It has 138 subsidiaries, but the firm saw return on equity fall to 16% in 2012-13 from 31% in 2006-07.
Having a huge fleet of subsidiaries can prove to be a drag on the bottomline, Larsen & Toubro (L&T) is learning the hard way.
Over the last 10 years, the subsidiary strength of the company has grown from 30 to 138, according to annual reports filed by the company.
The conglomerate, whose vision was to scale up quite rapidly, put in thousands of crores of equity investment, but what the top management failed to spot was the trough of an impending infrastructure investment cycle in India.
The result is there to see.
While the subsidiaries are now contributing almost 45% of L&T’s consolidated revenues, on the profitability front, their contribution is languishing at a meagre 5%.
Worse still, analysts are expecting the situation not to improve much in the next two years or so.
The bottomline is the string of expansion has cost the company dear. According to a report from Motilal Oswal, a domestic brokerage, not just the contribution to profitability is down, but the consolidated return on equity (RoE) of the company has slid to 14% in 2012-13 from 31% in 2006-07.
Facts speak for themselves. In 2006-07, L&T had a total of 58 subsidiaries – a good 80 less than its current count.
The low profitability or the major drop in RoE is being mainly attributed to its scores of avatars of its core business of construction – roads, housing, power, equipment manufacturing, ship building and the like – staying primarily a part of its asset development vertical.
“Net loss in asset development increased to Rs 520 crore in FY13 vs Rs 310 crore FY12 and is impacted by i) poor toll collections for recently commissioned projects at just 5-6% of the project cost; ii) provision for diminution in investments of Rs 140 crore in property development business,” said analysts Satyam Agarwal and Nirav Vasa from brokerage Motilal Oswal in a report published on August 29.
Three of the main verticals that are weighing heavy on its balance sheet are infrastructure development, property development and manufacturing JVs (joint ventures).
But the analysts hold out some hope. Their assessment is the infrastructure cycle would be reaching its inflection point in the next two years and the company’s projects will start to gain traction again. And that’s when things will look up for the infrastructure major, now currently caught in a down cycle.
According to the report, L&T has 27 concessions, including 18 road projects (Rs 21,600 crore), five power projects (Rs 21,900 crore), three ports (Rs 5,700 crore) and Hyderabad Metro (Rs 16,400 crore) under infra development.
Agarwal and Vasa added that its net loss in concession business zoomed to Rs 580 crore in 2012-13 from Rs 320 crore in 2011-12, but net losses are expected to remain stable in 2014-15. “FY16/FY17 should witness a quantum jump as large projects in roads and Hyderabad Metro get commissioned,” they pointed out.
Similarly, property development business is expected to bring in strong profits in 2014-15. But manufacturing JVs, while offering a sunny side on long-term opportunities, would strain financials in the short to medium term as the global investment climate is not expected to move out of the sick bay any time soon.
L&T has four major manufacturing JVs – shipbuilding, special steel and heavy forgings, L&T-MHI turbine generators and L&T MHI boilers.
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