Larsen & Toubro Ltd (L&T) warned of more speed bumps after India’s largest engineering and construction group surprised investors with a profit drop as the protracted economic slowdown took a toll on infrastructure spending.
Shares in L&T ended down 7.4 per cent, their biggest drop in nearly four years, after the company said net income fell 12.5 per cent in the quarter ended June from a year earlier.
L&T, seen as a bellwether of the Indian economy, has been looking to boost sales in overseas markets as Asia’s third-largest economy grows at its slowest pace in a decade. Project bottlenecks, largely because of problems in acquiring land and high funding costs, have also sapped investment in the infrastructure industry.
But with India accounting for about 80 per cent of its sales, an investment slowdown in roads, ports and power plants is a major concern for L&T.
The company, which makes equipment used in power stations, said revenue from its key power segment dropped 44 per cent in the April-June quarter due to delays in the awarding of large orders.
“The fact is the situation is very challenging on the ground,” said its chief executive officer Krishnamurthi Venkataramanan. “Overall, if you see the situation, for the next two years, looks quite challenging from the Indian context.”
Reflecting the poor economic climate, the earnings outlook of many mid-sized Indian infrastructure builders such as Jaiprakash Associates Ltd (JAIA.NS) and GMR Infrastructure Ltd (GMRI.NS) has deteriorated.
ArcelorMittal SA, the world’s top steelmaker, and South Korea’s POSCO last week scrapped plans to build two steel plants in India, underscoring the obstacles that large projects face in India.
India has seen a slew of economic growth downgrades in the recent weeks due to the slow pace of reforms, high inflation and a record high current account deficit. Deutsche Bank last week cut its growth forecast for the year ending in March 2014 to 5 per cent from 6 per cent.
Net profit fell to Rs 7.56 billion from 8.64 billion a year earlier, said L&T, which builds roads and develops real estate. Analysts expected the company to post a profit of Rs 9.5 billion, according to Thomson Reuters data.
The company’s order book grew 8 per cent from a year earlier to Rs 1.65 trillion at the end of June. Its international order book increased 16 per cent.
L&T said it was maintaining its earlier forecast of a gain of 15-17 per cent in net sales for the current fiscal year and a rise of about a fifth in new orders, thanks to expansion in the Middle East and Africa.
In recent months, the company’s overseas orders include a $350 million road project in Oman and a contract worth nearly $300 million from Saudi Aramco SDABO.UL to build a gas processing plant.
“Internationally, the sentiment is good. The real issue for us is to gear up to be able to execute them well and maintain good margins,” Venkataramanan said, adding that the overseas sales would cushion the impact of the slowdown in its Indian business.