SN Subrahmanyan, Deputy MD and President of L&T says the company has prospect projects in the hydrocarbon space and gas exploitation business.

Jan 11, 2016, CNBC-TV18  SN Subrahmanyan, Deputy MD and President of Larsen & Toubro says the company has prospect projects in the hydrocarbon space and gas exploitation business and the company is L1 in considerable number of its orders. The issue of crude price fall is acutely worrisome and Larsen & Toubro  (L&T) is cautiously looking at the Middle Eastern scenario, says SN Subrahmanyan, Deputy MD and President of the company.

The company's hydrocarbons business has a large presence in the Middle East.

Countries such as Kuwait and UAE have surplus budget, rich sovereign funds and smaller debt as a percentage of gross domestic product (GDP) due to which these economies can sustain the fall in prices for next 3-4 years, he tells CNBC-TV18.

However, there could be belt tightening going forward where L&T's project spendings will be well-calculated, he says, adding the company will continue to pursue opportunities in these geographies.

Subrahmanyan is of the view that the company has prospect projects in the hydrocarbon space and gas exploration business and the company is L1 in considerable number of its orders.

In addition, L&T's infrastructure business is faring well because of many metro, road and welfare projects undertaken.

Further, Subrahmanyan says there is a challenge to achieve year-end targets but he is cautiously optimistic about meeting the company's targets.

Below is the verbatim transcript of SN Subrahmanyan's interview with Nigel D'Souza and Reema Tendulkar on CNBC-TV18.

Reema: You are joining us at a very opportune time because the hydrocarbon segment of the company has been a laggard for the company and now, with crude at 12 year lows, what kind of an impact are you seeing on the business? Has there been a slowdown in order inflows?

A: The crude prices having come down to what it is today and having even dropped yesterday to an extent which was predicted but what is coming true does cause anxiety and worry. There is no doubt about it. But at the same time, one has to look at it from an overall perspective. The countries that we are in, Middle-east, which is essentially, Saudi Arabia, Qatar, Oman, Kuwait and UAE, have all got surplus budgets. These countries also have huge amount of sovereign funds. The debt percentage of the gross domestic product (GDP) is negligible as of the moment.

So, our belief is that these economies will be able to sustain it for the next three to four years. But if the oil prices continue to remain where it is and that is a single most, biggest source of their income, then naturally, belt tightening and spending on projects and essentials would be looked at in a different manner and it would be a serious matter therein. But as of date and at the moment, we believe essential projects will go through. Projects that we have on hand will continue to get funded and projects which are futuristic in nature will continue to get exploited, that means developed and therefore, we look at a scenario which is cautiously there in front of us and we need to take it forward as such.

Nigel: But over the last few years, order inflows for infrastructure business has been driven by the Middle-east. Is the slowdown in oil in fact, impacting the order inflows for the infrastructure business as well?

A: We had booked nearly USD nine billion of infrastructure projects. The back log as of date is about USD eight billion because we have also been performing and progressing on the jobs and billing is taking place. Now, to categorise projects in Middle-east into one basket is not the appropriate thing to do. There are projects which are categorised in three or four baskets. One is the hydrocarbon sector which is dealt by my senior colleague in the board and as I can see it, there continues to be prospects in certain parts of Middle-east especially, Saudi Arabia and Kuwait, and we will continue to pursue that.

There are gas exploiting projects which continue to be looked at in the Middle-east. I suppose we will continue to pursue that. On the infrastructure side, there are again two broad kind of projects. One is the essential spends like the metros, the roads, and welfare projects. These projects is our belief will continue to get priority. We do see prospects, we do see tenders, we have quoted for such projects and we look for success as we go by.

Reema: You did mention that you are prepared for cost cuts in the Middle-east. If the situation persists maybe for the next two or three years, the company has already taken considerable write-offs in the past on account of your hydrocarbon business. Should we expect further write-offs in the near-term?

A: We have written off what is needed to. As we see it, the projects that we have on hand are reasonable pertaining towards the profitability that we need to have. Hydrocarbon business also, as we understand it, has gone over issues that it has been through. We should be back on track and we should take it forward to where it ought to be taken to.

Nigel: The company has formally announced order inflows or roughly around Rs 6,200 crore on the exchanges. That is for the third quarter. Now, that number compares with nearly around Rs 14,000 crore for the same quarter last year. To meet your guidance, you company would require inflows of close to around Rs 1-1.1 lakh crore in the second half of FY16. The analysts on the other hand, they are factoring a decline of 10-15 percent in terms of order inflows. Are you still optimistic about meeting your target?

A: As we see today, there are orders that we announced, there are orders that we got which we are unable to announce because of client request or confidentiality involved therein. There are also contracts where we are L1 considerably, but we cannot mention it till we have got those orders. And most of these orders which are in L1 basis, should accrue to us.

But the fact remains that there is a challenge as we see it to achieve the year-end targets that we have set forth. Normally, the quarter that sees the maximum traction is end of Q3 and Q4 predominantly, because most of the government organisations and agencies and including private sector tend to close out the Budget, so try to increase the capital expenditure (Capex) to see that budget Capex of what they have budgeted is achieved.

And therefore, traditionally, if you see the way we go about Q4, is a season in which we get the maximum orders. As we see it, there are opportunities in front of us that we have quoted, it is not even quoting, we have quoted. We are well placed in some of them. We expect to be well placed in some of them. Overall, I would leave it to you at the moment to say that we are cautiously optimistic about what we had thought about ourselves. Let us wait for the Q3 results, there will be a press meet, there will be an analyst meet when we tend to clarify such matters more in depth and then we will look at it as we go by.

Reema: So, as things stand, there is no change in your order inflow guidance of 5-7 percent that you had set out for FY16?

A: That has been the stated position and I would continue to keep that in front of us at the moment, yes.

Reema: Let us talk about margins. There has been a concern that the company’s bid for sub-optimal orders to meet, you have been bidding to meet your tall order inflow guidance. How have margins been on the new orders and what kind of margins are you expecting for the full year?

A: Margin is a game where there is always pressure. One would always like to increase margins, no doubt about it. But look at our size now. We are a Rs 1,00,000 crore company. We have a reasonable backlog which is nearly two years of sales. We are not being unusually aggressive or going all-out to achieve orders just because there is a target in front of us. This is a professionally managed company. There is a fair amount of due-diligence, risk understanding, project profiling, client profiling, even the geography profiling that takes place before we bid for jobs.

So, we continue to do what we need to do in terms of protecting the profit and loss in balance sheet. But, as the volume grows higher, there tends to be a little dip in margin which is visible, but at the same time, understand a 10 percent margin was relevant when the inflation was 10 percent, the bank rates were 12-13 percent and the economy was such, but when the inflation is come down to 5-6 percent and the bank rates have come down to 10-11 percent, you can tend to be a little more offsetting on that and that is what is happening.

But we continue to place enormous importance on operational excellence. We continue to look at productivity increases, we continue to keep technology edge, has been our background and where we are and margins are a constant reminder of how we function as an organisation and therefore, we will continue to look at it. There will be no compromise on that. .