Larsen & Toubro: Engineering its Path to Growth
Priya Nigam
Over the past couple of years, India’s construction industry has grown at a phenomenal pace. While the country’s economic growth has been strong, infrastructure is clearly inadequate. We have been spending huge sums on money on infrastructure (which never seems enough!). The industry has recently been plagued by the surging prices of steel, cement and other inputs. Nevertheless, the potential is huge. In fact, infrastructure investments are expected to grow to between 7% and 8% of India’s GDP during the 11th five-year plan period (2007-2012).
One of the companies that is poised to be a beneficiary of this substantial growth is India's largest engineering and construction conglomerate Larsen & Toubro. The company has just won orders valued at Rs344 crore from the state-run Power Grid Corporation of India Ltd (PGCIL). Larsen & Toubro was up against stiff competition from foreign firms for the orders. The project involves the construction of 755 km of transmission lines in the western region of the country and is scheduled to be completed in 30 months. This announcement comes less than a month after the company bagged four orders worth a total of Rs1,687 crore.
Larsen & Toubro is also spreading its wings globally as well as entering into different sectors within India. Earlier this year, it signed an MoU (memorandum of understanding) with Boeing to tap business opportunities in India’s defence sector. The company is also in advanced talks over a proposed joint venture with NHPC for targeting hydro projects in India and abroad. While NHPC wants a majority stake in the joint venture, Larsen & Toubro is seeking a stake of as much as 74%. However, the company is optimistic about signing an MoU in the next couple of months. As part of its efforts to target new sectors, Larsen & Toubro has also entered into an agreement with the Tamil Nadu Government to set up an integrated shipbuilding and port facility north of Chennai. The project is valued at Rs3,068 crore.
These initiatives help to insulate Larsen & Toubro against vagaries of the domestic economy or any one sector. The company’s IT arm, L&T Infotech, is likely to be listed sometime early next year. The other two fastest growing subsidiaries of the company, L&T IDPL (Infrastructure Development Projects) and L&T Finance, are also expected to be listed in the next couple of years. These events will lend support to Larsen & Toubro’s share price. Shares have been on a downward trend after reaching a 52-year peak of Rs4,670 in November last year. There was some recovery in the latter half of April. With shares trading close to Rs3,000 now, there seems to be upside for investors with longer-term horizons.