The company is paradoxically on the rise and in a delicate phase. There are two classic phases during which a company is cash-strapped: in large-scale development phases and in reorganizing. Large-scale development, on the one hand, has been pretty much constant, since the creation of the firm in 1938. In less than half a century, it established its place as one of the leaders in India, then Asia, and is now the largest engineering and construction company. In 2010, Larsen & Toubro (L&T) received the Company of the year award, from the Economic Times.

During development phases, cash flow is severely strained, because costs are incurred daily at a very high rate, and client payments occur later on, if nothing goes wrong (see below). Re-organization is also a financial speed-bump, as it commits human resources to following the re-organization scheme, instead of being dedicating purely to business. Also, no re-organization being ever perfectly planned, many kinks will impair performance, until they are worked out and processes are streamlined again.

L&T started a series of heavy re-organizing measures in 2010, and the following year, the firm was fragmented into 9 business unit, each with an advisory (and therefore toothless) board of managers. Many changes, some hefty, have occurred since. Now re-organization is always the cause and the effect of slow business. Companies reorganize in the hope that the move will be hamper on business for only a short while, whereas the old business model was causing long-lasting lag.

L&T is getting hit, quite hard, at a moment where it can’t really afford it. Problems have piled up, of various nature, and are now making the firm stagger.

Operational setbacks are first matter of concern, as they hit the core of the activity and their effects are rapidly felt. In last September, Icra Ltd, an Indian rating agency, downgraded two large road projects (1), managed by L&T, into negative rating, which indicates that L&T will lose money on both projects. Severe operational delay on both the Chennai-Tada tollway and the Hallol-Hamlaji tollway, induced widely by inability to purchase the land necessary to the road construction, pushed the projects below water. In a move which surprised many, as it indicates how low the firm is on options, it turned to the government to re-fund, so as to keep the project afloat.

Legal and P&R situations arose as L&T multiplied its ventures with Western partners. In November of 2014, large and substantiated doubt regarding the possible use of child labor (2), something the Western public simply will not put up with (3), forced L&T to issue statements (4) denying any wrongdoing, breaking with a firm tradition of not commenting ongoing cases. Matters got worse, when the Ernst and Young delivered an explosive report (5), which L&T has buried very deep, that led to the investigation, indictment and removal of several top officials for malpractice and financial mismanagement, indicating severe internal control issues.

The accumulation resulted in a sharp drop (6) in the company’s profits, in the second quarter of 2015, something the firm is not used to.

Is the government turning its back on L&T? It turns out that the two bogged down tollway projects (see above), which could end up costing L&T many millions it cannot really spare right now, is in large part government-induced. Most of the delays on the project are due neither to missing workforce, nor do fund unavailability, or even to force majeure. L&T has simply been given access to barely a quarter of the land which is to receive the new roads. The government, which has authority on large-scale forcible land acquisitions, is therefore placing L&T under enormous risk: bank regulations dictate that, regardless of payments made, if L&T is unable to complete the project within 4 years of the planned delivery date, the project will be re-classified as a “non-profitable asset” and seized, durably damaging the firm’s reputation. One of L&T’s engineers bitterly complained, claiming “Even after six years, we were unable to complete the construction as we are yet to get about 25% of the land, and even the land given was not contiguous. So, as on 30 September, this project will turn into an NPA for purely technical reasons.” It is highly unlikely that either side were unaware of such an explosive situation. The stalemate is therefore not the result of oversight, but deliberate, casting doubt on the government’s intentions regarding the engineering firm. Furthermore, as the project was underway, the Gujarat government opened a competing project, by broadening a parallel route, which effectively depletes the eventual profitability of the project L&T invested Rs 475 crore (USD 85 million) into. So far, L&T’s call to the government to re-capitalize have remained unanswered. Indications that the firm would be out of favors are piling up.

In an attempt to stock up on cash, in addition to deciding on several large cutbacks (7), L&T has been scrambling all over the world, slashing its prices and pushing sales processes forward. The list of newly signed contracts is impressive and scattered : electricity projects in the Middle-East, hotel construction (8) in Oman, power distribution in Qatar (9), metro tracks (10) in Riyadh, all with a background of economical cutbacks. The firm is currently attempting to land Ashghal’s IDRIS (11) project: a huge wastewater network upgrade in inner Doha. While the project could eventually inject much-needed cash into L&T, it’s still unknown whether H.E. Eng. Nasser bin Ali Al Mawlawi, Ashghal’s president, will entrust L&T with such a critical project, despite their current difficulties. And whether increasing activity (and therefore strain on cash flow, in the hope of recapitalizing later on) is the right way to go, is open to debate. Some experts say yes (12), whereas many others (13) seem doubtful.

1. http://www.livemint.com/Companies/pPucVXUkP86RsdFRJc0fYM/LT-IDPL-seeks-govt-help-to-tide-over-financial-downturn.html
2. http://www.heraldscotland.com/news/13191890.Scottish_firm_urged_to_probe_partner_s_links_to_slavery_in_India/
3. http://www.ibtimes.co.uk/blood-bricks-campaign-companies-which-want-work-britain-must-stamp-out-slavery-1490514
4. http://www.thehansindia.com/posts/index/2015-08-08/LT-clarifies-on-use-of-child-labour--168613
5. http://www.business-standard.com/article/companies/financial-mismanagement-charges-see-a-dozen-leaving-l-t-arm-115100101048_1.html
6. http://timesofindia.indiatimes.com/business/india-business/Larsen-Toubro-posts-over-37-slide-in-Q1-profit/articleshow/48296469.cms
7. http://www.moneycontrol.com/news/business/will-save-rs-100crrbi-policyneed-bigger-cuts-lt_3363501.html
8. https://projects.zawya.com/LT_wins_construction_contract_for_Omrans_W_Hotel/story/ZAWYA20150622071231/
9. http://www.moneycontrol.com/news/buzzing-stocks/lt-gains-1-powertransmission-biz-bags-orderqatar_2747861.html
10. http://rtn.asia/d-r/14718/lt-to-design-and-build-tracks-for-riyadh-metro
11. http://www.ashghal.gov.qa/en/Projects/Pages/The-Inner-Doha-Re-sewerage-Implementation-Strategy.aspx
12. http://www.financialexpress.com/article/markets/indian-markets/buy-rating-on-l-a-good-bet-despite-negative-news-flow/149705/
13. http://www.financialexpress.com/article/industry/companies/icra-revises-ratings-for-two-arms-of-lt-infrastructure-development-projects/139883/