Stressing on core competence

K V Rangaswami, Member of the Board and President – Construction, Larsen & Toubro was in Oman recently. He speaks to Mayank Singh about commodity price escalation, India’s investment driven growth strategy and the outlook for FY2010. Excerpts:

Can you give us a brief on Larsen & Toubro (L&T), its operations and financials?
L&T is the largest construction and engineering company in India and we have many divisions. Out of this, the division pertaining to construction is the largest and it accounts for about 50 per cent of L&T’s turnover. Heavy Engineering is also an important division and we do work for defence, ship building, aerospace etc. We also have an oil and gas division which is known as Engineering and Construction (E&C). Then we have manufactured industrial products, which includes loaders, excavators etc. And finally there is Electrical and Electronics (E&E). These are the five broad areas of our operations. We recently started another company called L&T Power because of the Indian government’s thrust on power projects. In L&T Oman we have operations pertaining to the construction arm of L&T called Engineering Construction and Contracts (ECC) and E&C or hydrocarbons in Sohar. For the year that ended March 2010, our revenue was around $10bn. We have over 200 jobsites in India, with the airports in Mumbai and Delhi being our biggest projects.

As a company we are trying to focus on our core competence which is engineering and construction. Internationally, wherever we can operate directly we do so like in Dubai or Abu Dhabi, where we can operate as a branch of an international company. In countries like Oman you need to have a local partner and so we have partnered with The Zubair Corporation. In the Gulf we have established ourselves in Doha and have some business in Kuwait. We are looking at re-entering the Saudi market in a big way. We have operations in South Africa but only for certain jobs. Whatever we are doing in Bhutan, Nepal, Bangladesh and Sri Lanka, that we do not consider as an overseas job, but as an extension of our Indian operations.

The global financial crisis proved to be a difficult time for most companies, how has L&T’s performance been in the last two years?
The year 2009-2010 was a difficult year. During the first three quarters of the financial year the growth was not appreciable because we did not have a good order book. India was not directly affected by the global meltdown, but there was a spillover effect. But in the last quarter our sales shot up by 40 per cent and we made up for that deficit. We finished the year with a 11 per cent growth which was quite creditable given the circumstances. Our order inflow grew by more than 35 per cent in 2009-2010. Our consolidated order book is around $25bn. The company has performed well under difficult times during the past couple of years as reflected in the numbers below.
 

India is working on an investment (infrastructure spending) driven approach to development. Is this helping L&T?
It is definitely helping us. If you see even in the US when they had a downturn they realised that the only way to get out of it was by investing in new jobs and to kick start the economy. In India’s case there is a demand supply gap when it comes to infrastructure. Thus infrastructure spending has a twin effect: one it is an antidote to the global slowdown and secondly it fulfils our infrastructure gap. We expect the government investment in infrastructure to gain momentum and this will provide immense scope and opportunities for the company.

What are the major projects that you are working on in Oman?
L&T Oman should be achieving an order inflow of $500mn in 2010 and is expected to grow at 10-15 per cent in 2011.

How important is Oman as a market for L&T?
Oman has good business potential. With an RO23.5bn ($61bn) economy, and an average growth of six per cent, it presents huge prospects and opportunities related to our business. Moreover, Oman government’s efforts to shift from oil dependency to non-oil revenues, thrust on infrastructure development, airports and power distribution will open up new prospects for construction companies. The development of new growth centres like Duqm and Salalah will lead to new growth avenues. Oman’s GDP is estimated to grow from RO25.1bn in 2010 to RO32.7bn in 2014 (research data source BMI). The contribution of construction to GDP will be around five to six per cent every year.

Fluctuating commodity prices have been a challenge for most engineering companies. How are you negotiating this challenge?
On an average 65 to 70 per cent of our contracts have a price escalation clause linked to Reserve Bank of India’s price indices and we also have a few contracts that are on a cost plus basis. In addition to this we have commodity (e.g. zinc, copper, aluminium) and currency hedging to safeguard our exposures.

A number of our government contracts have an escalation clause. There is a formula, sometimes the formula compensates fully for the commodity price rise sometimes it does not. When we work out a tender we see what relief we get from the formula and if there is a small difference, we provide for it upfront in our price. In the case of private clients we ask them to put a target on the cost of commodities like steel, cement etc, during implementation instead of an escalation clause. If the price goes up you pay, if it does not, you do not pay. Quite a few of them see merit in this approach. There are other clients who want us to guess estimate any inflation and we do it for them. Sometimes we gain and sometimes we lose.

What is the company’s outlook for 2010 and 2011?
The company expects a revenue growth of 20 per cent and a growth of 25 per cent in its order inflow for 2010-11. The large order book of the company provides sufficient visibility to its growth momentum in the medium term. The company is ready to harness the opportunities thrown-up by power, infrastructure, defence, hydrocarbon, building and industrial sectors.

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