress payments from customers. This represents a 12%
 growth over revenues in the Previous Year. Losses incurred on
 Hydrocarbon projects in 2014-15 were largely avoided in 2015-16 and
 Profits after Tax at the Group level grew to Rs. 5,091 crores
 representing a growth of 7% over the corresponding Profit in 2014-15.
 
 It gives me pleasure to announce that your Company has recommended a
 Dividend of Rs. 18.25 per equity share on a face value of Rs. 2 per
 share for the year. The corresponding dividend during the previous
 fiscal was at Rs. 16.25 per equity share.
 
 Internationalisation
 
 GCC countries, our staple international markets, are experiencing
 fiscal stress due to low oil prices, and opportunities in the
 hydrocarbon space have been reduced. Core infrastructure such as power
 transmission & distribution, hospitals, urban infrastructure, roads and
 rail networks, however, continue to see investment and these areas have
 yielded significant order wins for us. We are also focusing on select
 countries in Africa and some parts of South East Asia. We believe that
 the opportunity basket that is likely to be provided to us in
 international markets will still be sufficiently large enough to enable
 a healthy, geographically-diversified revenue mix. The unexecuted Order
 Book from international markets stood at over Rs. 70,000 crores, which
 translates to 28% of the total Order Book.  This largely comprises
 orders from diverse infrastructure areas such as metro rail, power
 transmission & distribution, road & expressways and hydrocarbon
 sectors.
 
 Going Digital at L&T
 
 Larsen & Toubro is implementing solutions using digital technologies to
 make quantum improvements in all key areas of work. A major step in
 this direction has been the setting up of a Digital Group which will
 ideate, initiate and implement solutions to deliver results to the
 business.
 
 The areas where solutions are being developed and deployed are Tracking
 and Monitoring performance on all equipment deployed at construction
 sites by installing sensors and gateways; improving productivity and
 safety of workmen through tracking and tagging; optimising logistics
 and material consumption through GPS and RFID; project monitoring &
 control through data and visuals captured in real-time, and use of
 modern geospatial technologies including LiDAR and UAVs for surveys.
 
 Another key area is Analytics that will pull in the data from all these
 initiatives into an Analytics engine to deliver trends, actionable
 insights and forecast scenarios for proactive and corrective action.
 
 As technologies and business processes evolve, the group will continue
 to develop breakthrough solutions and evangelize the digital
 transformation.
 
 Talent Management
 
 Your Company views its people as the cornerstone of business and its
 Human Resources policy is geared towards developing individuals along
 with the organisation. The Company has a 7-step leadership development
 program which aims to build a leadership pipeline at various levels of
 management.
 
 Sustainable Development
 
 Your Company is committed to conserving natural resources and enhancing
 social equity to achieve sustainable progress, while creating value for
 stakeholders.  Significant initiatives have been undertaken in the
 areas of climate change and water conservation. Your Company''s
 sustainability performance in energy conservation and carbon emission
 intensity reduction was showcased in the UN - Paris Climate Change
 Summit 2015. The Company''s campuses in different parts of the country
 are focused on becoming water-positive and zero wastewater discharge
 units.
 
 Your Company''s CSR programmes focus on health, education, skill
 development and water & sanitation interventions to contribute to a
 better quality of life for the needy.
 
 The total spends on CSR initiatives in 2015-16 by your Company amounted
 to Rs. 120 crores under eligible items as defined in the Companies Act
 which translates to 2.36% of the average annual net profits of the
 Company over the last 3 years.
 
 Outlook
 
 The thrust given by the Government on core infrastructure and ''Make in
 India'' initiatives continues to give us a healthy basket of
 opportunities to tap. Increased allocations by the Centre and States on
 infrastructure spending, higher levels of outlay by cash-rich Public
 Sector enterprises and significant funding of infrastructure projects
 by bi-lateral and multi-lateral lending agencies is propelling the
 investment momentum forward. Several upcoming projects provide us with
 a broad perspective of the opportunity horizon opening up for us in
 2016-17.
 
 Segments that hold promise in FY17 include -
 
 1) Infrastructure:
 
 a) Roads - The new political dispensation at the helm of affairs has
 kick-started investment in roads and FY16 saw a significant uptick in
 ordering of EPC road contracts by the National Highways Authority of
 India. We expect this impetus to continue and to be augmented by
 investments in specialised bridges and tunnels as well as highway
 orders in some Middle East countries.
 
 b) Railways - In FY16, your Company continued to build on its success
 in bagging orders for the Dedicated Freight Corridor program currently
 being piloted by the Indian Railways. The balance of orders in this
 program are likely to be ordered out in FY17 and your Company will
 participate in those bids as well. Some Middle East countries are also
 planning investments in conventional rail networks and your Company
 will participate in those programs as and when the opportunity arises.
 
 c) Metro Rail  Your Company has been successfully executing Metro Rail
 projects in multiple cities over the last few years. Urban development
 authorities are increasingly viewing metro rail networks as the ideal
 solution to urban traffic decongestion and our assessment is that this
 area is likely to see increased spending in FY17 and beyond, through
 the launch of new projects in a number of cities across the country.
 Execution of 2 large metro rail projects won in Saudi Arabia and Qatar
 in FY14 is progressing well.
 
 d) Urban Infrastructure  While private sector investments in Urban
 Infra have seen lower investments, particularly in residential real
 estate, your Company continues to see a healthy pipeline of prospects
 in affordable housing, hospitals, office space for IT majors and
 facilities for educational institutions.
 
 e) Smart World and Communication  Larsen & Toubro has consistently
 aligned its capabilities to national priorities. Presently, there is a
 growing need for creating Digital India and smarter, secure and
 intelligent solutions to enhance quality of life. This has led to the
 rise of smart cities, advanced security solutions and communication
 infrastructure.
 
 In response to this, L&T has integrated its range of comprehensive
 offerings in this sector to set up a dedicated Smart World &
 Communication business vertical which offers end-to-end solutions as a
 Master Systems Integrator in the areas of Security Solutions,
 Communications Network and Telecom Infrastructure and Smart
 Infrastructure. With adequate data and superior analytics, these smart
 world solutions will empower city leaders and planners to make better,
 more informed decisions, anticipate problems to resolve them
 proactively, coordinate resources to operate more effectively and
 efficiently, thereby enhancing the overall quality of life.
 
 f) Water Infrastructure  This area has seen relatively poor
 investments over the last decade and such under-investment in basic
 water management resources is leading to seasonal water shortages
 across the country. Recognising this critical need, the Government has
 increased allocations in this essential sector recently and your
 Company expects to see a surge in revenues from the increased spends.
 This will be augmented by the opening up of fresh investment avenues in
 the allied segments of Waste Water Management and Lift Irrigation
 programs.
 
 2) Thermal Power Generation:
 
 This sector has been constrained with overcapacity in the manufacturing
 of boilers and turbines, delayed environmental clearances, dearth of
 fuel availability, increased difficulty in obtaining water linkages as
 well as long-term funding. FY16, however, saw a number of projects
 being ordered which your Company could not win due to intense price
 competition. FY17 is likely to witness ordering of projects aggregating
 around 8-10 GW and your Company is hopeful of garnering a significant
 share.
 
 3) Power Transmission & Distribution:
 
 FY16 continued to see strong ordering by Central and State power
 transmission utilities as well as by countries in the Middle East. Your
 Company has secured major orders in this sector and expects the
 investment momentum to continue into FY17.
 
 4) Hydrocarbon:
 
 Low oil prices have dampened investments in oil production facilities.
 Some Government enterprises, however, continue to invest in oil
 production with a view to bolstering India''s fuel security, offering
 opportunities for your Company to leverage its EPC capabilities.
 
 With India''s commitment made in Paris on climate change, investment in
 clean fuel projects is likely to give opportunities to the Hydrocarbon
 business.
 
 We are also eyeing opportunities in the domestic fertiliser sector, as
 plants opt for capacity augmentation. On the international front, your
 Company is eyeing opportunities in gas production, processing and
 associated pipeline networks in the Middle East.
 
 5) Defence Sector:
 
 The current Government has made the most credible effort so far, to
 indigenise the manufacture of defence equipment. For L&T, with its
 long-standing association with the Ministry of Defence, extensive R&D
 and manufacturing muscle, this presents a major opportunity. We are
 participating in several bids for ships and artillery guns, among other
 programs.  Any order wins for naval vessels will help improve the
 capacity utilisation at the Kattupalli Shipyard.
 
 6) Heavy Engineering:
 
 The domino effect of the fall in crude prices has led to shrinking
 orders for oil & gas projects globally and under-utilisation of
 manufacturing facilities for hydrocarbon equipment. The integrated
 steel-making & forging facility set up to meet the needs of the
 hydrocarbon and nuclear power sectors has also been negatively
 impacted. The Civil Liability for Nuclear Damages Act has been a major
 roadblock and the same is now being resolved with the formation of a
 Rs. 1,500 crore insurance pool, thus opening up opportunities for
 establishing new nuclear power plants in the near future, for which
 your Company is well placed. This could spark a resurgence in nuclear
 power investments which would augur well for your Company''s heavy
 engineering business.
 
 7) Metallurgical & Material Handling:
 
 With global overcapacities in steel and a fall in commodity prices,
 investment in the ferrous and non-ferrous sectors in India has shrunk
 considerably.  This has adversely affected a business which is already
 impacted by underutilisation.
 
 Fortunately, the outlook is more positive. The green shoots of recovery
 in the mining sector is expected to provide a fillip to the Material
 Handling segment. The business expects to improve utilisation in
 2016-17.
 
 8) Electrical & Automation (E&A):
 
 The Electrical & Automation business has registered muted growth in
 2015-16 due to sluggish demand from the industrial, agriculture and
 building sectors.  The Company''s array of best-in-class low-voltage and
 medium-voltage products continues to provide a competitive edge,
 enabling the company to make the most of the expected revival of
 domestic demand.  During the year, your Company launched a series of
 contemporary Final Distribution products in the categories of MCBs
 (Miniature Circuit Breakers), RCCBs (Residual Current Circuit
 Breakers), Control Accessories and Distribution Boards as well as a
 full programme of Bus-bar trunking systems for modern buildings and
 Intelligent Controllers for agricultural markets. With a focus on
 operational excellence, the business expects to continue delivering
 profitable growth
 
 9) Realty:
 
 This business, which was launched by your Company a few years ago,
 continues to contribute to revenues and margins through delivery of
 superior quality projects. Projects under execution in Mumbai and Navi
 Mumbai are progressing well and a residential housing project launched
 recently in Bangalore has been received favourably by way of advance
 bookings.  The business is slated to shortly launch another project in
 Chennai as well as the second phase of its project in Powai, Mumbai.
 With a substantial land bank for development in hand, this business is
 expected to deliver steady and profitable revenues over the next few
 years.
 
 10) Information Technology and Technology Services (IT&TS):
 
 The IT&TS business vertical continues to grow and prosper and your
 Company intends to list these businesses through Public Offerings in
 2016-17. With the focus on client mining and growth seen in multiple
 verticals such as BFSI, Automotive, Aerospace, Industrial Products and
 Process Engineering sectors, the business is slated to register
 continued growth and profitability.
 
 11) Financial Services:
 
 This business, which was listed in 2011, continues to grow and had a
 loan book of over Rs. 57,000 crores at the end of FY16. The business is
 focusing on portfolio rationalisation, right-sizing of manpower, and
 improving the quality of assets in an effort to enhance Return on
 Equity.
 
 12) Development Projects:
 
 Your Company currently has a portfolio of concession assets in the
 areas of roads, power generation & transmission, and a metro rail. Most
 of these projects are operational and as such, the infrastructure
 projects portfolio is going through a major restructuring exercise for
 the Company to continue its efforts to become more asset light. The
 metro rail project in Hyderabad, which is one of the largest
 ''transit-oriented-development'' projects in the country, is progressing
 satisfactorily and is likely to be fully comissioned in FY19.
 
 13) Strategic Plans:
 
 Your Company has recently concluded deliberations on the strategy for
 the next 5 years and has finalised the contours of this plan.
 Highlights of this plan include:
 
 - Focus on execution of the large Order Book in hand, while selectively
 participating in new bids
 
 - Gearing up to tap emerging opportunities in the Defence, Railways,
 Mining, Smart Cities and Digital business
 
 - Consistently growing revenues over the plan period
 
 - Steady reduction of Net Working Capital levels
 
 - Exit from the General Insurance business
 
 - Monetisation of road, port and power assets within the plan period
 
 These steps are expected to result in improved Free Cash Flows, Profit
 after Tax and Return on Equity.
 
 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 profi table growth of the business.
 
 Thank You
 
 A.M.Naik
 
 Group Executive Chairman
Source :
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