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Larsen Seeks Partners for Asia Airports Debut: Corporate India

April 09, 2013

Larsen Seeks Partners for Asia Airports Debut

The logo of Larsen & Toubro Ltd. is displayed outside the company's headquarters in Mumbai. Larsen reported an 11.6 percent operating margin in the year ended March 31, 2012. Photographer: Kuni Takahashi/Bloomberg

Larsen & Toubro Ltd. (LT), India’s biggest engineering company, is seeking partners to bid for airport and power projects in Asia and Africa after a slowdown at home cut sales growth to the least in 10 quarters.

The Mumbai-based company needs local tie-ups as it has negligible presence and expertise in the regions, S.N. Subrahmanyan, director at Larsen, said in a telephone interview, without elaborating. Singapore and Indonesia have announced plans to expand their airports, while San Miguel Corp. (SMC), the largest conglomerate in the Philippines, said in September it may build a $6 billion airport near Manila.

“We are looking at all opportunities and we are talking to people,” Subrahmanyan said. These regions are “not our areas of strength. If we get a good partner and do value addition, we will definitely and seriously look at it.”

Larsen needs to win more projects abroad to counter a slump in India, where the pace of growth in the $1.8 trillion economy has dropped to the slowest in a decade. Overseas revenue as a percentage of total sales shrank in the three years to March 2012, defeating the company’s goal of doubling the share in the same period. Larsen’s stock has slid 17.9 percent in 2013, versus a 6.2 percent decline in the benchmark S&P BSE Sensex.

Abu Dhabi

The firm is the fifth-worst performer on the 90-member Bloomberg Asia Pacific Engineering and Construction Index this year, according to data compiled by Bloomberg. Earnings from abroad accounted for 12 percent of total sales last fiscal year, down from 19 percent in 2009.

The company is currently bidding across the spectrum of projects in the Middle East, Subrahmanyan said. It won a $257 million contract this month to build a new terminal from Abu Dhabi Airports Co. PJSC. One of its divisions is also building Salalah airport at Oman.

Turnkey airport projects have helped enhance the company’s experience in terms of technology, international sourcing and logistics, Subrahmanyan said.

“Larsen is going in the right direction,” said Jinal Joshi, a Mumbai-based analyst with BOB Capital Markets Ltd. who recommends buying the stock. “Larsen’s credibility is high in India, but they may face tough competition from domestic players in new markets. Just like foreign companies have ventures here, it’ll help the company to get a breakthrough if they form partnerships outside.”

Capital Goods

Revenue at Asia’s second-biggest engineering and construction firm by market value rose 10.2 percent in the three months ended December, the smallest since the quarter ended June 2010, according to data compiled by Bloomberg, mirroring a slump in capital spending in its home market.

India’s capital-goods production, a gauge of corporate expenditure on factories and machinery, has shrunk in 16 out of the 19 months through January, according to the latest available data. The government estimates gross domestic product probably rose 5 percent in the year ended March 31, the least since 2003.

India’s Finance Minister Palaniappan Chidambaram said April 6 a new cabinet panel on investment will meet this month for the fourth time to speed up approval of oil and gas, road, rail and other infrastructure works to boost GDP growth. GMR Infrastructure Ltd. threatened to walk out of a highway project in January, citing delays. Larsen was one of the sub- contractors.

Hurt Margins

As local projects remain stalled, competition overseas may erode margins, said Anik Das, a Kolkata-based analyst at Microsec Capital Ltd.

“Everyone everywhere is looking at new markets,” said Das, who has a buy rating on the stock. “There’s a definite element of margins getting compressed.”

Larsen shares fell 0.4 percent to 1,320.30 rupees in Mumbai today, reversing earlier gains of as much as 2.9 percent.

The company reported an 11.6 percent operating margin in the year ended March 31, 2012. That compares with Hyundai Engineering & Construction Co. (000720)’s 4 percent and China State Construction Engineering Corp.’s 5.7 percent, according to data compiled by Bloomberg.

The Indian builder may report a profit of 48.2 billion rupees for the year ended March 31, from 44.6 billion rupees a year earlier, according to the median of 39 analysts’ estimates compiled by Bloomberg. In the current year, that may increase to 52.8 billion rupees, the median of 41 analysts’ estimates shows.

Local Airports

Subrahmanyan said Larsen will look at bidding for infrastructure projects in Africa too. The company has already built factories, roads, power transmission lines and generation plants in Kenya, Mozambique, Suriname and Tanzania, according to the company’s website.

Larsen will separately bid for local airport construction work from state-owned Airports Authority of India, he said.

India is building airports that can handle 370 million passengers by 2017, from 240 million last year. Asia’s third- largest economy needs about $12 billion investments in airport infrastructure in the five years to 2017, according to the Planning Commission, a government body that designs five-year economic and social programs.

The company built the airports in Bangalore, Hyderabad, Mumbai and New Delhi. It’s currently constructing a facility at Chandigarh for Airports Authority, Subrahmanyan said.

Larsen won contracts worth 195 billion rupees ($3.6 billion) in the third quarter, taking the total order book to 1.62 trillion rupees. The builder was last month barred from World Bank-financed contracts for six months through Sept. 6 under the lender’s fraud and corruption policy.

“In the short term, the strategy to look overseas makes sense, but in the longer term they’ll have to get back home,” Microsec’s Das said.

To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net


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