***

Is a 25-30 per cent growth in order inflows achievable in FY10?

Order inflow in FY09 was Rs 52,000 crore and we expect a growth of about 25 per cent on that in the current year. This means that we have to book orders in excess of Rs 65,000 crore in the current financial year. The order inflow for the first quarter was Rs 9,600 crore and in Q2 so far, we have announced order inflows in excess of Rs 11,000 crore (including some orders received by our JV companies). Given the current market conditions and the outlook for business, we are reasonably confident of achieving the target.

What are the factors that make you confident?

Opportunities for our business verticals are visible in many sectors. The ability of private sector companies to proceed with projects has gone up in the past few months. This has been mainly due to the formation of the new government, improved liquidity situation and continued growth momentum in the economy. Banks have ample liquidity, thanks to low credit off-take in the first five months of the year, and they are aggressively pursuing the financing of infrastructure projects. This is helping financial closure of projects in power, roads, ports and other infrastructure areas.

With the formation of a relatively stable government at the Centre, the visibility for investments has improved. When we made the budget for the year, there were uncertainties on the political front. Post-elections, we feel more optimistic about the future.

Which are the segments that are picking up and which are lagging behind?

There is a lot of action both by the government and the private sector on the power front. There are opportunities in power generation, transmission and distribution. The hydrocarbon sector is also picking up with an improvement in oil prices and a favourable change in the overall growth outlook. There is renewed action in the roads sector and other infrastructure areas such as railways. Industrial capex is likely to be lower. However, this will be more than compensated by action in other sectors.

Will the growth in order inflows be led by government projects or private players? What is likely to be their share in your order book?

We expect an equal share of government and private sector projects in our order book. However, the scenario could tilt towards any one of the constituents depending on factors such as the government’s ability to fund infrastructure projects, clearance of irritants in the model concession agreements for roads, the financial closure of projects by the private sector, oil prices, and so on.

***

Looking up

In FY10, L&T is confident of achieving minimum 25 per cent growth in order inflows

*Including IJVs; Source: Company

***

Do you see a substantial change in the order book mix?

As of end June 2009, the infrastructure sector, which includes roads, ports, etc, formed about 39 per cent of our order book, followed by power (25 per cent) and the hydrocarbon and process sector (30 per cent). With the increased thrust on power, the share of the power sector in our order book may go up to over 30 per cent, while the share of infrastructure may accordingly come down.

What about order inflows in the next financial year?

It is difficult to predict for the next year. You will appreciate that the decision-making process for large projects sometimes gets delayed and that too enormously. This happens due to various reasons and orders get deferred. Sometimes, the projects get decided very fast due to political compulsion and hence there is a bunching of orders. It is, therefore, very difficult to predict likely growth accurately. However, considering the positioning of the company and the opportunities available, we should have reasonably good growth in the short- to medium-term.

How do you decide the order inflow targets?

There are three things we look at while giving an indication of our order inflow targets. First of all, we look at the total potential and opportunities available in the space we operate in, or are planning to enter. Then we examine the possibility of those opportunities getting crystallised. There is some discounting done and certainty and probability factors are applied. After that we consider our current and potential market share. We decide whether we have the ability to get, or do these jobs. We do this exercise before the new financial year begins, which is the budgeting exercise.

What is the outlook for industrial projects, which contributed 40 per cent of your order book and are mainly driven by corporate capex?

If you include the oil & gas sector then you are right in calling 40 per cent of the order book from corporate capex. However, this is not entirely right, as most of our customers in the oil & gas sector are primarily from the public sector, whether it is upstream or refineries. In our overseas oil & gas orders also, some are from the private and some from the public sector.

Corporate capex in some sectors will get reduced and we have already witnessed that. For example in steel, companies will go slow on expansion, looking at the demand/supply situation. As against that, there are other areas where capital expenditure will substantially increase, like in the case of power.

In infrastructure, which segments do you plan to focus on?

In the infrastructure sector, we will continue to focus on the roads segment, given the thrust of the new government on improving connectivity. The new minister’s target to achieve 20 km a day is encouraging.

In railways too, we see many opportunities. Many big cities are going to have metro rail. We plan to actively participate in this area. We were part of the Delhi Metro rail project (tunneling, construction of stations, and so on) and we are also working on the Monorail Project in Mumbai. We are involved in jobs like laying railway lines connecting ports to the main railway line and signaling systems.

There will be opportunities in the dedicated freight corridor, the setting up of rolling stock manufacturing plants, railway sidings and merry-go-round systems for power plants and other industrial units.

Water treatment and distribution is another segment which has tremendous opportunities for growth, as India needs good water management. We are also building our capabilities in areas like de-salination, wastewater treatment and re-use where we see enough potential both in India as well as in the Middle East. We are also focused on urban infrastructure which includes hospitals, educational institutes and offices.

How aggressive do you plan to get on roads, as the sector is expected to open up substantially and there are already many players?

We will focus on roads and continuously enhance competitiveness. We will continue to invest in this sector through the BOT (build-operate-transfer) route if the projects meet our threshold return criteria.

Why is L&T not into airports?

In India, there are not many big airports left. Globally, we are interested only in construction activity and not operation and maintenance of airports.

Are you looking to enter the power generation business?

We would like to enter the power generation business selectively. We participated in ultra mega power projects (Sasan, Mundra and Krishnapatnam), but we were not competitive. We are working on one hydro power project in Uttarakhand (99 mw, at Chandrapuri, in Rudraprayag district).

***

Slow but steady

Analyst expect topline growth to taper off in FY10 but margins are likely to be maintained

Source: Bloomberg; Data as on Sept 21,2009

***

With so many players getting into power generation and nearly all top corporates having announced plans, would you worry about oversupply?

I don’t think that there would be an oversupply situation in India for many more years, given the supply deficit. The potential in this business is large for players like us and there is no fear of oversupply. The only challenge in the power generation business is being profitable while being cost competitive. You cannot keep selling merchant power at the rate of Rs 7-8 per unit.

What are the challenges in new ventures like power, railways, defence and shipbuilding?

Challenges will vary from sector to sector. Like in the power business faster indigenisation of BTG (boiler-turbine-generator) manufacturing is a challenge, and managing Chinese competition is another challenge. In railways, right now establishing a team with expertise in different fields is a challenge. Business opportunities in defence, infrastructure and other sectors will depend on government policies, towards creating a level playing field for the private and the government sector. Government will have to make projects attractive for private players to participate, either through the development or construction route.

***

Scoring high

With the improvement in the economy, analysts have started assigning higher multiples to L&T

Source: Brokerage reports; *Includes infrastructure finance. **Includes L&T Urban Infrastructure

***

What is the outlook for international order inflows and where does the order book stand?

International business forms about 15 per cent of our order book, but that may go up to 25 per cent in the next few years. However, this does not include the order book of Middle East subsidiaries. We have set up manufacturing facilities in the Middle East for oil & gas and electrical equipment, and we have started looking at some new geographies. If we include the share of these international JVs, we see no problem in achieving this 25 per cent level.

What is the potential that it will go to this level?

In international business, we are mainly into hydrocarbons and electricals and we plan to focus on these areas. We are open to EPC (engineering, procurement and construction) contracts in the infrastructure space. While we are focused on the Middle East region and some select emerging market economies, we are looking at regions like South Africa, Libya and Brazil.

How will profitability be maintained with diverse businesses and so much competition?

We have proved over the years that we have remained competitive, through various measures like increasing the threshold size of projects we undertake, reducing the number of project sites, institutionalising risk management, efficient project management and cost optimisation.

Since you are in the investment phase in many projects, where do you see the return on equity (ROE)?

Our RoCE may get impacted, but that will only be temporary, as the capital we are investing today is going to provide us returns in subsequent years and over a long term. We do not see that as an issue.

How much capital is required for the company’s businesses – new as well as old, standalone as well as consolidated – over the next three years?

We will spend about Rs 3,000 crore in the next two years – Rs 1,500 crore each in FY10 and FY11 – towards normal capex. An equal amount of Rs 3,000 crore will be required in the form of equity infusion for our subsidiaries and joint ventures. This will be required in ventures such as nuclear forgings, shipbuilding, boiler and turbine JVs and BOT projects in the infrastructure sector. There will be some infusion of capital in the financial services business.

When do you plan to list L&T Finance, L&T InfoTech and possibly IDPL (Infrastructure Development Projects Ltd)? Which would be first on the agenda?

We plan to unlock value in these subsidiaries at an appropriate time. However, it is difficult to say whether it would be in this financial year or the next. Moreover, there are various ways of unlocking value, such as induction of partners in subsidiaries, merger with another entity, and the like.

Do give us an update on IDPL and the plans going forward.

In the developmental projects business under IDPL we have a portfolio of around 40 projects in roads, ports and urban infrastructure. Many of our projects are under construction, or have just been completed. Once they are operational/stabilised, they will provide a steady stream of cash flow. With increasing thrust on PPP (public-private partnership) projects, we expect to win more projects through the development route. Our balance sheet strength and project management capabilities give us a distinct advantage over our competitors in this space. We are actively bidding for NHAI projects and are looking for opportunities in railways and the transmission lines business on BOT basis.

What is the strategy to get into services businesses like mutual funds and general insurance?

L&T is also into the financial services business. It is extremely important in this business to offer a range of products to customers. In case the product range is limited, the customer has an option to switch to other service providers. It is, therefore, essential to be present in related areas. L&T Finance and L&T Infrastructure Finance are mainly in the lending business. It is essential for the service provider to offer packaged solutions which would include lending money, taking insurance and investing surplus funds.

Do you plan to exit Satyam at all? If so, then when?

We had a strategic interest in Satyam, in which we now hold 6 per cent. Our plan to exit Satyam will depend on an opportune time.