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Nandini Lakshman | August 07, 2004

It's the place to be for engineering giant Larsen & Toubro. At end August L&T's chairman and managing director A M Naik will be packing his bags and heading off for a maiden trip to China.

Accompanying him will be a phalanx of senior managers. The occasion? The Rs 11,107 crore (Rs 111.07 billion) L&T is all set to open its first office in Shanghai, and a smaller one in Beijing.

Only a few weeks ago, it opened an outpost in Kazakhstan, as it waits for its first contract there to materialise. The company now has a presence in 14 countries and it now wants to add two new destinations to its itinerary every year.

It's not tough to understand why L&T is gung-ho about its prospects in the international markets. In the last one year, it bagged over Rs 2,700 crore (Rs 27 billion) worth of international orders, up from Rs 200 crore (Rs 2 billion) three years ago.

Also, if Naik has his way, international business, which currently accounts for 17 per cent of L&T's revenues, will touch 25 per cent by 2009. That will be an extraordinary achievement for a company L&T's size.

To make this happen L&T will pursue a mixed bag of international business including joint ventures, exports and turnkey projects. It is armed with a war chest of over Rs 500 crore (Rs 5 billion) and, unfazed by two aborted attempts at acquiring engineering companies in the US, it is still shopping for good buys.

"We are looking at a customer-facing, high technology, process engineering companies in the US. We have to go up the value chain," says Naik.

For the past eighteen months, L&T has been one of the most aggressive Indian companies in the international arena. But even though it announced its global ambitions a few years ago, to hedge against the vagaries of the domestic market, it is only now that the orders are pouring in.

But as the scale of its international operations improves it's re-drawing its plans for the future.

Over the next five years the company aims to reduce its reliance on some markets, hive off some more unwanted businesses and improve its profitability both at home and abroad. "We don't call it global operations but international business. We truly want to be a multinational company," says Naik.

Look at the orders it has bagged. A little over a fortnight ago, it won the $52.5 million contract from UAE's Bunduq Company for a process platform in an oil field in the Gulf.

Then in June, it won a Rs 95 crore (Rs 950 million) contract for coal gasification equipment for China's Zhong Yuan Project, with technology provided by Shell. Its earlier Rs 105 crore contract in China was for the Yuntianhua Group to set up an ammonia plant in Yunnan province.

Early this year, came the $30 million order to upgrade the facilities at the Bu Hasa project in Abu Dhabi.

In Tanzania, it is part of a $100 million World Bank funded oil sector project and has tied up with global majors Exxon, Shell and Agip for a project in Nigeria. Says Naik, "Our overseas projects are dominated by the hydrocarbon sector and process industries."

Even as oil and gas and the hydrocarbons sectors remain its thrust areas, L&T is trying to reduce its reliance on the Gulf countries. Today, the Gulf accounts for half its revenues from the international business.

These orders come from almost all the Gulf countries including Saudi Arabia, United Arab Emirates, Oman, Qatar, Jordan and Kuwait. But because of the political volatility in the Middle East, L&T is trying to develop other markets including the CIS countries, Southeast Asia, Brazil and parts of Africa like Sudan, Nigeria, Kenya and Tanzania. And while it is eyeing Iraq, it is yet to bag a contract in neighbouring Iran, despite being there for well over a year.

This focus for construction and projects is largely restricted to developing countries. Naik says, that L&T is not looking at developed markets in the near future except for exports.

"For supply contracts, there are local companies which are much more competitive. When you work in other countries, there are local laws, labour policies, regulations and other risks. So if we want to do a turnkey construction project, we will partner with a local construction company and do it."

At the same time, L&T is also broadbasing its skills. And once again, the Gulf is its biggest playground. It is constructing multi-storeyed service apartments for the Radisson group in Bahrain, a commercial complex in Dubai, a bridge in Jordan and sub-stations in Oman and Abu Dhabi besides building platforms for the oil and gas sectors.

While it is looking for oil and gas work in Khazakhstan, infrastructure work is out in China. "We just cannot compete with Chinese companies. So there we will sell switchgear, medical equipment, heavy reactors, coal gasifiers, rubber and plastic machinery," says Naik.

What has changed in recent years is L&T's strategies for the global markets. When it first ventured out, except for its exports, it had a bleak track record in the international markets. Competition was stiff as it had to bid against both German and Japanese heavyweights.

As a result, to make a dent, it focused on small orders forgoing profitability to build credibility. "We had to first walk before we could run. Today, we are walking briskly in the Gulf," says Naik.

Although that was intentional, he claims that now L&T is in a better position to bag larger contracts. But last year's demerger of its cement business, which was ultimately sold to the Aditya Birla Group, saw a 30 per cent decline in L&T's net worth even as it liabilities were shaved off by 55 per cent.

This is what the market is sceptical about. "With a decline in net worth, they will not be able to bid for bigger orders," says an analyst tracking the company. According to Y M Deosthalee, chief financial officer, L&T, the reduction in net worth is no deterrent as the company already has some internal policies for export order bidding.

"We are very selective in bidding in the international market. We generally do not quote for jobs valuing more than $100 million. We would gradually shift towards higher values, may be in the next few years," he says.

Adds Naik, "In the current year, even after the dividend, we have put Rs 300 crore (Rs 3 billion) in reserves. So we are back with barely 5 per cent to 10 per cent from where we started. And by this fiscal end, our net worth will be the same as before the cement demerger."

But L&T's margins are still on the lower side. While its average is 8.5 per cent to 9 per cent, close competitor, the public sector Bharat Heavy Engineering Ltd margins are 14 per cent. L&T's domestic margins are 7.5 per cent to 8 per cent for projects and 11 per cent to 12 per cent for equipment.

In comparison, margins on international business vary. While it is 6 per cent to 6.5 per cent for construction projects; heavy engineering and electronics is 12 per cent to 13 per cent. Now, Naik wants to improve the company's average margins to 11 per cent.

Says he, "We have two pressures -- public sector purchase preference and international competition. So we get squeezed both ways. We have to be much smarter to improve our margins." But for the time being there are plenty of new worlds to conquer.

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