L & T does well in challenging business environment

By Our Corporate Reporter

CHENNAI, JULY 22. In the challenging business environment, Larsen & Toubro (L & T), has performed satisfactorily during the year ended March 31, 2001. Income from sales and services for the year at Rs. 7,825 crores showed a modest 5.4 per cent growth over the previous year.

While the E&C business registered a 33 per cent growth in order booking, the order flow was oriented towards the later part of the year. The cement prices also remained unremunerative for nearly eight to nine months during the year. All these resulted in a modest growth in the revenues of the Company.

The profit before depreciation, interest and tax for the year at Rs.1,013 crores. also showed only a marginal increase over the previous year.

The profit before tax and profit after tax at Rs.338 crores and Rs. 315 crores respectively, are lower as compared to the previous year reflecting the pressure on margins in an unfavourable business environment.

The impact on the margins could have been higher, but for several cost reduction and productivity improvement measures initiated by the company.

Despite the adverse business conditions, the company leveraged its technical capabilities and leadership position to register a 24 per cent growth in total order booking. The company booked orders worth Rs.10,427 crores against Rs. 8,414 crores in the previous year.

Some of the major orders booked by the company include power plants in India, Oman and Sri Lanka, hospital project in Saudi Arabia, road project in Orissa, Gujarat, West Bengal and Tamil Nadu and Metro Underground Railway Corridor at Delhi. The order backlog at the year end at Rs. 9,760 crores is substantially higher by 38 per cent when compared to Rs.7069 cr. as at end of the previous year.

Engineering and construction business

The engineering & construction business constitutes the largest business segment of the company. The division has successfully executed some landmark projects with stringent delivery schedules during the year. The completed projects include : Jamnagar - Loni LPG pipeline for GAIL (Asia's longest pipeline), refinery packages for IOCL400 KV GIS installation in Sardar Sarovar project, 220 KV overhead transmission line in UAE, Super Specialty Hospital for Sri Satya Sai Trust.

The company's E&C business is also expected to benefit from the Government's thrust to the road sector under the National Highway development programme. There are good prospects in other infrastructure areas namely water supply schemes and effluent treatment plants, flyovers and bridges. The recent announcement by the Government of its intention to open up defence production for the private sector, augurs well for the company.

Cement business

The company sold 11.3 million tonnes of cement and clinker during the year. This was 8 per cent higher than the quantity sold in the previous year. While the company's performance in the cement business has improved, the cement consumption in the country was in fact lower by 2 per cent, which is a significant decline considering the average annual growth rate of around 8 per cent over the last decade. The company exported 2.3 million tonnes of clinker and cement valued $46 million during the year to become the country's largest cement exporter.

The price of cement in all the markets in which the company sells was depressed for eight months during the year. The export prices were unremunerative given the competition from Thailand, Indonesia and China. However, improved price realisation in the domestic market during the last quarter and sustained cost reduction and production efficiency measures enabled the Company to improve the operating margins to 17 per cent from 12 per cent in the previous year.

During the year, the company commissioned the one million tonne grinding unit at Arakonam, Tamil Nadu, increasing the overall capacity of the group to 15 million tonnes. The commissioning of one million tonne grinding unit at Durgapur, West Bengal is expected to be done during the third quarter of the current year, taking up the Group's cement capacity to 16 million tonnes.

Restructuring of cement division

Based on expression of interest received in February 2001 from potential candidates for a strategic partnership, the company selected three bidders for further participation in the transaction. The due diligence by these parties has been recently completed. The company has circulated the various joint venture documents to the potential partners with a view to agreeing on the JV terms before the final bid is received from them. This would ensure against dilution of the value of the bids and also against loss of time in signing the agreements, subsequent to selection of the partner.

Meantime, the group has increased its capacity from 12 million tonnes at the time of commencement of the restructuring exercise to the current level at a very low cost of Rs. 650 per tonne. The company has also assiduously been improving its operating efficiency to rank among the lowest cost producers in the country.

All the above has meant substantial value creation even while the company has been making progress on restructuring its cement business. The final bids are expected in the next one to two months.

Other initiatives

The company has launched several initiatives for enhancing its competitiveness and expanding its reach. The company paid focussed attention to step up its international business. Specific countries have been identified for market development. The initiatives have already started yielding results with the company securing orders from West Asia, Sri Lanka, Europe and U. K. The export earnings for the company more than doubled to Rs. 725 crores during the year as compared to Rs. 316 crores in the previous year.

Other initiatives launched by the company included global sourcing, scaling up of IT systems and knowledge management processes, aimed at improving the competitiveness of the Company.

As a natural extension of the engineering capabilities, the Company set up a business unit, L&T e-engineering Solutions to offer high-end software solutions in engineering design and product data management. The company also set up a unit at Mysore for providing software solutions in the area of embedded systems. These initiatives are expected to seer the company towards being a premium knowledge based organisation.

In all the businesses, the company is constantly looking at ways and means of controlling manufacturing costs, reducing overheads and improving efficiency. The new performance measurement system has now been institutionalised. All the businesses have identified critical value drivers which are linked to the performance measurement system and are being regularly monitored.

All these initiatives are expected to strengthen the leadership position that the company enjoys in its businesses and prepare it better for the future to achieve the vision of becoming an Indian multinational.

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