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Larsen & Toubro's super-critical power equipment business, whose break-even was delayed by a year-and-a-half, got a breather today. After a gap of nearly two years, the capital goods company has bagged an order worth Rs 5,680 crore, its biggest order yet, from Rajasthan Vidyut Utpadan Nigam.
The order involves supply of equipment as well as the civil construction work for a 1,320 megawatt power plant to be set up at Chhabra in the Baran District in Rajasthan. Even this order, however, does not ensure that the power equipment business would achieve a breakeven.
The company had forged a joint venture with Japanese major Mitsubishi to produce environment friendly super-critical equipment, under the name L&T-MHI Turbine Generators (LMTG) in 2007. The JV hoped to bag orders as private power producers who were expanding then, but many orders were lost to Chinese companies.
“We are on the threshold of a break-even. This order alone is not enough. We have to bag another order of similar value for break-even,” said Shailendra N Roy, whole-time director of the company. The company, which has a capacity of 5,000 megawatts, is capable of executing 50% more orders, than it currently has. Its facility in Surat, Gujarat also has an option to increase its capacity by another 1,000 megawatts, which has not been utilised due to low ordering. After the Rajasthan order, the facility has L&T now has orders for supply and installation of 26 super-critical steam generators and steam turbine generators.
The last large order that was won by L&T MHI was from JP Power for its 1,320 megawatts power plant Madhya Pradesh around two years back. After that they bagged a small balance of plant job from the Dainik Bhaskar group. While orders from private power generators have dried up due to worries over coal supply, L&T is banking on orders from state-owned utilities.
It expects as many as eight state utilities are expected to announce their orders in the current financial year. It has already bid for three of these tenders which have already been announced, and is known to be the lowest bidder of yet another 1,320 megawatts order for boilers from NTPC. This news, however, was not confirmed by the company.
Last month, rating agency CRISIL revised outlook on the business of L&T Mitsubishi joint venture to 'negative', while re-affirming its rating at 'A+', indicating low-credit risk for its long-term loans of Rs 1,500 crore.
The agency had revised its rating due to its shrinking orderbook. “The slowdown in investments in new power plants is leading to fewer orders for the company; competition from both domestic and international peers has also intensified,” the rating agency said, in its report.
CRISIL had said that LMTG is likely to receive a new order in its report released before the announcement. Yet, it believed that the order book is expected to remain significantly lower than earlier expected. This low ordering, would adversely impacting the company’s revenues as well as profitability.
“LMTG is likely to take longer to achieve breakeven; its capital structure and debt protection metrics will remain constrained over the medium term, given the continued pressure on its profitability and the increased debt levels,” the report said.
'Good start'
Roy said that the latest order is a 'good start'. They are expecting three more orders this year, though none of them might fructify in the next three months. After the latest order, the capacity utilisation its super-critical equipment facilities will increase to 75% from 62% before.
The orders expected from utilities in Uttar Pradesh, Andhra Pradesh on the anvil, might be on the same model at its Rajasthan order. They will be mostly turnkey which includes civil construction with equipment supply, increasing the scope and value of the contract.
“The uptake of orders will depend on how fast authorities can close the orders,” says Roy. The total power orderbook of L&T is at around Rs 26,000 crore, which includes civil work as well as equipment orders.
“I am quite bullish and optimistic. We need a bit of luck and a bit of strategy,” said Roy.
