While the intentions of the current government are good and it’s moving in the right direction, the implementation of policy reforms and measures directed towards accelerating economic growth is taking “longer than anticipated,” according to AM Naik, group executive chairman of engineering conglomerate, Larsen and Toubro Ltd (L&T).
The Mumbai-based company reported its earnings for the fourth quarter of fiscal 2016 on Wednesday. Despite operating in a challenging business environment, L&T reported a 19 percent year-on-year increase in net profit for the quarter ended March 31, 2016, to Rs 2,450 crore. The improvement in bottomline came on the back of an 18 percent rise in turnover in the same period to Rs 33,160 crore.
For the full year 2016-17, however, L&T’s growth was muted and it missed the order inflow target that it had set for itself. The company had expected to grow its order book by 10-15 percent in FY16. The company’s order inflow in FY17 declined by 12 percent to Rs 1,36,900 crore and the total order book grew by only seven percent to Rs 2,49,900 crore. This order book doesn’t include another Rs 15,000 crore worth of orders that are with the company, but which have been moving slowly due to lack of funds with the sponsors of these projects.
L&T reported a turnover of Rs 1.02 lakh crore for FY16, up by 12 percent over the previous fiscal. The company’s net profit in the same period rose by seven percent to Rs 5,090 crore.
According to R Shankar Raman, L&T’s chief financial officer, the tapered growth in FY16 was a result of weak investor sentiment that has led to many capital expenditure projects, especially in the infrastructure sector, to be either deferred or cancelled. However, the growth in revenue and profitability reported by the company has been a function of existing orders with the company, especially in the international markets, being executed profitably.
The operating profit margin reported by the company in the January-March 2016 quarter stood at 14.7 percent (from 12.8 percent in the same period a year earlier). Its full-year margin declined marginally to 12 percent from 12.2 percent in FY15.
“Infrastructure projects have become largely dependent on government spending as the private sector is passing through stressful times,” Naik said at a press conference to announce the company’s earnings. “Though we may see some accelerated spending programmes in the highways and railways sector, some of the other sectors have to catch up. Overall, the next six to 12 months should be better than the previous six months.”
Naik also suggested that to spur infrastructure creation in the country, the government needs to re-look at the hybrid model of development mooted under the public-private partnership route to make it more attractive for investors; and attract private sector developers by offering them guaranteed internal rates of return on projects, as was the case in the power sector 10-12 years back.
L&T, which has experienced a slowdown in new orders from the Middle East (due to depressed crude oil prices), which is its biggest international market, will be bidding for projects in new geographies, including Africa and the Far East, Naik said, in a bid to offset the sluggishness in business growth from the Middle East.
L&T’s septuagenarian chairman also indicated that he may take a call to pass on the baton to his successor “sometime before September 2017”. While Naik stopped short of stating that SN Subrahmanyan, L&T’s deputy managing director and president, will succeed him at L&T, he said that Subrahmanyan’s elevation as group MD was a clear indication that he was “number two” in the organisation (after Naik) and said that it was unlikely that his successor will be chosen from outside the company.
Regarding L&T Infotech’s proposed initial public offering (IPO), Naik said that a final call on when the IPO will be launched will be taken in a week’s time.