Larsen & Toubro, the country's largest private engineering company, is facing headwinds in hydrocarbons sector owing to time and cost overruns in 4-5 projects in West Asia.
"After many years of profitable operations, hydrocarbons business has reported negative contribution in projects that we are executing overseas. We have seen award of orders slowing down considerably in the last few quarters. Domestic market hardly participating in order-book and international orders have also been slow in last few quarters, consequently there has been decline in order book," R Shankar Raman, chief financial officer, said, at the first-quarter earnings conference.
L&T's consolidated net profit in first quarter surpassed market estimates, rising 111% to Rs 966.89 crore year on year mainly on the back of Rs 1,350 crore netted from Dhamra port sale.
L&T reported a one-time gain of Rs 249.28 crore as it it sold shares in L&T Finance Holdings to meet the capital market regulator's guidelines and the City Union Bank stake sale.
Led by overseas orders, net sales rose 10.1% to Rs 18,974.75 crore yoy. Order inflows rose 11% on-year to Rs 33,408 crore. Consolidated order book as on June 30 rose 13% to Rs 195,392 crore from a year earlier, with overseas orders accounted for 26% of the total.
In the hydrocarbons segment, five projects in West Asia -- two in upstream, three in downstream and mid-stream -- recorded cost and time overruns, and according to the accounting convention the company had to make provisions for these. It provided Rs 900 crore for such time and cost overruns in such orders which are worth around Rs 10,000 crore, Raman said. These were mainly a result of stringent contractual conditions, changes in specifications by customers, sharp increase in local labour costs and certain unforeseen execution complexities, the company said.
Majority of hydrocarbon orders are fixed price and hence do not have cost escalation or pass through option. These projects are moving towards completion during the current year, and the management does not expect requirement for more such provisions on any other orders.
Hydrocarbon segment's revenue in the April-June declined 49% on-year to Rs 1,555 crore due to lower opening order book and deferment of project awards, L&T said. International clients contributed 51% of segment revenue during the quarter. The company received fresh hydrocarbon orders worth of Rs 5,704 crore during quarter ended June, registering growth of 80%. Total order-book grew 32% on-year to Rs 14,580 crore.
Raman said international orders wins in hydrocarbon is a recent phenomenon, and many of these clients are interacting for the first time with the company.
"We do believe our discussion with customers will enable us to drive some settlements which could provide some improvement in progression of these projects in subsequent quarters," he said. Apart from sharpening its risk management matrix, the company would now be more selective and adopt sub-contracting as a significant model, Raman said.
The order pipeline in hydrocarbon sector was looking more robust especially in international market like West Asia, as UAE, Kuwait and Saudi Arabia continues to invest in onshore and offshore projects. In domestic market while investments are delayed, large customers like ONGC is seen ordering more. "A few bids that we made are pending and we hope those will be finalised in next few months. It is likely that ONGC's capex programme will not get constrained by subsidy burden this time. ONGC may also invest to re-energise its depleting wells and develop new finds. Thus, prospects for domestic market which has remained very subdued over last 12 months is expected to improve in the remaining months of this fiscal," Raman said.
"Following headwinds in a few hydrocarbon projects, L&T's blended margins would be weak until these projects are completed. Management clearly did not show apprehension on new hydrocarbon orders.
However, we expect revision in the company's earnings estimates as well as reduction in target price as apart from hydrocarbon, many other core segments of the company put up a weak show. It can be said that developmental project business saved the day," an analyst from leading domestic brokerage said.
He said the stock had been outperforming since last few months hence some profit booking is called for. While in short-to-mid term there were concerns, in the long term L&T would definitely gain as the capex scenario is only likely to improve from here.