L&T Turns to Roads as Power Plants Stall: Corporate India

Larsen & Toubro CFO R. Shankar Raman
R. Shankar Raman, chief financial officer of Larsen & Toubro Ltd. Photographer: Kuni Takahashi/Bloomberg

Larsen & Toubro Ltd., Asia’s largest construction company by market value, is betting on road and rail orders in India and overseas to help maintain growth as power generation projects stall in the South Asian nation.

The company sees an “opportunity” of as much as $35 billion to build highways, rail networks and small airports in the next two years, Chief Financial Officer R. Shankar Raman said. Larsen added 65 billion rupees ($1.2 billion) of road construction contracts in the first quarter of the year that started April 1, he said.

“Road is one area of opportunity in all this compressed investment environment,” Raman said in an interview yesterday in Mumbai where the company is based. Contracts in the “third and fourth quarter are expected to pick up.”

Lack of coal and gas supplies to fire electricity plants have hindered expansion plans of utilities in Asia’s third-largest economy, prompting Larsen to increase focus on infrastructure projects. The company also expects more orders to build transmission networks in India after the world’s biggest blackout last week knocked out power for half of its population.

“Larsen is in a better position than its peers because of its diversified business portfolio,” said Dhananjay Mishra, an analyst at Mumbai-based Sushil Finance Consultants Ltd., who recommends buying the stock. “Even in a depressed investment climate, it can still find orders to grow.”

The company’s stock has gained 42 percent this year, making it the best performer in the benchmark BSE India Sensitive Index. The shares rose 0.8 percent to 1,417.7 rupees at close of trading in Mumbai. Bharat Heavy Electricals Ltd., India’s biggest power equipment maker, dropped 2.8 percent this year.

Danish Engineers

Larsen, set up in 1938 by two Danish engineers, may report an 11 percent increase in profit to 52 billion rupees in the year ending March 31, according to a median estimate of 17 analysts compiled by Bloomberg. Bharat Heavy’s net income may drop 12 percent in the period, according to 16 analysts.

Larsen is either building or operating 19 road and bridge projects as of the fiscal first quarter, according to a presentation on its website. The company “doesn’t see traction” for its services from the steel, cement and food processing industries, Raman said.

The builder is targeting highway projects in India as Prime Minister Manmohan Singh seeks to step up investments in expressways to remove bottlenecks that choke economic growth. The government aims to award contracts to build 9,500 kilometers (5,900 miles) of roads in the year that started on April 1.

Power Outages

At the same time, coal-supply shortages have forced some of the nation’s utilities to halt expansion. NTPC Ltd., India’s biggest electricity producer, said in June it scaled back plans to add coal-fired capacity by 42 percent because of the fuel’s scarcity. The country depends on coal to generate more than half of its electricity.

Power stations operate below their capacity as supply from Coal India Ltd., the world’s biggest producer, lags behind demand. That has contributed to frequent power outages, sometimes lasting as long as 10 hours, in the world’s second-most populous nation. Electricity shortages shave about 1.2 percentage points off the nation’s annual growth, according to the Planning Commission.

Two days of blackouts that left about 640 million people without power last week prompted India’s government to pledge investment in improving the nation’s grid. That may help Larsen add construction contracts, Raman said.

Overseas Sales

Orders from companies in the power sector accounted for 21 percent of contracts Larsen won in the first quarter. In comparison, projects such as roads, bridges and metro rail networks contributed 65 percent. The company added 196 billion rupees of total orders in the period, up 21 percent from a year earlier, according to the presentation on its website.

Profit in the first quarter increased 16 percent, helped by a 26 percent gain in sales, the company said July 23. Operating profit fell 9 percent, the first drop in at least five years, after costs of raw materials and components surged.

Engineering and construction business accounted for 89 percent of Larsen’s sales in the period, according to data compiled by Bloomberg. The company said it had an order backlog of 1.53 trillion rupees as of June 30.

International sales contributed 17 percent of total revenue in the quarter. Larsen aims to earn as much as 25 percent of sales from overseas this year, Chairman A.M. Naik said in May, as India’s economic expansion slows. The nation’s gross domestic product expanded 5.3 percent, the least in almost a decade, in the three months through March.

“Projects have got deferred because business fundamentals have changed,” Raman said. “There is no solution but to invest out of our troubles.”

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