Larsen Pushes for Water Projects as Sales Growth Slows

Larsen & Toubro Ltd., India’s biggest engineering company, is pushing to win more water projects after sales grew at the slowest pace in 14 quarters.

The company is getting enquiries for water supply and wastewater treatment, and expects the business to expand at least 20 percent annually, S.N. Subrahmanyan, head of the infrastructure and construction division at Larsen, said in an interview. It will also look for setting up desalination projects in the Middle East, he said.

Chairman A.M. Naik, who in July said the volatility in the rupee and uncertainty in financial markets is affecting investment sentiment, is turning to municipal bodies in towns such as Cuddalore in the southern state of Tamil Nadu for orders. India is doubling spending on water management as inadequate clean water threatens to stunt growth in industrial and farm output.

“As of date, our specific focus for this particular sector is government, which is the essential provider of water,” Subrahmanyan said by telephone on Sept. 2. “As population grows and per capita demand for water grows, water will become a more serious matter.”

The federal and state governments have set aside 1.1 trillion rupees ($16 billion) for sewage treatment, irrigation and recycling for the five-year period ending March 2017, according to the ministry of water resources in April.

Larsen, based in Mumbai, in August won orders worth 11.4 billion rupees from municipalities and water boards, the company said in a statement to the stock exchange.

Stalled Projects

The increased focus on water projects comes amid the slowest pace of economic growth in India since 2003. The gross domestic product expanded 5 percent in the year to March 31, and the rupee touched a record low of 68.845 a dollar on Aug. 28.

Prime Minister Manmohan Singh, who this year set up a panel to speed infrastructure projects such as utilities and highways, in his Independence Day speech on Aug. 15 said steps are being taken to remove hurdles in the way of stalled projects.

There were 32 national highway projects that had not yet tied up funds, Sarvey Sathyanarayana, junior minister for road transport and highways, told parliament on Aug. 12.

Growth Pockets

Decisions on essential services such as those related to water are usually not delayed, said Dhananjay Mishra, an analyst at Sushil Finance Consultants Ltd. in Mumbai.

“Some departments have the financial autonomy to take decisions without waiting for any approvals,” Mishra said. “So if you’re looking in the right place, there are opportunities to be found despite the slowdown.”

India’s urban population of about 360 million people need almost 50 billion liters of municipal water every day, according to a May report by the Central Pollution Control Board. That daily requirement will more than double to 110 billion liters by 2050 as the number of people living in the nation’s towns and cities rises to exceed 800 million, it said.

About 38,000 million liters per day of wastewater is generated in urban centers with population exceeding 50,000 and municipal treatment capacity is about 29 percent of wastewater generated, according to the report. That is estimated to exceed 100,000 million liters a day by 2050.

Orders Traction

Larsen’s construction unit accounted for about half its revenue, with water projects contributing 10 percent of the division’s business, according to Subrahmanyan.

“This is one of the fastest growing verticals within the construction space,” he said. “We are seeing a traction of orders.”

The company got 251.6 billion rupees of fresh orders in the quarter ended June 30, compared with 279.3 billion rupees of new contracts in the three months ended March.

“These kind of projects alone can’t prop up their order book,” Paras Bothra, vice president for equity research at Ashika Stock Broking Ltd. in Kolkata, said referring to Larsen’s push for water and sanitation contracts. “Capital expenditure has dried up considerably.”

Larsen’s first-quarter net income fell 13 percent, missing analysts’ estimates. Sales in the three months ended June from building power plants and networks declined 44 percent from a year earlier because of lower order book, the company said.

Shares of Larsen rose 4 percent, poised for the biggest gain since June 28, to 727 rupees as of 9:30 a.m. in Mumbai trading. The shares have lost 32 percent this year, compared with a 2 percent decline in the S&P BSE Sensex.

New Leadership

Larsen, which is currently building a wastewater treatment plant in Doha, is looking for a new leadership team to drive sales in the Middle East, Subrahmanyan said.

“We have still not tapped the potential in the Middle East where water is a perennial requirement,” said Subrahmanyan. “If we are able to get our leadership and structure right, we will see a fair amount of traction in the Middle East also.”

The company is evaluating what the plunge in the rupee against the U.S. dollar means for it, Subrahmanyan said. The Indian currency has declined 18 percent against the dollar this year, according to data compiled by Bloomberg.

“Such drastic increases anywhere leads to more pain than gain,” said Subrahmanyan. “Bulk of contracts are with recourse to clients.”

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