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Larsen and Toubro (L&T), India's largest engineering and construction company, said it is yet to see any meaningful increase in order inflow from private sector, where profit margins tend to be higher and contracts are more flexible than government orders.
“It's predominantly government driven story right now. Government is the biggest spender on infrastructure as well as other social spending. We see some offshoots of private sector in minerals and metals space, but it's too early to comment on it,” said SN Subrahmanyan, Chief Executive Officer and Managing Director of L&T.
Subrahmanyan added that it could take another two years for the private sector orders to come back.
L&T said it had to prune its order book by Rs 16,000 crore as some developers in real estate faced liquidity issues. This was the second tranche of order book cleansing by the company in FY18.
Out of Rs 1.18 trillion domestic orders bagged by the company in FY18, around 70 percent was from government and the rest was from private sector. It expects similar pattern to continue in FY19 as well.
The capex cycle in India peaked in FY13 when share of private sector stood at a high of 60 percent of total projects under implementation.
Since then the share of the private sector has been declining and is now down to 30 percent as the sector is besieged with twin balance sheet problems, over supply and market related problems.
Twin balance sheet problem refers to the stress on balance sheets of banks due to bad loans on the one hand, and heavily indebted corporates on the other.
Meanwhile, the government has stepped up infrastructure spending to offset the decline in private spending.
The government raised spending on infrastructure by one trillion rupees to Rs 5.97 trillion in FY19 as it expands affordable housing, rail, roads and ports.
But the problem with government orders is that they come at extremely competitive rates and companies have to execute the projects at wafer thin margins.
“The ability of the company to keep its pencils sharp, to be competitive, because the minute it is government, it is L1 (lowest bidder) basically. In private sector you have the opportunity to sit across and negotiate, and drive the negotiation. So to that extent the dynamics have changed,” said R Shankar Raman, Chief Financial Officer, Larsen and Toubro (L&T).
L&T management said it pins its hopes on the Insolvency and Bankruptcy Code or IBC - that's aimed at reviving of stressed businesses through targeted resolution of "twin balance sheet" problems and facilitating increased credit lines to kick start private sector capex.
L&T on Monday reported a 4.6 percent year-on-year (YoY) rise in March quarter consolidated profit at Rs 3,167 crore, beating estimates.
The net profit in the same quarter of previous year stood at Rs 3,025 crore.
Revenues grew 11 percent YoY to Rs 40,678 crore in Q4FY18 from Rs 36,828 crore.
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