28 May 2013
Larsen & Toubro, India’s largest construction and engineering company, last week shocked its shareholders after it revealed an unanticipated fall in profits, Berny Torre reports.
L&T’s net profit fell by almost seven per cent in the quarter ending March to 17.88 billion rupees ($320 million) compared to the 19.2 billion registered one year earlier.
The international engineering giant promptly suffered its biggest drop in shares for three years, closing almost six per cent down on Wednesday.
The figures for India’s engineering bellwether were way off estimates by analysts of 18.56 billion rupees, according to Thomson Reuters.
"Slow-moving orders are a concern not only for the company, they paint a true picture of the economy," said Jinal Joshi, an analyst at Mumbai-based BOB Capital Markets.
India’s economy in the last quarter showed its weakest growth in the past decade at five per cent, according to estimates from its national statistics agency.
"The challenges in the growth path of Indian economy are still persisting," L&T said in a statement.
"Constraints to the speedy implementation of the reform process are adversely impacting the investment climate."
L&T said infrastructure development has been deprioritized by the Indian government as it tries to appease voters with social spending ahead of next year’s general election.
But a substantial increase in finance and inventory costs also cut into the company’s profitability.
Inventory charges soared seven-fold to 8.2 billion rupees and finance costs were more than doubled to 2.81 billion, according to the earnings report.
"I wouldn’t want to give a very optimistic view," A.M. Naik, L&T’s executive chairman, told a news conference in Mumbai.
"Until the new government is installed, there will be social spending and development will take second priority," said Naik.
But L&T, founded in Mumbai in 1938 by two Danish engineers, has put a "tremendous amount" of effort into diversifying and not being an "only-India organisation", he added.
Larsen & Toubro’s Indian offices. (Credit: Ravichandar84)
"Since L&T has a wide range portfolio and since we have overseas presence, whatever shortfall we have in India we’ll make up for it outside India."
With the Indian construction sector weighed down by bureaucracy and a lack of financially viable projects, the company aims to offset the shortfall by concentrating more of its efforts in overseas markets.
Overseas sales made up 13 per cent of the total contracts, L&T’s report read, and the Chief Financial Officer said in an interview with Bloomberg earlier this year that the conglomerate aims to have 30 per cent of its overall sales coming from abroad.
The company won 880 billion rupees of orders in the last year, and predicted a 20 per cent rise in new orders in the next financial year.
Analysts have approved of the company’s move towards Middle Eastern and African markets.
"Larsen is going in the right direction," Mumbai-based business analyst Jinal Joshi, told Bloomberg.
"Just like foreign companies have ventures here, it’ll help the company to get a breakthrough if they form partnerships outside."
L&T have already built factories, roads, power transmission lines and generation plants in Kenya, Mozambique, Suriname and Tanzania, according to their website.
India aims to increase its airport capacity to 370 million from 240 million last year by 2017, and needs $12 billion in investment, according to the government’s Planning Commission.
India’s biggest builder of power networks and airports will continue to bid for state-owned Indian airport projects and is currently constructing a facility at Chandigarh for Airports Authority.
L&T are currently ineligible to be awarded a contracts financed by the World Bank until September this year, after being barred under lender’s fraud and corruption policy.