Larsen & Toubro:‘We are insisting on profitable growth’

YM DEOSTHALEE, chief financial officer (CFO) of Larsen & Toubro, is enormously respected for his 13-year-long stewardship of the premier engineering company's finances, a period which has seen many business cycles. During this period, L&T's money management has acquired a formidable reputation. Its treasury operation, for instance, is regarded by its peers as best in class. Mr Deosthalee spoke to ET NOW on the company's better-than-expected performance in the past quarter and what the company is doing to maintain the momentum in the coming quarters.

You have managed to post better margins in the fourth quarter, even after booking mark-to-market losses to Satyam to the extent of Rs 186 crore. L&T, currently, has an order backlog of Rs 70,000 crore. Can you give us a sense of how you see this flowing, in terms of revenues in the quarters to come?
The backlog in the order book consists of approximately next 24 months of revenues. As far as the financial year 2009-10 is concerned, a substantial part of the revenues will come from this order book. Some parts of the revenues will come from new orders, which we will book in the first quarter and maybe early part of the second quarter.
Over the next two to three quarters, how much of that order backlog do you see coming in?
We have indicated that we will grow at 25% this year. We believe that the government will continue its thrust on infrastructure. And we have a lot of opportunities in the roads sector, urban infrastructure, water supply schemes and ports. We are also expecting new orders from the power sector and we have beefed up our capabilities. We are also beefing up our engineering, procurement and construction capabilities and strengthening our engineering capabilities to undertake lumpsum turnkey jobs in the power sector.
The other aspect investors would want to know is about your margins going forward. The raw material costs have gone down. Do you expect margins to improve further?
As far as our E&C segment is concerned, the margins are reasonably good at over 12%. The benefit of reduction in commodity prices was reflected in our margins. We don't want to grow at the cost of profitability. We are insisting on profitable growth.
How do you price your orders at this point of time? What percentage of the new orders will be on a fixed-price basis?
It is difficult to forecast that. Many customers do not agree on the cost-plus arrangement, they would like contractor to take all the risks and, therefore, those jobs will be fixed-price contracts. There are some customers who are willing to share the risks, and therefore, the price escalation formula is built into the contract. On the whole, about 50% of the jobs are on a fixed-price basis.
In recent times, L&T has lost quite a few orders. Any particular reason?
In a contracting business, it is not that you get all the jobs, you get some and you lose some. The scenario is becoming very competitive. Since there is no growth in many parts of the world, companies from Korea or Japan or Europe are all hoping to get jobs from India. However, when we give you a guidance of 25%, we do take into account what are the opportunities and potential available for the company.
And finally, the outlook on two businesses — shipbuilding business and infotech. How will life change for L&T Infotech now that you don't have Satyam?
As far as shipbuilding is concerned, we are making investments near Ennore. We are setting up a new shipyard. It is going to be a very focused activity catering to the Indian Navy. As far as infotech is concerned, we are growing at a reasonable rate.
It is important for us to look at possibilities of growth in this business. We aren't saying that we're going to be one of the largest companies, but we need to be of a reasonable size, and that could be a billion-dollar plus. We will continue to grow in this business, which is a derisking strategy for the group. So from that perspective, we will look at opportunities in the infotech sector.

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