The Hindu Business Line : Power portfolio may boost L&T’s profit margins

With the Rs 6,900-crore order awarded by the Maharashtra State Power Generation Company on Tuesday, L&T has over the last three months bagged projects worth Rs 13,000 crore for supply of power equipment and setting up of plants. It is therefore small wonder that the company upped its order guidance recently.

After its tie-up with Mitsubishi Heavy Engineering for manufacturing supercritical boilers and steam turbine generators, L&T has been on a winning streak, especially in the supercritical segment, despite competition from international and domestic players.

EPC strength

L&T’s key strength in this space lies in the fact that the company has carved a niche for itself in the balance of plant (BOP) work, which involve plant electricals, civil and architectural works.

Unlike orders placed about five years ago when equipment and balance of plant orders were awarded separately, power utilities now prefer a single bidding point for equipment and balance of plant work in order to expedite bidding and execution.

While BHEL too undertakes total engineering procurement and construction (EPC) contracts, much of the BOP work is outsourced, limiting their profit margins and sometimes causing delay in projects.

For L&T, in-house qualification in EPC and its planned manufacture of key equipment components such as pressure piping and heavy forging would provide a strong backward integration. To this extent, L&T may earn higher margins on such projects.

However, this may not happen in the near-term, as competitive bidding to kick-start order wins may keep profit margins muted.

BHEL enjoys operating profits margins of about 15-17 per cent in the power equipment space.

Revenue flow

The prevailing mood of caution among utilities in placing orders with Chinese players has also aided L&T’s power segment order flows, so much so that power now accounts for close to 40 per cent of the order book from 14 per cent in FY-08.

However, this change in portfolio is likely to elongate the revenue flow for L&T as power segment orders, especially larger ones, can have longer execution periods than regular civil and infrastructure work. To this extent, L&T’s revenues while becoming lumpy may nevertheless derive strength in profit margins from the power segment.

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