Engineering major Larsen & Toubro’s hydrocarbon projects order book has crossed Rs 1 lakh crore, giving the company revenue visibility for the next two-and-a-half years. This also allows the company to be selective and focus on projects offering high margins, Subramanian Sarma, L&T’s head of energy businesses, told Moneycontrol in an interview.
While the recent deferment of big-ticket hydrocarbon orders in Saudi Arabia disappointed the Street, which was hoping that L&T would bag some of these orders, Sarma is not perturbed. His confidence stems from the company’s current order book and the fact that L&T is well placed to tap the new opportunities emerging in the sector even as its traditional fossil fuel market remains steady.
Sarma, who is also a whole-time director at L&T, is responsible for its hydrocarbon, power, green manufacturing and development projects.
He spoke about opportunities emerging out of decarbonisation and energy transition. Sarma also touched on L&T’s hiring strategy in the Middle East and how the company is stabilising despite witnessing high attrition.
Edited excerpts follow:
The global oil and gas industry’s capital expenditure for 2024 looks promising, according to data and experts' views. What is your assessment?
We are continuing to see some good opportunities both in the domestic and international markets. I think with the energy transition evolving now, people are assessing various alternative routes to reduce their carbon footprint. In that evolving scenario, very interestingly—for the hydrocarbon industry and for us—there are multiple opportunities. First, we continue to see opportunities in our conventional fossil fuel business with more emphasis on gas development, which is being seen as the fuel for the transition. Secondly, even if oil and gas producing companies want to diversify to non-oil and gas, they need capital. With the oil prices remaining at a decent level it provided the revenue stream needed to develop the new stream. There is little bit of urgency to monetise those assets. For these two reasons, we will see a good amount of capital allocation going into developing conventional fossil fuels.
Now, in addition to that, every organisation is also becoming quite responsible towards environmental issues and wants to reduce its carbon footprint. Even hardcore oil and gas companies are looking at ways to reduce their carbon footprint with blue ammonia, blue hydrogen, and carbon capture. These opportunities are coming up for new and old existing projects.
Thirdly, the long-term view taken by many of the oil and gas producing companies is that as the energy transition gains momentum and more electric vehicles and transportation fuel is needed, refineries have to be repurposed, because crude, which is used for producing refined products, will have to now be used for chemicals and petrochemicals. There is huge potential for integrated petrochemical complexes and units oriented towards downstream chemicals. So, that is creating another set of opportunities. I have spent four decades in the industry, and this is perhaps the sweetest spot we have been in because we are able to address all these three evolving themes.
Your win rate has been 15-20% on the pipeline you bid for. Will this continue?
Our order book crossed Rs 1 lakh crore in December for hydrocarbons; this gives us a runway for two-and-a-half years. Our focus is always on strong execution because that is how we will remain profitable and secure more jobs by satisfying customers so that the win rate also can go up.
This provides an opportunity for us to be a little bit selective and to position ourselves the way we want. We are looking at future trends to pick up work in those areas that are going to be there in the long-term and are more strategic, like doing some carbon-capture large cracker projects like what we're doing in Barmer, Rajasthan, for HRRL (HPCL Rajasthan Refinery Ltd). We will not just go after volume because we have enough; we have to focus on execution. We will pick up something that will give a decent growth, positioning and track record and opportunities to position ourselves for the future.
In January, Saudi Arabia directed state-owned Aramco to halt its plans to scale up capacity; the bid process for the $10-billion orders for Safaniya oilfield projects was canceled. In Algeria, some projects have not moved ahead. Would this impact the FY24 order inflow? Are there concerns about some of the mega projects not fructifying the way you had foreseen?
We have secured a very large volume of work in FY24. The jobs in Saudi and Algeria, the ones you mentioned, had they materialised it would have been the icing on the cake. But it was not that I needed those for my survival. When you are talking about large-scale capital investment, the momentum has been so large that you have to anticipate that some of them will get deferred or postponed because the customer is monitoring capacity in the industry and the supply chain. When they see the strains in the system, they try to reassess their priorities and some projects get deferred.
I think the press has made too much out of that announcement, forgetting that we had a record run.
Having said that, as I said, gas is a bridging fuel for the energy transition. The projects that got deferred were for oil development, which will undergo more scrutiny and it might get deferred. The project in Algeria will come back; these are normal trends with government transitions, elections, politics, and many other factors. All this is about timing and prioritisation of capital, we should not see anything more than that in this. These trends will continue but the opportunities are still quite huge.
What’s the ratio of oil and gas projects in your order book? Given the opportunities that you see, is there a possibility that this mix will change?
I don't have an exact number, but our portfolio mix in the international market is skewed more towards gas now because that is where the capital is being spent. Our win rate has been more on the gas projects. Notwithstanding that, in the future, it might change.
India is talking of increasing gas use but challenges regarding the availability of gas supply restricts the projects in the local market…
Yes, but gas development is more relevant to the international market; in India this opportunity is limited. There are some offshore gas developments of ONGC in the east coast and Reliance Industries, but we don't have that many gas reserves compared to our demand. We will have to rely on imports, but new opportunities might emerge. We may need more LNG receiving terminals and more regasification terminals as the economy grows and gas demand grows. Assuming that at some point in time gas prices also start falling in the international market, India may switch more and more towards gas as it is less carbon emitting.
How are the margins looking going ahead, considering raw material prices and intensifying competition?
The margins are in a similar range as what we have been seeing in the past. And our efforts are always to see how we can bring improvements. In this organisation, there is a huge emphasis and focus on improving the bottomline through fundamentally improving our execution efficiency, operational efficiency, using the latest technology, and getting better productivity. I think we have had some good successes; first thing is that we have been able to bring down our working capital. That’s a significant improvement from where we were two-three years back; that helps in the PAT.
Productivity and timeliness—these are the aspects where I can be more efficient and reduce cost leakages. There's a lot of effort going on in using technology to improve that. As for competition, not much has changed; it is pretty much the same players. Everyone will be a little bit more selective, so hopefully it will give us an opportunity to pick up jobs at a better margin. We’ll have to see how it evolves. But you will always find some dark horse who is desperate and customers also would like to have a dark horse in the bidding list.
When you say the same margin level, what does that mean?
I don't know what numbers because there are analysts margins and operative margins; these are different definitions. But, let me say that we will remain in the same range, at around 9-10% PBIT.
L&T CFO R Shankar Raman told Moneycontrol earlier that Saudi Arabia is emerging as a wider play for L&T, like India. What’s the hiring strategy in the Middle East?
There are two aspects to it. One is that there is a requirement, like our Atmanirbharta, that as we increase local contracts, we are required to engage more and more Saudi nationals. That is happening as it is a contractual requirement. And two, as RSR said, the volume of business is so large that we are taking a medium- to long-term view with respect to how we want to operate in that country. It is always nice to go beyond the contractual requirement in hiring people; there is good talent available. We are adding more talent for the operations and some of them also come to India for training.
I think last year (2023) we saw some high attrition—people were moving around. It has stabilised and we are putting in efforts to see how we can attract more people. L&T has now been rated as a great place to work, which is another shot in the arm.
Attrition has remained high. Why?
It’s just an industry phenomenon. I think it's nothing particular to us. Sometimes we face that situation but it is also stabilising.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
