Being choosy pays for L&T, Punj Lloyd

Larsen & Toubro (L&T) is loosely qualified as an engineering major, but the company is present in over 40 businesses with each having the qualities of a respectable company in its own right, says AM Naik, chairman. There is no single firm that can be compared to L&T. Another engineering company, however, which is probably closer to L&T is Punj Lloyd, despite the difference in size.

Despite being in similar businesses, the two follow opposite strategies. L&T sees the future mostly in India, while India will be one of the five markets for Punj. L&T has a huge portfolio of projects in roads, airports, and ports where it is the developer — something Punj seems to be avoiding. The two different approaches are likely to have a much greater impact on the future of these two companies, than any other factor.

L&T’s engineering and construction business is three times larger than Punj, despite the latter having made a major acquisition recently.L&T works on larger and technically more complex projects and in a wider range of sectors. Punj is present in just five verticals — pipelines, tanks, process plants, power and civil construction. L&T’s ECC division works on a far wider range of projects — nuclear power, metro rail, industrial projects, etc. In terms of complexity too, L&T executes larger and technically more complex projects — process plants, airports and offshore platforms, for instance.

However, with their acquisition of Singapore-based Sembawang, Punj is trying to broaden its profile into areas like process plants, metro rail and ports. Going beyond the obvious, L&T is almost entirely Indian and has started looking abroad only recently, but India will remain the focus area. Punj gets almost half its turnover from abroad, a proportion which will increase this year.

“We are going to the Middle East because we want to benchmark with the best companies worldwide. It is also a strategy to lower attrition — many of our people leave to work for companies based in the Middle East. Finally, it is also a hedging strategy if business in India slows down, we will already have a foot through the door, rather than trying to do it then,” says Mr Naik.

However, he expects that India will account for 80% of the turnover. “Our primary commitment is to build India. If we as L&T don’t do it, no one else shall. Also, we don’t want to get into too many regions because that requires management bandwidth as well. We can’t work on more than three countries at one time,” he says.

L&T has worked on projects in Tanzania and Barbados, something not likely to happen again. L&T’s measured pace for getting into new regions could also be due to the fact that it operates in other businesses as well, like electrical & construction equipment, ship building etc, and the management doesn’t want to spread itself too thin.

In comparison, Punj seems to be going overseas with a vengeance. Over 40% of the company’s revenues during FY06 were from Asia Pacific, Caspian and Middle East. Close to 50% of Punj’s orders comes from overseas like Libya, Yemen, Indonesia, Qatar, etc. The overseas focus is not by accident.

“There was a phase in 1991-93 when we were based almost entirely in India and there was no work. Since then, we have consciously de-risked ourselves from any one region. We managed to survive the south-Asian crises when others floundered. Now, we are based in five regions — India, south-east Asia, Middle East, Caspian and North Africa and 19 countries,” says Atul Punj, chairman, Punj Llyod.

“We are very comfortable with risk. For instance, in Indonesia, we are working for Total in the Kalimantan province and are being paid in Singapore. We don’t see any risk here. On the other hand, we refuse to go to places like the Niger Delta where we cannot ensure physical safety of our staff.”

A recent trend among Indian engineering companies is their emerging role as project developers. Companies are picking up equity stakes in road projects, airports, ports etc. L&T has perhaps the largest portfolio of projects as a developer.

L&T IDPL, the holding company for these projects, was valued at Rs 2,500 crore in a private equity deal last year. A good chunk of L&T’s overall valuation comes from these projects now. These projects yield higher margins and a stable revenue stream. Most of the other construction majors have also started donning the developer’s hat now.Punj is an exception here. The company feels that getting into project development will be inevitable at some stage, but isn’t justified by the current cash flows.

One factor common to both companies is that given the volumes of business, they are getting more selective about the projects they take up. “We have stopped bidding for civil construction projects smaller than Rs 50 crore and hydrocarbon projects below Rs 100 crore. At a company level, we have reduced our project sites from 400 to 200,” says Mr Naik.

Punj, too, is looking at larger projects. The past few EPC projects bagged by the company range from Rs 320-1,350 crore. “We are trying to establish an internal benchmark for bidding. Our average currently stands at $40 million,” says Mr Punj.

(Head2Head is an occasional column which will give you an insight into the performance of two or more industry peers)