L&T to go for subcontracts in Persian Gulf instead of hiring

With the domestic hydrocarbon business muted, L&T has spread its operations in the Gulf

Larsen & Toubro (L&T) will strengthen its project management team and go in for subcontracting instead of hiring local staff in the Persian Gulf, following a Rs 942-crore pre-interest and tax loss in the hydrocarbon segment in the last quarter.

L&T posted a 111 per cent year-on-year growth in consolidated net profit to Rs 967 crore in the first quarter of 2014-15 on the sale of its stakes in its finance services company, L&T Finance Holdings, and Dhamra port.

However operationally, its results remained weak due to problems in the hydrocarbon business, which makes up 7 per cent of its order book (Rs 1.95 lakh crore). With the domestic hydrocarbon business muted, L&T has spread its operations in the Gulf. It has been scouting for large orders in the segment for the last three years.

In the first quarter, L&T reported an 11 per cent growth in new orders, bagging Rs 33,408 crore worth of projects. Seventeen per cent of the new orders were in the hydrocarbon business, which is now executed by a separate subsidiary and does not form part of L&T's stand-alone results. Segment revenues fell 49 per cent to Rs 1,553 crore in the first quarter due to a smaller order book and execution challenges.

The hydrocarbon business was affected by an increase in wages in the Gulf region, changes in contract conditions, including mandatory hiring of locals, time and cost overruns and some delays from clients. Also, the company had to rework some of its projects to meet 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 projects in the Gulf for the 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 at around Rs 10,000 crore, that are nearing completion.

He said the company would not incur the same costs going forward as it has sharpened its risk management policy, and it has decided to go in for subcontracting instead of hiring local staff in the Gulf and strengthened its project management team.

"There are a lot of minor operational steps which improve 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," the chief financial officer added.