Workers at an L&T factory (Photographer: Santosh Verma/Bloomberg)

L&T Betting On Africa, Central Asia To Deliver 10% Revenue Growth In FY18, Says AM Naik

Larsen & Toubro Ltd. Executive Chairman AM Naik is confident that the engineering and construction giant will meet its 10 percent growth forecast this fiscal and maintain the level in the financial year 2017-18.

Naik told BloombergQuint's Menaka Doshi that his optimism stems from the fact that the company historically has had a good fourth quarter and the execution of projects is generally accelerated in the last three months of the fiscal.

L&T has lowered its guidance for the current fiscal to 10 percent from 12-13 percent earlier.

The company’s revenue grew 1.38 percent in the third quarter ended December 2016 to Rs 26,287 crore from Rs 25,928 crore in the year-ago period. The consolidated order inflow fell 10 percent year-on-year to Rs 34,885 crore in the third quarter.

“There is always a fourth quarter where the budgets that our governments have (Centre and states) -- more than half of our projects are government projects -- and they want to spend that. Consequently, we don't have to slow down. We accelerate our execution always in the fourth quarter,” he said.

For the next fiscal, Naik said the order book is “very good” at over Rs 2.5 lakh crore and if there is an improvement in slowed-down private projects and and if real estate starts moving as the impact of demonetisation fades, L&T will grow at over 10 percent.

We are hoping for the best. Therefore, every time we were saying we’ll grow at 15 percent (in FY18), I’ve moderated it down to 10.
AM Naik, Executive Chairman, L&T

Naik said L&T derives 36 percent of its revenue from the international markets, especially the Middle East. But since the drop in crude oil prices, the economies in the Middle East have slowed and scaled down spending, lowering the growth for L&T.

L&T Betting On Africa, Central Asia To Deliver  10% Revenue Growth In FY18, Says AM Naik

At Rs 11,865 crore, the company’s international orders constituted 34 percent of the total order inflow in the quarter ended December 2016.

“Our ability to make up 30 percent from Middle East to really target 12 or 15 percent (overall growth) has become difficult. So we are looking at different geographies. Its benefit will begin to come in 2017-18,” he said.

L&T has been exploring North Africa, East Africa, Central Asia and South East Asia, including Indonesia, Malaysia and Myanmar.

The share of revenue from the newer territories will be lower. As a result, Naik expects the revenue share of international business would be five-seven percent lower in FY18.

“One thing is that the order size is smaller (from new territories). Second, we are also learning those geographies. It was only 18-24 months ago that we selected them and decided to go ahead with it. It is going to take some time before it reaches a level of maturity.”

Naik said gross margins are 10-11 percent in India, 7-8 percent in the Middle East, tax free, and 8-9 percent in North Africa, adding that he is hopeful of maintaining margins despite the geographical diversification.

On Budget 2017, Naik said he was satisfied with the allocation of funds for the infrastructure sector. Considering the government’s other commitments and state polls, it could not have done more, he said.

I am cautiously optimistic. While it is short of what we possibly wanted, and mega projects are something what L&T really does, so the huge amount of push that has been put in affordable housing is not something which L&T does.
AM Naik, Executive Chairman, L&T

“In a way our exposure to infrastructure of all kinds put together will be limited to almost the same things. Maybe slightly, if at all, better,” Naik added.