Larsen & Toubro's hydrocarbon business records a profit margin of 7.7%

For 2017-18, Larsen & Toubro’s (L&T) hydrocarbon business recorded a profit margin of 7.7 per cent. This, for the segment that earlier struggled with sticky orders, is a complete turnaround from losses reported between fiscal year 2013 and 2015.

Top officials heading the segment attribute the turnaround story to major internal restructuring and cost rationalisation, while external factors continued to remain challenging. “The hydrocarbon business of L&T booked losses for three years — FY13, FY14 and FY15 — predominantly because we had ventured into the international market in a big way for the first time and had to go through a steep learning curve,” said Subramanian Sarma, chief executive officer and managing director for L&T Hydrocarbon Engineering.

Sarma was brought in to head this team in 2015 when this section was struggling with sticky orders and booking segment losses. L&T Hydrocarbon was formed as a subsidiary of L&T in 2013 to sharpen focus on its hydrocarbon business.

Narrating the turnaround story, Sarma mentioned that restructuring the international business team was a key step. Until then, L&T had two different teams, one each to oversee its domestic and international operations. Sarma decided the model needs to be done away with. "Such a model did not suit L&T Hydrocarbon as cultural integration and alignment across diverse markets does not always work for every organisation. By realigning the structure, we essentially collapsed the divisions between international and domestic and made it a more cohesive team,” he said.

In addition to streamlining its operations, the team also went ahead to cut costs. Sarma said the vertical managed to rationalise costs by 28 per cent in the first six to seven months. “In India, we had multiple offices and the external market was extremely challenging, so we had to reduce costs even on the domestic front. We minimised overheads and fixed costs by centralising functions and consolidating locations,” he said.

For 2015-16, the hydrocarbon segment reported earnings before interest, taxation, depreciation and ammortisation (Ebitda) margins of 0.6 per cent, which improved to 6.8 per cent in FY2016-17 and 7.7 per cent in FY2017-18.

“Our turnaround only proves that the setbacks suffered in 2013-15 were an aberration and the results of the last two years are the true reflection of this organisation's actual capability,” said Sarma. He remains hopeful to add more basis points to these margins in the current fiscal year. To be sure, most of the hydrocarbon turnaround story has unfolded during a low crude oil price regime. “Oil prices have turned around only during the past few months. Now, if the upward movement of the oil prices leads to new investments and opportunities, we are well placed to take advantage of the same,” Sarma said.

With the restructuring of both domestic and international operations, L&T Hydrocarbon also increased its focus on employee training schedules. For the last few years, employees go through mandatory training modules at regular intervals.

One of the major reasons contributing to L&T Hydrocarbon's losses between 2012 and 2015 were few of its international orders that had been completed but revenue recognition was facing issues. Sarma said the number of these orders has now dwindled to two to three and does not have any material impact on the overall financial performance of L&T Hydrocarbon. “Every element of the business that we have improved over the last two years had contributed one way or the other to the projects, which had gone wrong in the past and had dragged us into the red,” he explained.

On the road ahead, Sarma remains confident of a healthy order book. “In terms of order visibility for the current fiscal year, my efforts will be to see how quickly we can grow our order book to Rs 400 billion level,” he added.