Capital goods firms eye overseas markets as India growth slows.

Mumbai: Indian capital goods companies are increasing their focus on expanding exports and revenue from international businesses, as they struggle with sluggish economic growth and stalled projects in their home market.

Larsen and Toubro Ltd (L&T), the country’s biggest engineering and construction company, Thermax Ltd and ABB India Ltd are looking to markets such as Africa and the Middle East to increase their global footprint and generate higher revenue overseas.

At home, economic growth slowed to 4.5% in the year to March 2013, the least in a decade, and is forecast by the Reserve Bank of India to remain below 5% in the fiscal year that has just gone by. High borrowing costs, and delays in government approvals and project execution have crimped the cash flows at many companies and stalled projects.

“For de-risking the organization, having an international business is a must for growth,” said M.S. Unnikrishnan, managing director and chief executive officer, Thermax. “We are taking initiatives for increasing our export business and also to be locally present in some critical markets outside India.”

Only about 33% of Thermax’s revenue now comes from outside India—from exports and overseas subsidiaries.

The company intends to increase it to 40% in five years. The company plans to focus on growth in South-East Asia, the Middle East and Africa.

For the December quarter, Thermax reported revenue of Rs.1,013.77 crore, a 3% drop from a year ago.

At L&T, which has been proactive in bidding for infrastructure projects outside India, even smaller business units like the electrical and automation (E&A) business are targeting higher exports.

L&T’s E&A business is seeking to increase its annual international revenue to 35% of its total sales, from the current 30% by the 2016 fiscal, said S.C. Bhargava, senior vice- president and head of E&A. The unit expects to cross Rs.5,000 crore in annual revenue in the just-ended fiscal year, Bhargava said.

According to Bhargava, the only way to compensate for the impact of the domestic slowdown is by expanding in fast growing overseas markets.

“Dubai and Qatar continue to have a boom in the building and construction industries and we keep looking for opportunities there,” Bhargava said.

At Crompton Greaves Ltd, the management expects the performance of its international business in the 2015 fiscal to be better than the current year, Nomura analysts Amar Kedia and Vineet Verma wrote in a report dated 30 January. The company’s international order book at the end of the December quarter was up 21% compared to a year ago, it added.

“The domestic market continues to remain challenging due to a slowdown in the investment cycle, but the order outlook for international business (including automation) is looking much better,” the Nomura report said.

The management at Crompton Greaves did not comment, as it is in the so-called silent period ahead of the announcement of its fourth quarter earnings.

ABB India’s export order book for calendar year 2013 grew by more than 25%, according to Subir Pal, head of country business development and marketing. At present exports contribute around 15-17% of the ABB’s revenues and it plans to maintain that ratio.

“We have reached a stage from where we can only grow the numbers,” Pal said, adding that the company did not have a specific target for the international business.
ABB will also increase its focus on Africa as a potential market.

In many parts of Africa, gross domestic product growth is in excess of 6%, presenting a potential business opportunity for the country to tap, Pal added.

Some analysts say the overseas focus risks crimping profitability in the short run.

“It is a good strategy to expand in different locations, but companies should ensure that they scale up gradually in these geographies, since rapid scale-up in the absence of optimal controls can impact profitability negatively,” said Misal Singh, director of institutional equities at Religare Capital Markets Ltd.

Source : livemint.com