Mumbai: Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company, expects to double its revenues in five years as it focuses on sunrise sectors such as defence and explores new markets such as Africa.
Simplifying its management structure and reducing subsidiary units will also help sharpen its focus, said executives.
A doubling of revenues over five years translates into an average annual growth of 15%, which, however, doesn’t represent much of an ambitious growth.
In the five years to fiscal 2016, L&T grew its revenues at 14.5% annually despite a slowdown in the economy and issues such as delayed environment clearances and land acquisitions which stalled investment demand.
But the company is ambitious in other financial performance yardsticks.
As part of its five-year strategic plan, by 2021, L&T expects to expand margins by 100-120 basis points, or bps, to 11.2%, improve return on equity by 6 percentage points to 18%, and reduce working capital by 6 percentage points to 18%, according to the company’s recent interaction with analysts. One basis point is one-hundredth of a percentage point.
This will be a big leap over the 2.5% average annual growth rate in net profit over the past five fiscal years. Even in the June quarter, L&T reported a profit of Rs.609.60 crore that fell short of Street expectations. However, the company remains optimistic about achieving the 15% growth rate owing to a few factors.
A “few states are preparing for elections in (the) next two years, while the centre will have general election in 2019. We are expecting bulk orders in next five years, giving us 15% year-on-year growth,” R. Shankar Raman, chief financial officer (CFO) of L&T, explaining the company’s strategic five-year plan named Lakshya.
He said the plan will not have brand new things barring defence manufacturing and nuclear power equipment manufacturing and that’s assuming that the government will place large orders in the coming years.
“We will stay focused on construction and engineering, which is the core of our business, and specialized high-tech manufacturing and key services businesses,” Raman said.
In an interview with Mint earlier in July, group executive chairman A.M. Naik said he is reorienting the group for its next leg of growth, where four services businesses—infotech, technology, finance and real estate—will form the group’s core and provide a cushion from the riskier projects business. (http://bit.ly/2aCn4T3)
Raman said the company will maintain a 70:30 ratio for revenues from the domestic and international market, respectively. As domestic order flows started floundering, L&T started focusing more on international markets since 2010.
“We are reasonably confident that we will get a fair share of efforts to create social infrastructure in the Middle East if we bid properly. We might also look at Africa as a market in near future,” he said.
L&T’s financial results show that this international focus has paid off. From just under one-tenth, a few years ago, the international business now contributes to almost one-third of both order inflows and revenues. In the June quarter, while domestic order inflows declined 9.7% from a year ago, international orders rose 14%.
Given “the kind of size L&T has attained, it would be difficult for domestic business (irrespective of the timing and intensity of revival) alone to support the order book and top-line growth investors would be satisfied with,” said Pankaj Sharma, head of equities at investment banking and consulting firm Equirus Securities (P) Ltd.
But there is more to Lakshya. One of the key objectives of the five-year plan is to enable all group companies to have independent management structures, said deputy managing director S.N. Subrahmanyan.
Now, L&T operates through a complex structure of 82 business units and has seen its returns to shareholders nearly halve between 2008 and 2015 due to misallocation of capital in various low-return businesses. It now wants to make up for past mistakes by reducing working capital over the next five years.
“L&T Finance Ltd and L&T Infotech Ltd are listed while L&T Technology Services will get listed. L&T Hydrocarbon Services is already a separate subsidiary,” said Subrahmanyan, pointing out the way forward.
The company said on 15 July it will sell up to a 15% stake in its unit, L&T Technology Services Ltd, through an initial public offering (IPO). Its other unit L&T Infotech Ltd went public in July. Sale of non-core assets is another option. According to Subrahmanyan, L&T is looking to sell its portfolio of 13 road assets. The general insurance business is going to HDFC ERGO General Insurance Co. Ltd and the Kattupalli Port to Adani Ports and Special Economic Zone Ltd (APSEZ). It is also looking to sell its Nabha Power plant by fiscal 2018.
Many analysts, however, remain skeptical citing past capital misallocation and a change to new Ind-As accounting norms to cut medium-term earnings per share estimates.
Prabhudas Lilladher Ltd, for instance, said it is paring earnings forecasts by 8-9% for this fiscal year and the next, to factor additional requirement of provision of expected credit loss and employee benefits under the new norms.
Working capital levels are still high at almost a quarter of sales, though the management is not unduly worried on receivables.
“Brokerages are in a tearing hurry to pass verdict on the company. The impact on our topline of the new changes would be minimal at 2-3%, 50 bps on Ebitda (earnings before interest, taxes, depreciation and amortization) and 50 bps on profit after tax (PAT) due to reinstatement of accounts. However, we may have to provision for credit as per guidelines till we recover payments from our clients,” Raman said.
The post GST Bill To Address Tax Ambiguities, Spur Growth, Say Industry LeadersL&T aims to double revenues by 2021 appeared first on businessfortnight Daily News Portal.