In late August this year, around the time the beleaguered rupee was just about spinning back to recovery mode following a disgraceful showing versus the US dollar inspiring a sigh of relief in the financial canyons of Mumbai´s Dalal Street top officials from Larsen and Toubro (L and T) landed at Ashgabat, the capital of Turkmenistan, to parley with the country´s deputy prime minister. The discussions related to the role the Indian EPC giant could play in building a series of overseas oil and gas platforms in the Turkmen zone of the Caspian Sea.
Hardly unusual that for a 75-year-old, $14 billion turnover company, which has for a considerable period of time left its imprimatur on projects overseas, notably in the Middle East. What was significant here, though, was the message of welcome from the Turkmenistan Government, which emphasised that ´huge opportunities await a reputed firm like L and T´a reflection of the clout the Indian construction sector goliath commands globally and underlining the fact that the time was ripe for the company to make a big leap internationally. From an L and T perspective, however, the move was a planned forward thrust into a geography thus far dominated by Chinese, Koreans and Japanese firms. Ergo, the company is making a very strong bid for the supply of three overseas platforms in the zone, as well as a gas processing plant.
But, L and T´s place at the top of the pantheon of Indian construction firms is not just about how it is perceived overseas. It is also extremely grounded in domestic achievement, and is more real than the 'Imagineering' coined by the company´s minders. Rock solid, if you consider the order book position of Rs 1.76 lakh crore (as of September 30, 2013) it has managed to grow at a rapid pace notwithstanding its large size and despite being in the debilitating umbra of the economic slowdown. L and T has made considerable headway in the Indian infrastructure market over the past three years despite the overall situation, which is challenging from the project execution standpoint and declining margins. Come hell or high water, this is one Indian multinational that always demonstrates a never- say-die attitude. This sunshine spirit stems from a breathtaking all-round performance for FY14, the company is expected to close with an order book of Rs 186,000 crore!
It is easy to see why there are no immediate challengers to the company in the construction zone. ´In the past 15 years, it has transformed itself into a company that is very focused on creating value for its shareholders,´ says Arvind Mahajan, Partner and National Head, KPMG India. ´There is no one like it on the horizon. L and T towers over all players. It is No. 1 to No. 10!ö Mahajan´s intent is not to convey that other players in the Indian field are recent upstarts or parvenus but to underscore the fact that the engineering and construction major outruns the others by many a mile.
The result is already there for everyone to see across India´s vast landscape in the form of L and T´s successful projects: metro rail stations, airports, power transmission substations, solar plants, water supply, cement plants, transport systems, bridges, roads, ports, nuclear plants, ship building, hydroelectric projects, buildings, and even supplying critical components for ISRO´s rocket programme or building the country´s first nuclear submarine. In short, the company has played a pivotal role in nation-building. ´L and T is a well known and respectable name in the construction industry with a reputation of delivery on time and with quality,´ affirms BI Singal, Director General, Institute of Urban Transport, New Delhi. ´The kind of projects it does, whether airports or metro rails, are a huge national confidence generator. As a result, more and more cities are constructing or planning to construct such projects.´
Competitive edge and capability Having established itself as a dominant force in the EPC space, the country´s largest construction and engineering company is not just ahead from an order-book perspective but even from a capabilities standpoint.
So what gives the company an edge over the competition? Innovation, most certainly, has been central to L and T´s strategy in all areas of business, from buildings and factories, heavy civil infrastructure, transportation and power transmission and distribution to water and renewable energy.
In fact, the company has been counted among the World´s Most Innovative Companies by Forbes in the past.
"We have initiated several innovations in all areas of our business with a clear focus on the areas of supply chain management, cost competitiveness, operational excellence, value engineering, and improved capacity utilisation," reveals SN Subrahmanyan, Member of the Board and Senior Executive Vice President (Infrastructure and Construction), L and T. L and T´s core competence lies in its strong engineering capabilities with facilities backed by R and D laboratories and technology assimilation that provides key services like feasibility studies, project reports, system engineering, and architectural, structural and civil design for infrastructure development projects, all internally.
For example, L and T Ramboll Consulting Engineers provides civil engineering and consultancy services for a wide range of projects in the transportation sector, including ports, airports, highways and bridges. In addition, L and T hasn´t shied away from looking outward to access technology with leading global players like Mitsubishi Heavy Industries, with whom it entered into a JV for a UMPP project in India, Komatsu, Demag Plastics, Halliburton and Shell. These collaborations enable L and T to develop best global practices and benefit from superior technology to gain edge over other competitors and transfer capabilities internally.
Further, L and T has in-house manufacturing and technology capabilities that provide support in faster execution of projects by manufacturing electrical and mechanical machinery and components required for construction activity as opposed to competitors, who either buy or lease equipment on the basis of need. It has a demonstrated equipment capability that it leverages to its advantage. Also L and T´s in-house technology services help provide continued IT-enabled systems for construction activity, helping it manage a large set of diversified projects effectively and on time. ´Our world-class construction methodologies serve as a major differentiator with our domestic competitors says Subrahmanyan.
L and T also sets itself apart from other EPC players by leveraging its well-integrated engineering capabilities. ´Historically, L and T has been a company to bring forward engineering solutions that have been applied coupled with best-in-class project management practices for the timely execution of EPC projects in various areas,´explains Girish Shirodkar, Managing Director, Strategic Decisions Group, Asia Pacific, ´The company´s continued contribution to a wide variety of sectors stems from a culture of applicative R and D and research. Today, developers ask specifically for L and T because of its ability to synthesise and integrate its diverse world-class engineering, manufacturing, procurement, construction and fabrication skills around turnkey projects. This is reflected in the fact that it grew its order book at a time when other EPC players struggled in the nationwide slowdown.´
Admirers Inc This ability evokes admiration from collaborators and competitors alike. Just ask Malaysian firm Scomi, L and T´s consortium partner for the first monorail project in India.
"We are happy to have found a proficient and supportive partner in L and T," says Kanesan Veluppillai, CEO, Scomi Engineering Bhd. "In our association since 2008, we have gained valuable learning in our journey together to bring a modern transport solution to Mumbai."
For his part, Aditya Mehta, Director, Jaypee India, Kolkata, is wont to describe L and T as ´a synonym for quality in construction.´ He elaborates, ´Whether it is a project on a time constraint or one demanding crucial expertise for execution, the company possesses the capability to execute it with ease. It is not wary of adopting new methods, challenging each milestone and exploring new construction techniques with every project. Be it a nuclear power plant, state-of-the-art airport, oil field facility, modern urban transit system or even a simple building, L and T with its dedicated workforce, which thinks beyond the ordinary, is ready for any challenge.´
To this, Ashish Rakheja, Regional Managing Director-Building Engineering, AECOM, adds, ´On one side, the construction industry in India is extremely price-sensitive owing to fierce competition and on other, developers bend backward to engage L and T at a price premium on their projects. This speaks volumes about an engineering company that generates confidence among end-users and owners owing to its timely delivery and highest quality.´
Order book and financial performance An examination of the financial results of construction and engineering companies reveals that L and T has further consolidated its position and managed to attract business owing to its rock-solid leadership in the segment. This is also reflected in its share price.
L and T commands 71 per cent of the sector´s market capitalisation while its construction division contributes to 36 per cent of the revenue of the sector. With a weak internal economy curbing spending on big projects 80 per cent of L and T´s revenues are from projects in the domestic segment and the current bottlenecks are caused by difficulties in buying land and investments are being deterred by high funding costs the company is currently making a concerted bid to win more orders overseas to meet its annual revenue growth targets. With the investment momentum now having veered overseas, the company is eyeing markets in the Middle East, countries in Southeast and Central Asia, and pockets of Africa.
New orders between July and September grew at an annual rate of 27 per cent to Rs 265 billion as international order inflows more than doubled, accounting for 43 per cent of total new business, according to a statement by L and T. Overseas contracts won in the quarter include a $1.4 billion project to build bridges, tunnels and stations for a metro line in Riyadh, Saudi Arabia, the Sheikh Khalifa Interchange, a major infrastructure project linking the emirates of Abu Dhabi and Dubai. In the power transmission business, it already has a strong foothold in the GCC and is expanding its footprint to Africa, Southeast Asia and Iraq. The company is also pursuing portfolio expansion in T and D along with forays into new lines of business. It is looking to diversify into infra electrics in the existing Gulf markets and is eyeing prospects of transmission tower exports to the US and Canada as part of identifying new zones for business.
Speaking about the company´s order book performance, DR Dogra, Managing Director, Care Ratings, says, ´Despite the slowdown in capital expenditure, especially in the domestic market, the company has been able to manage a relatively strong order book owing to its ability to cater to different segments backed by strong execution capabilities and an established track record. Further, it is securing more orders from other geographies, especially the Middle East, Southeast Asia and East Africa, which has bolstered the order book. In our view, the company shall continue to maintain its strong business position and a favourable capital structure.´ The company´s solidity was in evidence when it maintained its revenue growth forecast of 15 per cent for the current fiscal year to March after reporting a 7 per cent annual rise in recurring net profit for the three months leading to September 30, beating the estimate of analysts. Ahead of the earnings, shares in L and T, valued at $13 billion, catapulted 4.2 per cent in the Mumbai market, which gained 2.4 per cent. ´L and T numbers are ahead of our expectations,´ says Sanjeev Zarbade, Vice President-Private Client Group Research, Kotak Securities. ´We continue to be positive about the stock.´
Admittedly, while L and T is better placed than its peers in the construction sector, it is a fact that it doesn´t have its former balance sheet advantage in 2013 it has toted up a consolidated debt of Rs 61,994 crore, followed by a decline in productivity of capital owing to subtracted returns from a few infrastructure projects. A sale of stakes could be one of the measures it adopts to improve its position in the market.
Monetising assets To bolster its balance sheet, L and T is now increasingly looking to monetise its assets. Company sources aver that it could dispose units in a business trust backed by L and T Infrastructure Projects Ltd´s road network IDPL´s investment portfolio consists of 21 major projects including expressways, ports and the Hyderabad metro rail sometime early next year.
The engineering firm is reportedly contemplating announcing a listing in Singapore for its toll road projects, which could help raise $ 700 million. It still remains a big question, though, how much it helps the company ease its debt burden. ´Over the past few years, L and T has made significant invest¡ments in different business verticals including finance, infrastructure development projects, real estate and shipbuilding, and debt levels have increased at a consolidated level,´ reasons Dogra. ´However, the company has a stated policy of maintaining leverage at a prudent level. In the past, it has demonstrated the ability to raise funds by monetising investments with a mature business model.´
New growth pockets With shrinking margins, L and T will have to go all out to consolidate its order book position, most of it abroad because of the challenging situation. The fact that the company´s construction business is spread across many verticals and that it is continuously expanding its frontiers allows it a considerable cushion in terms of order inflow even during times of slowdown. As a result, even though many projects have been called off by various developers, L and T is examining growth undercurrents in spheres like railways, fertilisers, chemicals, renewables like hydro and solar, nuclear power, defence, ship building, marine structures and water. In fact, the company is pushing to win more water projects, notably work related to wastewater treatment, water supply and desalinisation plants in the Middle East. It is currently building a wastewater treatment plant in Doha, Qatar. In September, L and T Construction bagged new orders worth Rs 26.83 billion across various business segments in the domestic and international markets, of which the water and renewable energy business accounted for orders worth Rs 13.34 billion. Three major turnkey orders received were from the Public Health Engineering Department of Rajasthan for integrated regional drinking water supply projects. The scope of the contract includes supply and laying transmission pipelines, construction of water treatment plants, clear water reservoirs and pumping stations. Another key order is from the Bangalore Water Supply and Sewerage Board for improvement of water distribution systems in the city.
With considerable traction in orders in the water segment, the company hopes it will lead to a 20 per cent surge in business. Mahajan, for one, sees water as a great sectoral opportunity for L and T. ´I believe the company will increase its presence in the water segment in the long term,´ he avers. ´That is where the big opportunity is. Water, a scarce resource, will be the big challenge of this century, and wars may well be fought over it.´ The other opportunity zone is in the area of hydrocarbons.
In July, L and T bagged two EPC projects worth Rs 1,100 crore in the UAE from Takreer for the Abu Dhabi International Airport and in Qatar.
Overseas expansion Veritably, expanding abroad in what is now a close-knit world has become a strategic imperative for large companies like L and T. L and T Construction´s business abroad currently extends to areas like buildings and factories, heavy civil infrastructure, power transportation and distribution, water and renewable energy.
But can the company measure up to the intense competition in the international zone? ´L and T´s experience of executing projects internationally as well as its existing base at international destinations, like the Middle East, positions it on a par with other international construction companies, providing access to newer avenues of opportunities beyond domestic markets,ö says Shirodkar.
He believes that despite its unique engineering and project delivery capabilities, L and T has begun to reinvent itself for the global market sufficiently. ´It has not shunned away from compromising on prices to suit the extremely challenging operating environment, allowing it to post growth upwards of 20 per cent in order inflows year-on-year in the 1st quarter of FY13,´ he adds.
For his part, Subrahmanyan, explains his company´s strategy for growth thus: ´It will be through expansion of our footprint and strategic tie-ups for technology. Through diversification, penetration and expansion into new markets, we will continue to consolidate our different businesses and grow exponentially.´
Future outlook Nevertheless, growth in a increasingly shrinking world will be very challenging. Despite the pace it has set itself, India´s biggest engineering and construction firm has a long way to go to truly function as a global setup, like a Bechtel or Samsung, for example.
It begs the question: will it be able to do so 10 years hence? ´It doesn´t need to copy anyone,´ says Mahajan. ´L and T does possess the capability and if it has to compete with the best in the world, it will have to think of international benchmarks. I see L and T growing as an Indian multinational in coming years competing with players from other countries like Japan or Korea. However, it cannot afford to ignore domestic constituents if it has to rise in stature. The company will have to build on its existing capabilities.´
What offers hope is the fact that the company has the human resource and skills base to fulfil such aspirations. Despite criticism from the outside that it is a company run by a board that comprises full-time directors, nominee directors appointed by government-owned financial bodies holding a stake in the company and independent directors, it is a professionally run organisation, a hugely successful one at that with a veritable army of employees (26,487 for L and T Construction as on March 2013), and a bulging order book.
When the present executive chairman AM Naik came to the helm at L and T, the company was plagued by problems like a lack of meritocracy, lack of growth for young personnel owing to a seniority centric culture, focus on engineering solutions as opposed to unlocking value through its large set of business units, and lack of succession planning. While a number of these challenges have been addressed to a large extent by the transformation L and T has undertaken over the past decade including its restructuring the company would need to continue upon the path of transformation for it to achieve global status.
Infrastructure sector analysts feel that companies like L and T require further reform. For instance, Shirodkar is of the view that ´the company needs to transition from a individual-led leadership model to creating a network and culture of collaborative leadership that can be adapted in other geographies and businesses; allow business units to work as independent profit centres with substantial autonomy and decision making; and, going forward, take care of the succession planning threat because of an ageing board.´ Further, though the company´s business is diversified, sales are concentrated in the engineering and construction business, which contributes about 70-80 per cent of the company´s revenues. ´L and T needs to leverage its engineering, R and D and brand strengths to help unlock value in its other businesses,´ he argues. ´Even after the restructuring, L and T continues in too many businesses, some very small, very diversified, so portfolios have to be rationalised to maximise value and organisational capacity must be built up to support that growth and value creation.´
Meanwhile, Mahajan believes change is eminently possible. ´As a 75 year-old company, L and T has had to reinvent itself several times and it should do it again if necessary,´ he insists. ´There is always a learning curve and there will be difficulties going forward but if the company has to increase its business dimensions internationally, L and T will do well to form partnerships. That would be a smart way to grow.ö And to lead and tower over the world like Vamana, we might add.
L and T Construction has undertaken several HR initiatives with a clear focus on enhancing project planning and execution. A number of in-house training and development programmes are conducted to address the skill gap enhancement. In addition to this, customised programmes are conducted to enhance project planning and project execution capability such as Project Management for Execution Excellence (PMEE), Mentoring and Augmenting Planning Skills (MAPS), and project site interventions through Diagnostically Evolved Site Intervention (DESI) programmes. The company has maintained the culture of nurturing fresh talent from educational institutions, training them, entrusting them with different roles, providing challenging work profiles, thereby creating a pool of future leadership. An investment of about Rs 20 crore for HR training activities and close to 2 lakh training hours are testimony to the company´s commitment and initiatives to train and empower its manpower and augment its capability portfolio. The construction major´s emphasis on skill building can be seen through its support to eight construction skills training institutes (CSTIs) and 27 Industrial Training Institutes across the country. In 2013, L and T contributed Rs 73 .04 crore or about 1.49 per cent of its profit after tax towards social development, in the fields of education, healthcare, skill building and environment.
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