L&T strengthens project execution as hydrocarbon business impacts results

Following a Rs 942 crore pre-interest and tax loss in hydrocarbon segment in the last quarter, Larsen & Toubro (L&T) has decided to strengthen its project management team and will go for sub contracting instead of hiring local staff in the Gulf region.

Larsen & Toubro (L&T) posted a 111% year-on-year growth in consolidated net profit to Rs 967 crore in the first quarter (Q1) of FY15 on the back of gains from sale of stake in its finance services company (L&T Finance Holdings) and Dhamra port. But operationally its results remained weak due to problems in hydrocarbon business. Hydrocarbon business makes up 7% of its order book (about Rs 1.95 lakh crore) with most new orders coming from Gulf region.

With the domestic hydrocarbon business muted L&T has spread its operations in the Gulf. It has been scouting for large scale orders in the segment for the last three years.

In the first quarter L&T reported 11% growth in new orders bagging Rs 33,408 crore projects. 17% of new orders came in hydrocarbon business which is now executed by a separate subsidiary company and does not form part of standalone result. Segment revenue fell 49% to Rs 1553 crore in first quarter due to lower order book and execution challenges.

The hit for hydrocarbon business in the first quarter was due to increase in wages in Gulf region, changes in contract conditions including mandatory hiring of locals in Gulf, time and cost overruns and some delays from clients. Also the company had to rework on some of the projects to meet stringent safety and quality standards in the region. The company said the problems did not raise question about its engineering ability but had arisen because it was executing such large scale projects in Gulf for first time.

L&T's chief financial officer R Shankar Raman said the company had to incur additional expenses and make provisions of about Rs 900 crore. These are on account of five projects valued around Rs 10,000 crore and are now nearing completion. He said the company will not incur the same costs going forward as it has sharpened its risk management policy, decided to go in for sub-contracting instead of hiring local staff in Gulf and strengthened its project management team.

"There are lot of minor operational excellence steps which improves technology, safety, quality standards and execution bandwidth. Steps are also being taken to strengthen front end marketing and client relationship management. This would help us understand client requirements and the bid conditions better and help us avoid the problems we are facing now,'' he added.