It could take another two years before private sector investment picks up, says R Shankar Raman, chief financial officer, Larsen &Toubro. Meanwhile, with sections of the Street disappointed by L&T’s results for Q1FY17, largely the result of confusion on the new accounting standards, Shankar Raman says the company will restate accounts
for FY16. He explains to Shubhra Tandon in an interview that while in the past, profit lines flowed through the revenue and Ebidta into PAT, they now they flow directly to the PAT. In other words, the bottom line does not change with this disaggregation but the Ebidta does because the revenue changes. Edited excerpts:
Some analysts were disappointed with the Q1FY17 numbers possibly due to the change in the accounting standards…
The top line, we explained, dropped by Rs 400 crore going by the earlier accounting standards and if extrapolated for the full year the impact would be Rs 2,000-3,000 crore. So the top line which was Rs 1.03 lakh crore as per the old accounting standard would be around Rs 1 lakh to Rs 1.01 lakh crore by the new standard. Therefore, if someone had taken the guidance of 12-15% based on the declared revenues of FY16, they would be off by 2-3%. There is no damage to the top line and the impact is only due to the disaggregation of subsidiaries. We hope to put out the restated numbers for FY16 with the Q2FY17 results.
What has given you the confidence to stay with the guidance on order inflows?
The pipeline of orders of Rs 4-5 lakh crore in a year doesn’t seem to be diminishing. Last year we did Rs 60,000 crore worth of orders in infrastructure in an environment which is a shade darker than what it is today and this year we are expecting to do close to Rs 70,000 crore. With a slight improvement in the environment the 10-11% increase that we are targeting in infrastructure should happen. I am chasing close to R1.5 lakh crore of fresh orders across sectors.
Apart from infrastructure, where will the rest of the growth come from?
Between power generation, transmission and distribution we should be getting a combined Rs 23,000 crore of orders. In hydrocarbons we are chasing about Rs 13,000-14,000 crore and we are halfway through in Q1.
Heavy engineering, which is normally Rs 4,000 crore, can become R8,000 crore as the assumption in guidance is that some of the defence piece will happen, most probably a guns programme, which is a R4,500-crore order. And if the remaining businesses grow at about the same rate as last year, it will all add up to R1.5 lakh crore. I am not considering big defence orders — submarine or warship or landing platform dock — which will then give us a buffer for something not happening.
What will L&T’s strategy be? Will you compromise on price to gain volumes?
We have not done that, instead let the orders go. In power, for instance, three orders opened in Q1 but we did not win anything because we believed we would have lost money had we bid at those price points. So we will be competitive but we can’t be writing off profits and this is true for our overseas projects bids as well. We have risked that stigma of no orders and still priced it the way we thought was best. Our goal is to improve return on equity and for that we need to get more profitable and also churn assets.
Recent CMIE data show private sector investments continue to remain sluggish. You too have said as much in successive commentaries. How long before private sector confidence comes back?
My sense is it is still two years away because most of the customers we speak to are at 60-65% capacity utilisation and their boards won’t clear investment plans until they reach 80-85% capacity utilisation. So what will essentially happen is top-up investments; today there is a concern about profitability so productivity-related investments are happening. The orders that we are getting relate to such investments. Most industrial sectors are weak and, therefore, we assume it will take two years for them to recover. That’s assuming the economy recovers, consumption goes up, credit flows are good. Only then will industry have the courage to invest.
How optimistic are you that demand and consumption will pick up?
For India one of the lead indicators is exports, which are soft. Exports need to be far more robust and India is still not competitive. In the two years’ time till investments pick up, FMCG companies and firms dependent on domestic demand will be early gainers. However, the guys who will create capacity for the larger market will be on the wider end of this recovery. And most of our engagement is with that side. But the order book is so large that I can afford to take softer order inflows for two years.