Heavy engineering and construction major Larsen & Toubro expects government spend on infra development to pick up soon. R Shankar Raman, CFO, L&T in an interview with CNBC-TV18 said that the company is getting good orders from civil construction space.
Meanwhile, the company which posted 13% rise in profit in December quarter said, it has an order backlog of Rs 1,62,334 crore as on Dec 31, 2012, of which international order book constituted 13 per cent.
Did you read: L&T gets orders worth Rs 1,401 crore
Despite the sector being exposed to multiple challenges like inflation and tight liquidity, the recent policy measures will revive investment sentiment in sectors in wihhc the company operates, believes Raman.
The firm has played down the impact of losing some orders following GMR Infra and GVK walking out of two road projects last month, saying that its order pipeline will not be much impacted
Here is the edited transcript of the interview on CNBC-TV18.
Q: Let me talk about your margin which was the only wrinkle in your results. It declined to 9.6 percent and there has been a suggestion that it is because your business mix is getting a bit more skewed towards lower margin businesses like real estate, construction and even Middle Eastern orders. Can you clarify on that aspect and whether margins are expected to remain sticky?
A: We have been fielding this query for quite some time now. Considering that we are in project business and we have our accounting conventions where we recognize margins only when projects reach certain threshold levels, it is quite possible that on a quarter to quarter basis you could see some amount of volatility in this margin recognition.
It is largely to do with the mix of jobs which release margins into the system as compared to the jobs which do not release margins because they have not reached the required threshold. So far as the kind of orders that we are procuring from the market, let me clarify that these are not margin dilutive orders that we are picking up.
Obviously, we get busy only when the investors or the sponsors of the project put their projects up. We find in the last two-three quarters, there has been a lot of investment activity around the civil construction area. Consequently, we see the mix going more towards civil construction jobs rather than the hydrocarbon or the traditional power. However, let me assure you that these are not margin dilutive, they are at par with our threshold margins.
Having said that, I do concede that there is a lot of capacity available in the market. Opportunities are limited so there is competition for the jobs that come up. We do see and experience pricing pressures undoubtedly and one of the reasons why we did guide the market at the beginning of the year was because the margins could be lower than the ones reported in the previous year. It was largely recognizing the fact that there could be pricing pressure and inflation has not yet receded completely.
We are going to have an issue of margins getting sandwiched. It is a classic management call between remaining busy and keeping capacity going in contrast to paying a certain price to margins and we are in no different situation.
Q: Just a few weeks back there was a lot of intense scrutiny about a couple of large orders which Larsen and Toubro (L&T) had, GMR Infrastructure etc which might get cancelled. While your order inflow of Rs 19,500 crore was very well received by the market the fear is that may be those are coming with a higher proportion of what the market calls slow moving orders. Do you see that as a possibility?
A: If you seek in contractual terms the kind of orders that we are picking up are faster cycle jobs as compared to may be a power sector order. We did clarify in the press conference post our quarterly results that we have taken note of the correspondence between the concessioner over our customers and the government with respect to couple of road projects. Unless we hear from them directly on cancellation or termination of the contract we cannot prematurely recognize that.
Fortunately for us, Rs 162000 crore worth of order backlog does give us some headroom to accommodate should some of these turn slow moving. That brings me to the whole point about the need to take stock of several projects in several sectors not only to L&T but to the sector as a whole which require some pushing and hopefully the cabinet investment committee and their initiatives should possibly provide some momentum to these orders and derisk the fear about the order book getting slower.
Q: The problem here is what people expect to see through the course of the year and given historical experience with how difficult it can get for capital goods and infrastructure companies, the last six months are expected to see a big slump in terms of government ordering because they get into election mode and you are now increasing exposure overseas, which as you pointed out is a low margin business. Are you getting the sense that capital goods companies could be hitting that tough phase again where both revenues do not move, margins start slumping and business generally slows down considerably?
A: On the contrary, I am hopeful as compared to the situation we saw last year. The government’s push towards getting back on track, the RBI’s move to aid the government in this process, all of them should see projects moving faster.
Of course this is the optimistic side of me speaking but, if you objectively look at the situation, the momentum in international order flow is definitely brisk. Momentum to hydrocarbon ordering in domestic market is improving. Of course, power and transportation infrastructure, particularly the roads would require some amount of attention to detail to make sure they get back on momentum. Urban infrastructure is doing well, state governments are investing in both water and power transmission distribution.
So the fact that we are a fairly diversified engineering play gives us that comfort to toggle between sectors which are moving ahead in terms of brisker momentum and sectors which are not that brisk. I do not see or share your concern that we are going to see squeeze all round, slow moving orders, revenue dropping off, margins dropping off. I think companies like us are working overtime to make sure that we are pulling at all efficiency levers that are at our comment to make sure that we get the best of opportunities that are presented to us. Having got them, we execute within cost and time to accrue the margins that are embedded in these jobs.
It is not all that difficult scenario. It is challenging, but I think companies like us will have the strength to withstand these tough times and see through. I see slight lift up from the trough of last year as compared to your assessment. Perhaps, it could hit a new low.
Q: While I am not making comparisons, there are some disturbing reports coming from your public sector undertaking (PSU) peer Bharat Heavy Electrical Ltd (BHEL) such that they have had to hold back deliveries because payments are not coming through, are you facing any such challenge in the domestic space in terms of a choke-up at the other end or final delivery?
A: Power is definitely a unique situation. I think fortunately, as compared to BHEL, power is only one portion of the portfolio that we do as an engineering and construction (E&C) company. Consequently, I think the situations are slightly different.
So far as power is concerned, I think the fact that we do not have the kind of order book that BHEL has, puts us in a position of relatively less discomfort if I can call that. Having said that, in terms of the rest of the sectors, working capital has moved up for the company, not because of defaults but because of inherently better credit terms that the clients tend to negotiate in times such as these.
Liquidity has been at a premium as you know. Consequently, the clients are not as comfortable as they were three-four years ago in up-fronting the payments. So, they do prefer a certain staggered payment schedule.