"Growing up, we knew only two companies, L&T and Tata," Anil Manibhai Naik, group chairman of Larsen & Toubro (L&T), said last year. Naik was explaining why L&T was his dream job.
The company continues to be the dream destination for many. After all, in India, it is the gold standard in the tough construction-and-engineering business. Any firm in this space showing some sign of success — be it Punj Lloyd, Hindustan Construction Company (HCC), or more recently Dilip Buildcon — has been conferred the title of being the next L&T.
There’s data backing L&T’s stellar cred.
With a market cap of INR189,464 crore, it is the only construction company in India in the INR1 trillion club.
A list compiled by Engineering Record News for 2018 ranks L&T 24 among 250 global contracting firms. Barring Chinese construction companies on the list, in terms of market capitalisation, L&T is second only to French construction major Vinci SA, which is ranked 5.
L&T’s construction-and-engineering business is among the top few boasting an annual operating profit of over USD1 billion.
Its robust INR270,000 crore order book strengthens its claim of being among the world’s most sought-after construction firms.
From a distance, L&T does look like a company everyone would die to emulate.
A closer look, however, brings out cracks in the superstructure.
ET Prime’s analysis reveals that the company, which made its first real bridge in 1957 for a Hollywood movie, is still struggling to become a truly ‘global’ construction firm.
More worrying: The company’s gigantic order backlog indicates that L&T may be slipping in its hitherto impregnable home territory too. L&T did not respond to our request for comment for this story.
Not hungry enough at home?
There are plenty of construction firms in India, a country that feels like a perpetual work-in-progress, and new ones join the fray every year.
According to L&T’s own admission in its FY18 annual report, “The year 2017-18 saw a significant number of smaller competitors emerging in the market, consequently intensifying competition.”
The same report also says, “NHAI (National Highways Authority of India) has taken a decision to have a mix of build–operate–transfer (BOT), engineering-procurement-and-construction (EPC), and hybrid-annuity-model (HAM) projects in the ratio of 10:30:60, which will impact our addressable market.”
Market-share estimates compiled by HDFC Securities show that L&T’s share of NHAI orders has dropped from 17.8% in FY15 to 3.1% in FY18, while other players like IRB Infrastructure, Dilip Buildcon, and Sadbhav Engineering have become dominant.
L&T has been firm that it wants to move to an asset-light model and avoid the pitfalls of the BOT and HAM models, which involve capital deployment in assets. To compensate for its asset-light approach, it wants to increasingly focus on complex projects that yield better margins.
While this seems to be working for the company so far, resulting in improved profitability and falling debt, winning complex projects in India is not simple.
How aggressively a company bids for these projects depends on how badly it needs orders, says a sector analyst. L&T isn’t playing that game, he adds. With an enormous order book, the company may not feel the need to match the desperation of other contractors.
This could make it vulnerable to assault from rivals like Reliance Infrastructure, IL&FS Transportation, and HCC (in addition to unlisted companies such as Tata Projects and GR Infrastructure), which have the technical abilities to execute these projects and the hunger to win bids to boost their depressed order books.Apart from homegrown competition, Korea’s Hyundai Development Corp in a consortium with HCC has managed to win a package for the Mumbai Coastal Road project. Italy’s Astaldi and Anil Ambani-promoted Reliance Infrastructure together bagged the INR7,000 crore Bandra-Versova Sea Link project.
The INR17,750 crore Mumbai Trans-harbour Link projects, where L&T’s consortium with Japan’s IHI Corp won two of the three construction packages worth INR8,650 crore, saw many international bidders. According to media reports from January 2017, these included South Korean Daweoo Engineering, Chinese railway major Bridge Engineering Group Company, and Japan’s Sumitomo Mitsui Construction Company.
Overseas business a footnote in the books
While L&T’s order-book strength is in line with international behemoths such as Vinci and US-based Fluor Corp, most of these companies have domestic orders of only around 10% of their total order book.
In contrast, domestic orders make up almost 76% of L&T’s FY18 order book and 67% of its revenues.
It can be argued that L&T does not need to look overseas to get orders, since India is supplying abundant orders, given the government’s thrust on infrastructure. L&T could be like Chinese infrastructure companies that are raking in billions of dollars of revenue by just catering to domestic demand. But then, India is not China, where local companies have a government-backed moat.
As of now, L&T’s international presence is confined to certain geographies.
Of the total international order backlog of INR62,500 crore, the company gets around 69% from six West Asian countries — Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman, according to the L&T’s annual report.
About 31% of the international orders are from other near-shore geographies and a few African countries. This includes the USD500 million light rail-based urban-transit system order from the government of Mauritius, and the INR3,191 crore order for the Dhaka Metro in Bangladesh. Other orders include power-transmission and distribution-line projects in Africa and West Asia.L&T’s international orders are also skewed towards hydrocarbon projects. And volatility in crude oil prices has hurt the company’s business in the Gulf Cooperation Council countries.
To mitigate this impact, L&T is actively seeking to expand its presence in East and North Africa and East Asia, according to its FY18 annual report.
Order book comfort could put L&T out in the cold
Between a shaky home turf and limited international presence, L&T’s troubles appear particularly pronounced if its numbers are dissected over a 10-year time frame.
The company’s order book crossed INR1 lakh crore for the first time in FY10 and INR2 lakh crore in FY15. But over the last three years, the growth in order backlog has moved to the lower single digits.
Data over the past 10 years shows that fresh-order booking peaked in FY15, when the company won new orders worth around INR1.54 lakh crore. A year later, this number dropped 12% and was yet to recover as of March-end 2018.This slow growth is a strange phenomenon for an India-centric company, as most construction firms have been reporting windfalls in their order inflows.
At present, due to its order backlog, the company has revenue visibility for roughly three years. Its international competitors are far less secure, as their execution rates are faster. To be fair, these impressive execution rates are also due to the developed nature of the markets they operate in.
According to Vinci SA’s annual report, the company’s order book represents 11 months of average business activity, and around two-thirds of its orders are to be executed in 2018. Other companies like Sweden’s Skanska, Fluor Corp, the UK’s Balfour Beatty, and Spain’s Grupo ACS have an order-book-to-sales ratio of 1x-2x. For L&T, this number is around 3x.
So, while the order backlog of these companies is on a par or even lower than L&T’s, given the faster pace of execution, they are more driven to get more orders, and faster.
The bottom line
What was started in 1938 by two Danish engineers, Henning Holck-Larsen and Søren Kristian Toubro, as a representative of Danish manufacturers of dairy equipment, went on to become an engineering behemoth. But on its way to global glory, it seems to be hitting some wrong turns. On how deftly it negotiates these will decide whether the next generation echoes Naik’s fervour for L&T.
The company continues to be the dream destination for many. After all, in India, it is the gold standard in the tough construction-and-engineering business. Any firm in this space showing some sign of success — be it Punj Lloyd, Hindustan Construction Company (HCC), or more recently Dilip Buildcon — has been conferred the title of being the next L&T.
There’s data backing L&T’s stellar cred.
With a market cap of INR189,464 crore, it is the only construction company in India in the INR1 trillion club.
A list compiled by Engineering Record News for 2018 ranks L&T 24 among 250 global contracting firms. Barring Chinese construction companies on the list, in terms of market capitalisation, L&T is second only to French construction major Vinci SA, which is ranked 5.
L&T’s construction-and-engineering business is among the top few boasting an annual operating profit of over USD1 billion.
Its robust INR270,000 crore order book strengthens its claim of being among the world’s most sought-after construction firms.
From a distance, L&T does look like a company everyone would die to emulate.
A closer look, however, brings out cracks in the superstructure.
ET Prime’s analysis reveals that the company, which made its first real bridge in 1957 for a Hollywood movie, is still struggling to become a truly ‘global’ construction firm.
More worrying: The company’s gigantic order backlog indicates that L&T may be slipping in its hitherto impregnable home territory too. L&T did not respond to our request for comment for this story.
Not hungry enough at home?
There are plenty of construction firms in India, a country that feels like a perpetual work-in-progress, and new ones join the fray every year.
According to L&T’s own admission in its FY18 annual report, “The year 2017-18 saw a significant number of smaller competitors emerging in the market, consequently intensifying competition.”
The same report also says, “NHAI (National Highways Authority of India) has taken a decision to have a mix of build–operate–transfer (BOT), engineering-procurement-and-construction (EPC), and hybrid-annuity-model (HAM) projects in the ratio of 10:30:60, which will impact our addressable market.”
Market-share estimates compiled by HDFC Securities show that L&T’s share of NHAI orders has dropped from 17.8% in FY15 to 3.1% in FY18, while other players like IRB Infrastructure, Dilip Buildcon, and Sadbhav Engineering have become dominant.
L&T has been firm that it wants to move to an asset-light model and avoid the pitfalls of the BOT and HAM models, which involve capital deployment in assets. To compensate for its asset-light approach, it wants to increasingly focus on complex projects that yield better margins.
While this seems to be working for the company so far, resulting in improved profitability and falling debt, winning complex projects in India is not simple.
How aggressively a company bids for these projects depends on how badly it needs orders, says a sector analyst. L&T isn’t playing that game, he adds. With an enormous order book, the company may not feel the need to match the desperation of other contractors.
This could make it vulnerable to assault from rivals like Reliance Infrastructure, IL&FS Transportation, and HCC (in addition to unlisted companies such as Tata Projects and GR Infrastructure), which have the technical abilities to execute these projects and the hunger to win bids to boost their depressed order books.Apart from homegrown competition, Korea’s Hyundai Development Corp in a consortium with HCC has managed to win a package for the Mumbai Coastal Road project. Italy’s Astaldi and Anil Ambani-promoted Reliance Infrastructure together bagged the INR7,000 crore Bandra-Versova Sea Link project.
The INR17,750 crore Mumbai Trans-harbour Link projects, where L&T’s consortium with Japan’s IHI Corp won two of the three construction packages worth INR8,650 crore, saw many international bidders. According to media reports from January 2017, these included South Korean Daweoo Engineering, Chinese railway major Bridge Engineering Group Company, and Japan’s Sumitomo Mitsui Construction Company.
Overseas business a footnote in the books
While L&T’s order-book strength is in line with international behemoths such as Vinci and US-based Fluor Corp, most of these companies have domestic orders of only around 10% of their total order book.
In contrast, domestic orders make up almost 76% of L&T’s FY18 order book and 67% of its revenues.
It can be argued that L&T does not need to look overseas to get orders, since India is supplying abundant orders, given the government’s thrust on infrastructure. L&T could be like Chinese infrastructure companies that are raking in billions of dollars of revenue by just catering to domestic demand. But then, India is not China, where local companies have a government-backed moat.
As of now, L&T’s international presence is confined to certain geographies.
Of the total international order backlog of INR62,500 crore, the company gets around 69% from six West Asian countries — Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman, according to the L&T’s annual report.
About 31% of the international orders are from other near-shore geographies and a few African countries. This includes the USD500 million light rail-based urban-transit system order from the government of Mauritius, and the INR3,191 crore order for the Dhaka Metro in Bangladesh. Other orders include power-transmission and distribution-line projects in Africa and West Asia.L&T’s international orders are also skewed towards hydrocarbon projects. And volatility in crude oil prices has hurt the company’s business in the Gulf Cooperation Council countries.
To mitigate this impact, L&T is actively seeking to expand its presence in East and North Africa and East Asia, according to its FY18 annual report.
Order book comfort could put L&T out in the cold
Between a shaky home turf and limited international presence, L&T’s troubles appear particularly pronounced if its numbers are dissected over a 10-year time frame.
The company’s order book crossed INR1 lakh crore for the first time in FY10 and INR2 lakh crore in FY15. But over the last three years, the growth in order backlog has moved to the lower single digits.
Data over the past 10 years shows that fresh-order booking peaked in FY15, when the company won new orders worth around INR1.54 lakh crore. A year later, this number dropped 12% and was yet to recover as of March-end 2018.This slow growth is a strange phenomenon for an India-centric company, as most construction firms have been reporting windfalls in their order inflows.
At present, due to its order backlog, the company has revenue visibility for roughly three years. Its international competitors are far less secure, as their execution rates are faster. To be fair, these impressive execution rates are also due to the developed nature of the markets they operate in.
According to Vinci SA’s annual report, the company’s order book represents 11 months of average business activity, and around two-thirds of its orders are to be executed in 2018. Other companies like Sweden’s Skanska, Fluor Corp, the UK’s Balfour Beatty, and Spain’s Grupo ACS have an order-book-to-sales ratio of 1x-2x. For L&T, this number is around 3x.
So, while the order backlog of these companies is on a par or even lower than L&T’s, given the faster pace of execution, they are more driven to get more orders, and faster.
The bottom line
What was started in 1938 by two Danish engineers, Henning Holck-Larsen and Søren Kristian Toubro, as a representative of Danish manufacturers of dairy equipment, went on to become an engineering behemoth. But on its way to global glory, it seems to be hitting some wrong turns. On how deftly it negotiates these will decide whether the next generation echoes Naik’s fervour for L&T.
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