L&T Sees Signs Of Private Capex Growth Even As States Lag

Larsen & Toubro Ltd., India's largest construction and engineering company, is beginning to see an increase in private investments, a key barometer of sustained economic growth.

The central government has been moving as expected with "almost 35-37% of the center's capex allocation has been committed and projects have been awarded", R Shankar Raman, chief financial officer at L&T, told BQ Prime in an interview.

The pace of private capex has been refreshing too, he said. From anywhere between 15% and 20% of the total order book, "we are happy to see" it rise to 37% by September, he said.

This has been largely driven by data centres, steel plants, or renewable energy, he said. Indications from industries show that minerals, metals, railway station development, data centres, healthcare, IT and technology, will be the major drivers of capex for the private sector, he said.

An uptick in the share of private orders for L&T, a bellwether for the economy, is an encouraging sign as India recovers from the pandemic. The government has cut corporate taxes and is offering incentives to boost private investments and domestic manufacturing.

Raman, however, said the progress of states on the capex front has been "little wanting" as they deal with financial constraints, election spends, and expenditure on social welfare programmes. Public sector units are also lagging with their capex allocation, he said. But this picture, according to him, might change in the second half of the current fiscal.

“We do hope that, as in past years, in the second half of the financial year, the states get to act a little more briskly," Raman said. "Like states, PSUs are second-half-oriented, so we do expect the PSUs to come to the party,” he said.

Challenges Persist

L&T's second-quarter profit rose on better project execution across segments beating analysts' estimates.

Yet, the company may be prudent about its revenue guidance because of global headwinds and operational hiccups but is not blind to the opportunity to outperform, Raman said.

The challenges are varied, ranging from the geopolitical crisis to the unavailability of equipment and suitable manpower, he said. Time restrictions are the domestic hurdles, while the war in Ukraine and rising interest rates are the global difficulties that the company faces in public projects, Raman said.

“The clearances that we obtain from various authorities are also not something that works with clockwork precision... we have tried to gamely move ahead in the first half of the year," he said. "The potential to outperform exists."

"I don't think we want to be constrained by 12% to 15% [revenue] guidance, if we're able to overachieve on that, we'll be happy to do that,” he said.

L&T has cut down on its working period over the past two years, bringing it down to 20% of its sales versus 26% earlier, Raman said. “The whole idea is that we don't want to put our balance sheet [at risk] to complete the project and keep running behind the customers to recover our dues," he said.

"[In the] second half of the year, we hope that all the effects of increased interest rates, the global recession, and the depreciating rupee do not make our clients change their programs in a big way.”