The Engineering & Construction (Projects) Division of the company saw the creation of three operating companies under its umbrella -- for hydrocarbon upstream, hydrocarbon mid and downstream, and power. The E&C segment is the most critical division for the company, contributing as high as 82% of the total sales for L&T in FY 2008-09, dwarfing other segments like electricals & electronics (8%), machinery & industrial products (7%) and others like IT and financial services (3%).
However, although the economic slowdown is easing out, for the second quarter of the current financial year, this division grew just a shade above 14% in revenues, which was below the widely expected 20% growth. But what is significant is that during the quarter, the company saw a 47% year-on-year growth in order outflow, at Rs 18,365 crore, primarily driven by the power and hydrocarbon upstream sectors, underscoring the crucial role these sectors will play in L&Ts performance in the next few years. In fact, this has prompted the L&T management to maintain its guidance of a 30-35% increase in orders and a 15% growth in FY2010 revenues, with stable margins. The company expects a 25-30% growth in orders from the power segment, a 25% growth in the hydrocarbon business and a 20% growth in the process segment.
It is, however, not to undermine the 14% growth in E&C, considering that standalone sales of the company, for all the divisions, for the quarter grew only 2.3% year on year to Rs 7,866.2 crore. This was on account of below expectation performance by most of its other divisions. The subdued growth in the sales during the quarter was mainly due to delay in clearances from the clients in case of few project orders in infrastructure sector and also due to the lower offtake of industrial products and machinery, says broking firm Sharekhan in a recent report. In fact, it also shows the company has not entirely come out of the glut it went through in project delays in FY2009. Addressing shareholders at the 64th annual general meeting of shareholders of the company, Naik acknowledged that FY 2009, especially the second half, was a challenging period as decisions on awarding projects were repeatedly deferred on account of the economic slowdown and due to the code of conduct applicable to public sector bodies prior to the elections in May 2009.
This is where Naik hopes the new operating companies in hydrocarbon and power will help L&T maintain its growth trajectory. Says Naik, The company has planted seeds of growth in sectors likely to receive focused attention. These include the hydrocarbon business -- both in the upstream oil and gas exploration and in the midstream refineries, where increased capacity in the Middle East is likely to yield some growth in this sector in the years to come. Also, increased demand for power as a prerequisite of development offers good potential for us in future.
The recent surge in oil prices ($75 - $80 per barrel) and depleting oil reserves is expected to continue driving investments in the hydrocarbon sector. Countries such as Saudi Arabia, UAE, Qatar and Kuwait have upped their oil and gas investment budgets. In the domestic space, development of NELP blocks, increased private participation, renewed thrust in exploration activities, especially in deep water, and significant investment plans of its major customers particularly ONGC, will provide L&T opportunities in upstream space. Similarly, fuel upgradation, gas processing, fertiliser plants and petrochemicals will present opportunities in mid and downstream business.
Deepak Pareek, an analyst with Angel Broking who tracks the oil & gas sector, says that Indian oil companies like ONGC and OIL have planned significant capital expenditure to maintain their production as well as replace ageing fields. Despite the fall in crude oil prices last year, these companies have been spending heavily, says he. For instance, ONGC has been spending in the KG Basin and the Mahanadi fields. What a country like India looks for is self-reliance in oil, so domestic companies will be seen increasing their capex, he said.
In power, the revised mega power plant norms are expected to attract more investments. Several thermal power projects (mainly coal-based) are at various stages of planning and implementation. The company has already secured an order book of over Rs 13,000 crore in the power sector, mainly during the current fiscal. Setting up of manufacturing facilities of over 4,000 mw in the super critical boiler and super critical turbine space is in advanced stages of completion.
The E&C division is bracing itself up to this opportunity by bettering its execution facilities, intensifying its marketing efforts and drawing out its pre-bid strategies. In upstream, L&T has set up a new state-of-the-art fabrication facility for modular structures, heavy jackets and oil rigs in the Sultanate of Oman. It is expanding capacity at the existing modular fabrication facility at Hazira in Gujarat. The downstream operating company has set up a joint venture with SapuraCrest of Malaysia for improving offshore capabilities, while L&T-Valdel, the engineering arm, is positioning itself in the UAE.
For business development overseas, centres have been set up in Abu Dhabi (for servicing GCC, Iran and North Africa) and Mumbai (SE Asia, Australia and West Africa). In mid and downstream, pipeline capabilities have been strengthened through a JV with Gulf Interstate Engineering USA, and a business unit set up in Sharjah. In power, the company is eyeing opportunities in coal-based, gas-based and nuclear projects. Its here that its JV L&T-Sargent & Lundy, providing power plant engineering services, comes into play. L&T also has two JVs with Japans Mitsubishi Heavy Industries for manufacturing supercritical boilers and turbine generators, augmenting its capabilities in this segment.
However, the risks involved in all these businesses are significant, too. Oil producing companies are only slowly recovering from a collapse in oil prices after historic highs earlier last year. There are reports that the International Energy Agency will make a substantial downward revision to its long-term forecast for global oil demand, for a second year running. This view is contrary to a general view that crude demand will grow briskly in a post-recession world on consumption in countries like China and India. There are experts who also say that mandatory standards in emission control will tighten demand for hydrocarbons, as policymakers take new efforts to address climate change issues.
However, this is a bit far-fetched, and L&T says it sees a large opportunity, primarily since just over 60% of the potential of the oil sector has been explored so far in countries like India. Any price of crude above $60 a barrel is good news for oil companies, says Pareek. Globally too, companies are coming back with their spends in upstream and refining, which should be good news for L&T. And this, as the company expects, should help it tide over any setbacks from project or payment delays in infrastructure.