Moderate industrial growth and a slow uptick in demand means Larsen & Toubro Ltd.’s power business is not going to improve over the next five years, says executive chairman AM Naik.
“It is essentially a dismal picture from the growth perspective,” Naik told BloombergQuint’s Menaka Doshi.
Naik acknowledges no new power plants have come up in recent years. Power has become surplus in many places because a lot of people don’t have the ability to pay, says Naik.
“Second, the industrial growth which should have been much faster than this, is somewhat moderate and that’s why power consumption hasn’t gone up yet.”
The capacity of power equipment makers in India is 22,000 megawatts (MW), while the orders have been placed for hardly 5,000-6,000 MW coal-based plants, he adds.
“So, capacity utilisation is 20-25 percent. The net result is that the competition is so severe that people are virtually taking jobs (orders) without recovering depreciation, fixed charge, interest and only variable costs, and sometimes not even that.”
There is going to be a bloodshed (in coal-based power sector). You just wait and see. What happened in PPP (public-private model for infrastructure), it will happen here.
AM Naik, Executive Chairman, Larsen & Toubro
L&T’s power segment revenue fell 23 percent year-on-year to Rs 1,633 crore in the three months ended December 2016, according to company filings. The segment contributed 7 percent to its overall revenue in the third quarter.
EBITDA margin for the segment also dropped to 1.5 percent in the third quarter from 5.4 percent over the previous year. The primary reason for the slowdown in the sector was a smaller order book and a lower international revenue.
Given the dismal domestic conditions, Naik said the company is looking to explore newer geographies such as North Africa and East Africa in the power sector. The company is also setting up three gas plants in Bangladesh worth Rs 5,000 crore.
Naik said L&T is not pushing into renewable energy as there has been little execution on the ground despite a lot of talk around it.
Renewable is so highly priced that the implementation will not be as much as is being spoken about. And therefore L&T stays away.
AM Naik, executive chairman, Larsen & Toubro
Naik doesn’t expect large orders in the renewable sector. L&T is willing to construct, but not invest in the power sector, he says.