See FY14 E&C margins at 11.5%; 50 bps variance likely: L&T

Engineering conglomerate, L&T expects the company’s FY14 engineering and construction (E&C) margins to be at 11.5 percent, however, given the nature of the business, one may see a 50 bps variance to this guidance.

Whole-time Director and CFO R Shankar Raman told CNBC-TV18 that he is not surprised by volatility in seen in the company's margins and one should take call on the margins based on the company’s performance on a 12-month basis than three or six months.  Speaking about the latest happenings in the company, he said that L&T is expecting Dedicated Freight Corridor Corp order  to begin by March 2014 for the west-north region, which is the company's area of focus. The industrial corridor may have begun, but actual ordering is expected to start post election. Meanwhile, he is not too hopeful of capex cycle picking up anytime soon. He added that large industries are battling capacity underutilisation and recovery in the capex cycle looks another 12-18 months away. Also Read: Capital goods expensive now, rally on poll hopes, say Experts Below is the edited transcript of R Shankar Raman’s interview with CNBC-TV18 Q: Lately you have got lot of real estate orders or civil orders vis-à-vis mechanical orders that you have in your order book. What is the percentage of real estate civil orders in your book as a percentage of your total engineering and construction (E&C) order book? A: The real estate order is a sub-segment of the civil orders. Therefore, when we talk about civil orders, we talk about building factories, office space, and leisure health segment in terms of hospitals, malls, commercial buildings and residential buildings. So, all of this put together could be almost 40 percent of the total infrastructure sector orders that we report. Infrastructure sector orders is a portion of the E&C orders which includes hydrocarbon and power. So, at a point in time if hydrocarbon and power has subdued as in the recent past, the percentage of the civil orders tend to look up, but it is fair to say if things even out maybe 25-30 percent of the orders could be civil oriented. Q: You said civil orders are 40 percent now. How much were they and how much may they be one year down the line? A: Little over, it was somewhere between 15-20 percent. Q: Coming to the freight corridor and the industrial corridors, what is the amount of order flows from these and what is the speed of execution? A: Dedicated freight corridor – they have been ordering out on the north and the east segment as well as the West and the North segment. We have been one of the beneficiaries of that order flow for the west and the north segment. This is not the whole of the segment; it is a portion of the segment. The subsequent portions of west to north segments are under consideration. I expect possibly before the code of conduct kicks in maybe some element of ordering and I am assuming that we lineup for polls in May, by March the code of conduct will kick in so end of February, early March we are hopeful that we will get subsequent segment of the west-north corridor getting ordered out. East and north, we are not closely following because we would like to play to our strength in so far as these corridors are concerned. It is very tempting to look at all segments but we also have to execute responsibly. So, I think we are focusing on the west to north at the moment. On the industrial corridor, it’s still early days. I think ordering will happen realistically post elections but lot of ground work needs to be done even before that to happen. So, the initial studies are underway. Since they have not fructified into a specific bid, they have not come to the finance stable as yet, but I am sure the business development people are working with concerned agencies to give it some technical shape. So, its still work in progress. Q: Coming to margins, in the last reported quarter your margins were about 9.7 percent down from close to 11 percent year ago but 9.7 percent was inline with street expectation. Can you hold on to that in the second half? A: 9.7 percent is a point in time; it is a six month number. I have been pleading with the street that being a project company, 90 day cycle is a cruel cycle for us. There are many quarters where progress may not be achieved in a linear fashion. The revenue recognition and the margins are consequence of what we have achieved on the project sites. Given the fact, 12 month is a more appropriate representation than a three month or six months period. We got into the year on the back of 11.5 percent E&C margin in the pervious year and our guidance was that based on the order backlog and execution schedule that we were looking ahead; we felt that we should have a fighting chance of maintaining the margin in the E&C business by the end of the year. We never bargained for linear maintenance of that margin so internally we are not surprised with the way volatility between the quarters. We also put out at the beginning of the year at it is very difficult to predict very precisely these margins. So, any guidance that we give at any point in time, the street would be well advised to add and subtract 50 bps because of the nature of the business that we run. It is not very predictable. Consequently, I would expect us to be anywhere in 11.5 percent as a base with plus minus 50 bps variation in the E&C by the end of the year. We have four more months to go in our business the second half and within that the last quarter is the biggie. If all our planning and scheduling comes right in the remaining four months, we should reach where we targeted, but I would rather count my chickens after they are hatched.