If India’s largest infrastructure company Larsen & Toubro could have its way, it would like price of global crude oil to return to $80-100 per barrel, a range it believes will be a ‘sweet spot’ for the company.
Speaking to analysts at investment Nomura’s recent industry conference, the infrastructure major said that the sweet spot for capital expenditure could be at $80-100 per barrel range where it will not hurt infrastructure outlay in India and in Gulf countries.
Global crude oil prices have been on the boil since Russia’s invasion of Ukraine that triggered strict sanctions on Russian oil industry by the West. Brent crude oil futures are currently trading above $120 per barrel owing to supply crunch and strong demand as global economy leaves the COVID-19 restrictions behind.
That said, some major oil market voices expect crude oil prices to soar even more in the coming months as demand recovery remains strong. Investment bank Goldman Sachs’ Damien Courvalin expects Brent oil to average $135 per barrel in second half of 2022 and first half of 2023 with peak summer demand pushing prices closer to $160 per barrel.
Trafigura’s Chief Executive Jeremy Weir warned recently that oil prices could reach a “parabolic state” and said that it was highly probable that oil prices could top $150 per barrel soon.
Still L&T believes that current oil price dynamics is not enough to hurt India’s capital expenditure outlay going ahead simply because the government may have underestimated its tax collections for 2022-23.
“Management believes there is adequate fiscal space for providing relief to Indian consumers on inflation, and at the same time maintain the trend of infra investments,” Nomura said in a post-conference note.
Nearly 75 percent of L&Ts new orders currently come from the public sector including the Center, public sector undertakings and multi-lateral funding organisations. Economists have raised concerns that higher food subsidy and fertilizer subsidy bills could force the government to trim capex in the current financial year.
That said, L&T expects capital spends in gulf countries that benefit during periods of high oil prices to rise and improve the international order book of the company. L&T has taken steps in recent years to revamp its team in Western Asia to better execute projects after the failures of the past.
“We have built a very strong team in Middle East. There is a lot more confidence within the team now that we can take on billion dollar contracts and executed to time and within the cost,” L&T’s CEO SN Subramanian told analysts post its March quarter earnings in May.
At the same time, L&T expects private sector capital expenditure to improve in the second half of 2022-23 owing to better balance sheet, lower risk aversion among banks and government measures like production-linked incentive schemes.
At 10:40 am, shares of Larsen & Toubro were down 0.6 percent at Rs 1,574.6 on the National Stock Exchange.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
