Challenge is going to be resource management without doubt: Shankar Raman

Raman discusses the West Asia market, India's order prospect and L&T's new businesses

Larsen & Toubro (L&T) has reported a new high in terms of order book and order inflows for the September quarter. R Shankar Raman, the chief financial officer (CFO) and whole-time director of L&T, discusses the company’s prospects in West Asia, India’s order inflows and L&T’s new businesses, in an online interaction with Amritha Pillay. Edited excerpts.

 

With the robust growth in revenues and order inflows, will the company shift focus on  margins?
 

The focus was always on margins. In our business, unfortunately the cost gets committed upfront to the client, and the execution takes anywhere between three and four years.

 

What are the main challenges in executing the outstanding order book of Rs 4.5 trillion – do you see labour, supply-chain related concerns?

In our project wins in Saudi Arabia, the client factors in a lot of supply chain issues in how they schedule the project. The way they have been approaching EPC contracts is refreshing as compared to India. They do not mind stepping away from the L1 compulsion and look at somebody who's as close to that price as possible. The approach to contracts by those customers have been focused on finishing, not just commencing. The fact still remains that we will have to deliver, so the pressure is now on us to make sure we get our resources, our supplies lined up at acceptable costs. So the challenge for us is going to be resource management without doubt.

 

A significant portion of your order inflow is coming from Saudi Arabia. Does the company feel the need to de-risk or diversify?

So far our track record in executing projects in Saudi Arabia and Saudi Aramco were satisfactory. There is nothing that occurs to us as something that we need to de-risk. The risk levels associated with large contracts continue to remain the same and they need to be well attended. We will continue to participate in opportunities till such time our appetite and our capability to deal with these opportunities exist. Possibly there will come a time where we will feel stretched, and at that time we might have to take a call. So, to that extent, I think balancing the resources, opportunities, and balancing the deployment for profitability are things that we will have to juggle with.

 

Would there be some calls that you will take in the next few quarters of letting go of certain business divisions?

Not letting go of any business divisions other than thermal power EPC where the opportunities are limited and whatever limited opportunities are intensely competed.

 

How does the Indian market look in terms of order inflows for the current and the next quarter? Are there signs of an election year impact showing on the business?

The momentum of the pre-bid efforts continues. I don't think any slowdown is visible on the tenders that are coming out of the bidding exercises that we are doing. The way the half year orders have lined up at least secures us in terms of our plans for the year and that is the reason why I had mentioned that we could outperform the guidance that we had given.

What is a comfortable share of international orders in the total inflow for L&T?

I think we are around 60-40 (domestic-international) at the moment, and for one more year I think it will be like that because post elections, when the new government settles in, that is when a renewed momentum will take place. So, I think it is prudent to presume that dominance of international orders for a couple of more quarters could continue. If we continue to get large international programmes every year, year-on-year they will balance out the multiple opportunities that India will throw up.

 

In the size of the orders you bid for, is the floor and a ceiling you are working with?

The lower ceiling gets defined by competitiveness because small companies, smaller competitors are far more cost efficient when it comes to dealing with smaller orders. For India, the order size by and large ranges between Rs 500 crore to Rs 2,500 crore. It's only in West Asia that the sizes are becoming larger. The disadvantage with these lumpy orders is at this time next year you will again compare. So the challenge is going to be how to keep this sustainable because India has to do much more investments to keep pace with these volumes.

 

What are the updates on some of your new ventures?

The first electrolyser is under construction, and hopefully by the end of this financial year the product will be out. We will test it, and if it does, we will possibly start producing commercially for the markets.

 Things are moving all right as far as EPC is concerned, and we are still in discussions with Indian Oil Corporation for the EPC services for the hydrogen generating plant that they want to put up hopefully again by the end of the year.

On semiconductors, it is another area that we are trying to incubate. We've chosen chip design as an area and it'll be essentially focused on the automobile industry and industrial application. We think we'll be able to assemble a team India as a huge talent of chip designers already working on many, many fronts. And we also have in our LTTS the technology services. It'll be more in the IP area of chip designs that we will work on.