Engineering major Larsen & Toubro Ltd is optimistic about order inflow and execution, given the momentum so far in 2022-23 and the capex-heavy budget announced by the government. Chief Financial Officer R Shankar Raman said that the momentum may continue till 2023-24, if no major disruption happens.
According to Raman, the alarming layoffs in the information technology sector are a result of the transition taking place in businesses post-pandemic. And while there is an opportunity for core sector companies to attract talent, companies would have to make efforts to train and engage with people to draw them to the infrastructure sector — which requires complex on-site work, Raman added.
Edited excerpts:
In the third quarter of 2022-23, L&T’s order inflows were up 21 percent, revenue rose 14 percent, and profit after tax was up 20 percent. What has driven this growth and is the momentum likely to continue?
We have been examining this closely from the point of view of sustainability. If you look at the trailing nine months of FY23, the projects that were announced and fit for tender were worth Rs 10 lakh crore against Rs 6 lakh crore in the same period in FY22. Normally, towards the end of a political term, projects conceived earlier get a push to make sure that they take off and mature in the five year period. So the pie has gotten bigger.
Number two, since 2021, the government has done its bid to expedite the tendering process. This has helped companies gather pace. Traditionally, you will find that most of the EPC (engineering, procurement, and construction) companies have a softer first-half, an uptick in activity in quarter three, which finally peaks in quarter four. But this has changed in the last two-and-a-half years leading to a more consistent order flow between various quarters, both because of government capex to animate the economy, as well as an improvement in business sentiment after the pandemic. Of course, things like the Russian invasion of Ukraine, etc., and the resultant supply chain disruption, were not anticipated.
What is most significant for us is that these orders have been sufficiently large and complex from an engineering point of view. L&T excels in situations where there is engineering complexity. Also, our cost competitiveness improves when the projects are sufficiently large. So, both the scale and the nature of the orders help us play to our strengths, which has enabled us to win a little more frequently than we used to when projects were smaller and less complex, technically.
The recent budgetary announcement endorses the fact that the government believes that consistent, investment-led growth is what will generate employment and have a strong multiplier effect. The task before companies like us is to make sure that our resources are well mobilised.
Has there been a pick-up in private sector investment and orders? What’s the road ahead?
Statistically speaking, the share of private sector orders for the nine-month period ended December has increased to 35 percent compared to 25 percent in the same period last year. The sectors within the private sector that are ordering are very diverse. The first sector to pick up was minerals and metals.
Private capital is pretty calculative. it is deployed when the returns are reasonably certain and the investment sentiment is positive. So unless they see a two to three year runway of stable returns, the sanctioning of capital expenditure does not happen.
Given that the environment has turned conducive, the next sector to pick up was automobiles, driven by energy transition and the hope that electrical vehicles will be the people's preferred choice.
As infra investments gathered pace, the third sector that picked up was ancillary construction products for mining equipment, construction equipment, etc. There was sufficient need to expand capacity in that segment.
The big shift, however, happened when energy transition really took off. Solar energy became a preferred sector and investments picked up, even internationally, particularly in the Middle East. L&T being one of the largest EPC players in the solar area was naturally a preferred vendor, and we won some $1-$1.5 billion orders in the Middle East, orders which are much bigger than what we see in India.
We also see the momentum for large format data centres picking up.
And finally, there is investment in public spaces. There is a shift towards improving the experience of the travelling public.
So surely, the government’s investment will be larger, but 25-30 percent of the orders will come from the private sector.
For FY23, L&T has guided a revenue growth of 12-15 percent. In fact, after announcing the results on January 30, you said that if the momentum continues, you will grow in excess of that. So far this year the growth rate is significantly higher. Then why the reluctance to increase the guidance?
Typically for us, the first half is weak and the third and the fourth quarter are stronger, with fourth being the strongest. In contrast, the growth has been more uniform across quarters this year, but that does not mean that the trajectory will necessarily sustain over quarter four.
We have a guidance in the range of 12-15 percent, and there is a good possibility, if there are no surprises, that we will meet the upper end of the guidance, and maybe even exceed it. We're not being extra-cautious or extra-pessimistic but we must also remember that in the projects business, contracts do not increase just because quarter four has arrived. The benefit of the current year’s budget will play out in the second half of 2023-24, maybe closer to the run up to the next general election.
Assuming there is no discontinuity in government programmes, you will see that resulting in a fairly strong 2024-25.
The one dampener in the third quarter was the contraction of margins. How is that looking going ahead?
The projects that we are executing now and are reflected as revenues are projects where costs were finalised with our vendors and supply chain partners in the last 12-15 months. In that time, the inflationary pressures were pretty high. And even though things have cooled a bit recently, the projects we are executing have costs from the earlier period. When the project comes to an end, we will have an opportunity to sit down with the customers and try to work through the price variation clauses that are embedded in the contracts, and some reimbursements will be due.
Those reimbursements would be done after the recognition of the cost and the revenues resulting from the contract, and will pop up in later quarters. For now, we are going by the cost contracted during the inflationary period. The projects that we are bidding for now will take into account the higher base cost. If the prices do not rise the way they did in the last two years (which is expected) margins may be a little better than what we had anticipated getting into the job.
The margin profile will look up because the contracts we won in the last six months were better priced, taking into account the inflated material costs.
We are witnessing massive layoffs in the information technology (IT) space. L&T has expanded into IT and services, how is that business looking?
The large layoffs are happening in sectors and companies which hired as if there was no tomorrow when the pandemic struck. Once that was behind us, people began to question the kind of talent pool they’d assembled for their business models.
As far as IT services and products are concerned, I think there is a genuine demand shortage. Many of the businesses are in transition, either in terms of their IT infrastructure or their business model. So it's difficult to assess the kind of resources that are required. But very clearly, as the world gets more and more into artificial intelligence and robotics and automation, the skill that is required is very different from code-writing. So, much of the layoffs are happening in the code-writing space, where it is profitable to employ fresh graduates who cost less than somebody with 15 years' experience writing the same code. Some amount of attrition and shift is inevitable.
L&T, among others, has faced challenges in hiring talent in engineering and construction. IT, which is seeing layoffs now, has been the preferred choice of a large number of fresh graduates. Is there an opportunity to get this talent into core sectors?
What we need to deal with as a core sector industry is how to generate interest in working on sites. How to get people excited about working underground on complex engineering structures, etc. We find that foreign employment has become more susceptible to hire-and-fire. It's very exciting to work in western markets, but I think the work conditions and methodologies and practices need some getting used to. You don’t know in these markets if you have your job come Monday. India provides stability. The startup ecosystem in India has also helped retain some talent.
Many engineers are not going to the US or UK now by default. They're also exploring options in India. What this does is it retains a certain pool of talent in the country. And it is up to companies like us to create an attractive proposition for engineers.
Everybody needs to put food on the table. But are we doing anything to change the ecosystem, be it changing the infrastructure landscape of the country or one’s own technical prowess. This is something that the younger generation is concerned about. That is why NGOs are able to attract the brightest minds today, even though they may not pay very well.
I think companies like us who actually build India can look back at infra like the coastal road project in Mumbai and can take pride in what they have done. Our company is virtually a university of engineering. I think employers will have to do their bit to be relevant to the incoming crowd to attract talent. And the incoming crowd should invest time to get returns on their time invested. So I guess it's an evolution.
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