avy 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.
in the last two-three quarters, there has been a lot of investment activity around the civil construction area.
R Shankar Raman
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.
Larsen stock price
On July 30, 2015, Larsen and Toubro closed at Rs 1776.15, down Rs 13.5, or 0.75 percent. The 52-week high of the share was Rs 1892.95 and the 52-week low was Rs 1400.00.
The company's trailing 12-month (TTM) EPS was at Rs 54.35 per share as per the quarter ended March 2015. The stock's price-to-earnings (P/E) ratio was 32.68. The latest book value of the company is Rs 415.99 per share. At current value, the price-to-book value of the company is 4.27.
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