L&T may hike contract rates if cost pressures continue

Excerpts from CNBC-TV18’s exclusive interview with YM Deosthalee:

Q: The inflation number has jumped to unmanageable or a distressful 7.83%. How does that impact your working, the capital goods industry and the order flow from India Inc?

A: As far as the order flow is concerned, a company like L&T does not really depend on the immediate past. The expansion plans of the industries we cater to are decided years in advance.

For example-we work for the hydrocarbon sector and the expansion plans of this particular industry/sector upstream, midstream and downstream are planned long ago.

I don’t think anybody defers this kind of investment because of increases in prices. Typically, if the inflation is largely in the material cost, then to an extent, it has an impact on the margins of some of the entities, which are doing projects in this sector.

However, companies will have to look at various ways of managing this situation if the prices go up. They have gone up, for example, steel prices have gone up as well as prices of other commodities. But commodities haven’t gone up so much.

Steel has particularly gone up. One has to adopt different tactics i.e. we have to ask for escalation. We are also doing a lot of projects on cost plus basis and have made a review recently. As things stand today, we do not expect any major impact arising out of inflation or cost increases.

But if it goes unabated in the months to come, there will be some impact. If the investment decisions get delayed or impacted in some sectors there may be a marginal impact.

But we work for hydrocarbon, power and infrastructure. In all these three sectors, we don’t expect any impact arising out of this.  

Q: Talking about the commodities segment, you have just stepped out of cement. How do you view prices moving from here because that is also a key commodity, which has come under the government scanner for price controls?

A: Prices will not go up from here and there will be stability if not reduction in prices of some commodities, particularly steel and cement, in the next few months. The increase that has taken place in steel prices is unprecedented and there has to be some correction in that.  

We expect that prices will come down somewhat in case of both steel and cement. But we don’t think prices will come down by 20-25%. There will be some marginal reduction in prices.

Q: In the hydro carbon and power sector, where you have a bulk of your orders coming in, you haven’t yet seen a slowdown and may not see it soon. But since you are in the thick of India Inc., are you getting a feeling that people have started deferring projects or trimming their size in any way. If the policy makers are forced to push up interest rates even further, to tackle this inflation, do you see any dangers to the pace of growth?

A: As a result of inflation, if the regulators decide to push up interest rates, the impact will definitely be there. But that impact will be largely in the areas where consumer goods are involved, like housing or automobiles.

In those sectors, there is an impact already and there will be a further impact if that happens. But I do not believe that if interest rates go up by 0.5%, some of the long-term projects that people are making investment in like oil and gas or generating more power, will get delayed or deferred. That is unlikely and if people have already planned capacity expansion in steel or some other industries, I do not think there will be an impact on those industries.

The impact will be there in retail or industries that cater to individual segments.

We are not really sensing a slowdown in the areas in which we are operating predominantly. But there is some amount of slowdown in industries such as commercial vehicles or some electrical equipment. However, we have to watch the next few months to draw any conclusion on this. But in housing and real estate, we have seen some slowdown but definitely not in the main areas in which we operate.

Q: How do you forecast FY09 in terms of an earnings performance for corporate India, given the concerns that we are dealing with right now? Do you think it is largely going to be a pain with some recovery starting only in FY10?  

A: In terms of corporate India, there will definitely be earnings pressure. I expect the overall topline growth to be in the range of 15-20% in the year 2009. In some sectors, there will be contraction in margins by a couple of percentage points.

However, a lot depends on what is going to happen on the inflation front and when we see some correction in this. If that happens and if they are able to manage the situation better, we will see some relief for the industry. But there may be some impact both in terms of topline and bottomline sectorally.