Larsen & Toubro margins suffer in overseas forays

Sluggishness in some traditional mainstays but sales growth targets for FY14 seem achievable

Larsen & Toubro (L&T), the $14-billion engineering and construction conglomerate, with interest in manufacturing of capital goods, has been able to largely withstand the domestic downturn with an aggressive foray abroad. However, this has cost it in terms of operating margin.

The company reported 15.8 per cent growth in net revenue to Rs 74,498 crore in 2012-13. Operating profit grew 10.9 per cent to Rs 98,592 crore. On order inflow, it reported 24.7 per cent growth, on the back of fast investment decisions in transportation, urban and water infrastructure.

It faced sluggishness in engineering, procurement and construction (EPC) contracts for power generation and mining projects. The company bagged EPC contracts for two power projects, each having 660 Mw capacity. It had an order book of Rs 153,604 crore at the end of 2012-13, with 13 per cent of this coming from abroad.

"The company has guided for (forecast) 15-17 per cent sales growth for 2013-14, which appears achievable. However, the margins are likely to witness a further 28 basis points compression versus a guidance of flattish margins in 2013-14," said Amish Shah, analyst at foreign brokerage Credit Suisse, in a recent report.

The company has said it expected 20 per cent growth in its order book in 2013-14, almost doubling those from abroad. While giving the outlook for this year, A M Naik, chairman, said: "The international business environment provides opportunities but is highly competitive."

The diversified group has 10 independent companies (ICs) and its capital goods business is spread over power, heavy engineering and machinery & industrial ICs. It does not provide revenue and profit specific to the capital goods business.

But it does provide the figures specific to the machinery and industrial production business in its segmental reporting. The division that makes machinery for mining, rubber processing and foundry business and industrial products such as valves and welding equipments reported a 14.6 per cent decline in revenue to Rs 2,879 crore in 2012-13.

Revenue from the power business that is into making of boilers, turbines and generators, as well as the heavy engineering business that makes nuclear power equipment, is reported under the engineering and construction segment. This also encompasses the various EPC contracts businesses such as hydrocarbons, ship building and roads & infrastructure. The segment reported Rs 58,616 crore revenue in 2012-13, a 13.8 per cent rise from the previous year figure.

"For L&T, a key structural trend is increasing contribution of overseas business," says Satyam Agarwal, analyst with domestic brokerage Motilal Oswal. "For the overseas E&C business, we remain skeptical on margins and also the risk profile of projects." The management expects margins in the foreign business to be 250-300 basis points lower than in domestic business.The company had also intended divestments in 2012-13, both through long-term funding in L&T Infrastructure Development Projects and stake sale in project special purpose vehicles (Dhamra Port, road SPVs, etc). However, volatility and macro headwinds delayed the process. Now, it is attempting to conclude funding tie-ups in six to nine months.