No bridge too far

Last fortnight, Y.M. Deosthalee, Chief Financial Officer (CFO) of Larsen & Toubro (L&T), was burning the midnight oil over a strategic decision to acquire a business that isn’t quite core to the engineering & construction giant. L&T is one amongst the several companies in the fray to acquire the scandal-struck Satyam Computer. True, L&T has an IT services arm (L&T Infotech), and a buyout of Satyam would help it scale that business up considerably. However, investors don’t appear to be convinced about L&T’s software ambitions—the stock had tanked to a 52-week low at the time of writing—and would rather see those funds being pumped into the flagship operations.

The L&T top brass, for its part, is clear about its long-term vision for the group (and its shareholders), and such short-term hiccups in the market don’t faze its Chairman & Managing Director A.M. Naik. “Our diversity in different core sectors of the economy helps us to maintain growth even if some parts of our business portfolio are adversely affected by the market,” says the 66-year-old engineer, who has risen to the top from the ranks. For a company that has built a reputation by constructing bridges, roads and world-class plants—on time—challenges and obstacles aren’t exactly uncommon. Yet, after going through several economic cycles, the company appears to be coming close to perfecting the art of winning in a slowdown. The past two quarters have been a period of robust earnings growth, even as many of its peers have lost direction. The 25 per cent growth (excluding extraordinary income of Rs 916.3 crore) in net profit for the December-ended quarter was much better than what most analysts tracking the company were expecting.

The management is upbeat about closing the year with a revenue growth of 25-30 per cent; and the bottom line should also grow at the same rate for the financial year ending March 2009. L&T’s confidence stems from the Rs 68,800-crore order-book on hand—and, more importantly, none of these orders have been cancelled or delayed. Double-digit growth on such a large base in such trying conditions is creditable. Anand Rathi Securities expects the company’s net profit to rise by 18.8 per cent for the current financial year. “There will be a lag effect of 1-2 quarters for engineering companies,” says Ajay Parmar, Head of Research, Emkay Global Financial Services. He says the company is feeling some impact of the slowdown as growth in order inflows has been 11 per cent in the December quarter compared to 30 per cent for the first nine months.

So, how is L&T blazing a trail in the midst of an economic slowdown? “A rigorous risk management policy, increasing operational efficiency, a strong order-book and a diversified portfolio—including new businesses like railways and power—have all contributed to the growth,” says Deosthalee.

Why L&T is a winner A strong order book of Rs 68,800 crore as of December 2008 Unmatched expertise in executing large projects No major cancellation or delay of orders from clients A low debt-equity ratio

What also helps is that even though L&T competes with global players when bidding for international projects, its main focus is on the Indian market where there’s plenty of action. Some 85 per cent of its revenues come from domestic projects.

Still, there’s no denying that the ongoing slowdown will catch up with L&T, sooner or later. Project delays and cancellations will be inevitable as the downturn intensifies, and that may impact the order flow in the days ahead. Deosthalee, for his part, hardly sees any dark clouds ahead—not for another year, at least. “L&T is confident that it will be able to sustain a robust growth trend in 2009-2010,” he reckons.

Deosthalee, of course, has a few aces up his sleeve. Engineering & construction will continue to be the company’s biggest growth engines. But new businesses, like the railways division, will also start kicking in. Within six months of starting this arm, it has already got orders worth around Rs 5,000 crore. This includes a Rs 2,900-crore order for a mono-rail project in Mumbai and another Rs 1,600-crore order from the Indian Railways.

L&T’s biggest strength, though, is its sheer depth of experience in project execution. This helps it to often complete projects ahead of schedule, which, in turn, results in savings in costs and working capital. A decision taken a few years ago to shift back to a variable input cost structure has also helped it maintain profit margins. “Close to 70 per cent of our contracts are on a cost-plus basis, and we also have a very structured payment schedule,” reveals Deosthalee. If the economic slowdown intensifies in the days ahead, one of the few companies that looks well placed to hold its own is L&T.