PEST Analysis

1. Political Factors: (i) SEZ Act to Boost infrastructural Development SEZ is the new destination for real investor. Currently 150 SEZs are approved out of 85 SEZs are in the IT/ITES area and the 10-15 SEZs in the electr onics area. 130 SEZs are developed by real estate developers which constitute of about 50% of the total SEZ area. IT SEZ should be developed and made operational within the period of six months from the date of notification. Thus, 130 approved SEZ would result in investment of US$ 12bn immediately. (ii) Cement Prices Reduced for State Infrastructure Projects: The continued thrust on the infrastructur e development will provide impetus to the healthy growth in demand, protecting the bottom-line of cement companies to an extent. The reduction in the CST and in Freight rates on diesel and limestone will be marginally positive for some companies. (iii) FDI Liberalization to Augment Industry Growth: Recent amendments by the government have made accessibility to the required capital much easier. Opening of FDI in construction and allowing developers to raise capital in international market has led to development of larger projects benchmarked against international standard. (iv) REITs(Real Estate investment trusts) to Positively affect real Estate Business The proposed introduction of REMF( Real Estate Mutual Fund) and REIT will boost real estate investment from the small investors point of view. This will allow small investors to enter real estate market with the contribution as less than Rs 10,000. The concept of REIT is on the verge of en tering India and would be structured as company dedicated to owing and in most cases operating income producing real estate such apartments, shopping centres, offices & warehouses. 2. ECONOMIC FACTORS: (i) Growth in Construction Act ivity Stimulating GDP Growth: India is witnessing tremendous growth & expansion of construction activities and construction is largest component of GDP. It has been growing at a r ate over 10% in the past few years when GDP growth is around 8%. Within construction; sector such as roads, railways, housing and power have been keen drivers.

(ii) Rate Hikes Unlikely to Slow down Growth: It has been analysed that the residential prices has been increased b y about 15-20% on average in the last one year. There has been strong growth in demand supported by rising disposable incomes, low interest rates, and fiscal incentives on both interest and principal payment and increasing urbanization. 3. SOCIAL FACTORS : (i) Shifting Consumption Pattern to Fuel industry Growth The consumption patter n of Indian households is undergoing a gradual , but steady change. The share of food and beverages, which used to constitute almost 50% of household spend until 2003 is fall to 45% b y FY08. We expect the share of discretionary items to consistently rise given the rising affordability and changing aspiration levels. Increased exposure to western lifestyle has altered the consumption pattern of Indian people. (ii) Rising Urbanization to Boost Industrial Growth: Urban infrastructure consist of drinking water, sanitation, sewage systems, electricity and gas distribution, urban transport, primar y health services, and environmental regulation. Many of these services are in the nature of local public goods with the benefits from improved urban infrastructure. The urban pop ulation in India will grow b y 85 million over the next 10years. (iii) Green Building in India: The green building movement has gained tremendous momentum during 3 to 4 years, ever since the Green Business centre embarked on achieving the prestigious LEED rating for their own centre at Hyderabad. The Platinum rating for green building has sensitized the stakeholders of construction industry. There is tremendous potential for construction of green building in India. The estimated market potential for green buildin g will be about $ 400 million in 2010. 4. TECHNOLOGICAL FACTORS: (i) Low Technology Adoption to Hinder Growth: The poor state of technology adopted b y the construction sector adversely affects its performance. Upgrading of technology is r equir ed both in the manufactur ing of construction material and in construction activities. As a large number of construction materials are manufactur ed in the unorganised sector, effective monitoring and regulation of the production of these mater ial to ensure proper quality become difficult. Use of low grade technology in the construction sector lead to low value addition and low productivity, apart from poor or substandard quality of construction and time overruns in projects.

(ii) Construction As Per Indian Requirements: The construction needs to be done as per Indian standards and requirements which will demand considerable changes fr om the international r equir ements. The Infrastructure requirements of India are much different as the population spread, increasing urbanization, increasing slums, the small space for roads, the water problems are more. (iii) Ready-Mix-Concrete being Experienced With: The Ready mix concrete business in India is in its infancy. For example, 70% of cement produced in a developed countr y like Japan is used ready mix concrete business there. Here in India, Read y Mix concrete business uses around 2% of tota l cement production. The increasing use of ready mix not only saves time but also impr oves quality. 5. ENVIORMENTAL FACTORS: _ Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability _ With the entry of global companies into the Indian market, advanced technologies, are used in engineering & Construction. _ With the development or evolution of infrastructure sector, many of the MNC enter into Indian market _ Environmental situation affect the infr astructure sector. _ Infrastructure such as roads and bridges affect the many sector such as automobile sector etc. LEGAL FACTORS _ Ensur e a balanced tr ansition to open trade at minimal risk to the Indian economy and local industr y. _ Indian government infrastructure policy aimed at promoting an integrated, phased and conductive growth of the Indian infrastructure sector.

_ Confirms the governments intention on harmonizing the regulatory standards with the rest of the world _ Establish an international hub for engineering & construction companies so that new technology can be used. _ Legal provisions relating to safety measures

Business Strategy of Larsen & Turbo Ltd.

Strategic Vision: To stimulate the active learning of rigorous engineering principles and practices within an envir onment informed by internationally -leading research this fosters creativity, innovation and professionalism. 1. Growth Strategies: In a challenging market environment, an environment characterised by pr olonged downturn in the domestic industrial sector and a recession in the global market, an engineering company like L&T had to follow some crucial strategies for growth. General practices would be to reduce costs, go into hibernation and wait till the climate becomes mor e conducive. Move in aggressively thereafter. There is certainly no single sure-fire recipe guaranteeing both survival and growth in a challenging market. According to M r P.M. Mehta, Senior Vice-President (Operations), L&T is concentrating on hi-tech areas, vacating non-remunerative product lines and focusing on the exports market . The company is currently following a multi-pronged strategy for beating recession without compromising growth. Three years ago the company had visualised opportunities shr inking in the traditional sectors, process plants, power and refineries . It was then that the management really took a decision to move into the hi-tech sector. The company, which had a small presence in the defence sector earlier, started moving in aggressively after the sector was opened up to the private sector. L&T developed technology f or manufactur ing critical equipment for process, nuclear and defence sectors . It is currently looking at entering into joint collaboration with defence companies in various parts of the world. It is also in talks with leading aircraft manufacturers in India and abroad for supplying components. Defence orders are generally spread across four to six years. A submar ine, f or instance, would take 12 years for completion. The defence division could contribute Rs 1,500 to 2,000 crore five year s down the line which would be almost five times the current con tribution. Recently the company signed a joint venture with EADS Defence and Security, f or

defence electronics in India. The 5.7 billion (Rs37, 791 cror e) EADS Defence and Security is a systems solutions provider for armed forces and civil security. 2. Risk Management Strategy: _ Doing business within India remains paramount. Vision is to become an Indian multinational not just another multinational. _ Showing a long term commitment to consolidating presence in select geographies through setting up of offices, entering into alliance with collabor ators, developing marketing networks, brand promotion and wherever feasible, setting up manufacturing facility. _ Investment made in the Middle East for tr aining of workmen. _ Building a motivated and globally b enchmarked team of professionals through providing a fast track car eer gr owth, up gradation of compensation structure, setting up a Project Management I nstitute, conducting Companywide people engagement & leadership development pr ogrammes, international assignments and hiring Expats. _ Institutionalised a r isk management culture and framework in the Company 3. Future Strategy : A blueprint for the next phase of growth till 2015, named Vision 2015, at Larsen and Toubro Ltd is being dr afted. The company is planning to focus on segments traditionally dominated by foreign defence equipment makers and state-owned companies. Since 2000, L&T has charted two five-year plans to reposition the company which was heavily into engineering, procurement and construction segments with a large exposure to commodity businesses, such as cement and readymix concrete, to a more focused value-added engineering company . The first plan was devised b y Boston Consulting Group, a leading global management consulting firm. It saw L&T divesting its cement business in favour of the Aditya Birla Group. This was done through a unique arrangement with L&T employees getting shares of their own company following the divestment. More recently, L&T divested its r eady-mix concrete business in favour of Lafarge SA. The two five-year plans paid huge dividends to the shareholders of the company including its employees who hold a 12.7% stake in it through a trust . The market

capitalization of L&T was Rs15, 507 crore in January 2000. It soared to Rs1.31 trillion at the height of the bull rally in January 2008. L&T s recent moves such as signing a slew of pacts with nuclear engineering firms such as Westinghouse of USA, Atomic Energy Commission of Canada and Russia s Atoms troy export for nuclear plants, an entry into nuclear equipment forging, defence shipbuilding and the latest joint venture make it clear that L&T is focusing more on its core competencies . Its power business is also taking shape with 11 new factories making var ious parts of power equipment. The highly skilled areas of engineering that L&T is entering ar e currently largely serviced b y imports. The operating margins are currently at 8-9% and the new areas it is entering could fetch margins of about 11 -12%. The company also hopes that the nuclear program will be in place once the new government assumes power. By signing pacts with three companies in the nuclear ener gy space, L&T has hedged its risks as a nuclear equipment maker. It has put in place a nuclear equipment forging shop in Hazira in Gujarat at an investment of Rs1, 500 cr ore. This is in addition to a defence shipbuilding yard near Chennai at a cost of Rs1, 500 crore. As per plan, the company will create three operating companies to look after defence, aerospace and nuclear power sectors for effective operations. The three operating companies could happen in 2012-13, provided they had the r equisite volumes.

Porter Five Forces Model:

1. Threat of New Entrants: Low threat of new entrant due to _ Economies of scale _ Labour Intensity _ High Capital Requirement _ Lack of Knowledge and Experience _ Acess to input _ Access to maket 2. Suppliers Bargaining Power: High Bargaining power of supplier . Suppliers of construction materials are fragmented and are extremely critical for this industry since most of the construction wor k is outsourced. Proper supply chain management is a costly yet critical need.

3. Buyers Bargaining Power The Bargaining power of buyer is low/moderate. Buyers in Engineering & construction sector have less choice due to limited number of players. The mar ket forces havent empowered the buyers to a large extent. 4. Industry Rivalry: The industry rivalry is high. This instinct of the industry is primarily driven by the technical capabilities acquired over years of gestation under the technical collaboration with international players and the completion of project on time. 5. Substitute : There is no perfect substitute to this industr y. It will be effected only when the countr y is fully developed than the company need to look fo rward towards the emerging economies.

SOWT ANALYSIS:

Strengths _ Larsen and Toubro (L&T) is India's largest engineering and construction company. _ It has created inter national presence by operating supply networ k offices in 10 locations worldwide, including Houston, London, Milan, Shanghai and Seoul. _ L&T has created a strong brand name b y building worlds largest Tubular Reactor for a petrochemical plant and has also built world's longest Product Sp litter and longest LPG pipeline. _ Larsen and Toubro's order book has repor ted continuous growth. The compan y has a strong pipeline of projects in domestic as well as international markets, which is likely to ensure a steady revenue growth Weaknesses _ In spite of having a diversified expertise, the revenues of the company are highly concentrated

Opportunities _ The company has acquir ed the switchgear business of TAMCO Corporate Holdings of Malaysia in April 2008 _ With TAMCO the company will be able to offer a compr ehensive r ange of MV switchgear and become a significant player in the MV segment in India _ L&T has also entered into various joint ventures in the recent past. L&T has joint venture agreement with Tamil Nadu Industr ial Development Corporation Limited, Mitsubishi Heavy Industries and A.A. Tur ki Contracting & Trading Corporation (ATCO) of the Kingdom of Saudi Ar abia. _ These joint ventures boost and strengthen the operational efficiency of the company, as well as provide it with avenues to gener ate additional revenues and also leverage its strong presence in order to exploit the growing capital goods and infrastructure industry _ Growing Indian capital goods and infrastructure industry as the government has planned a series of measures to encourage private sector participation and incr ease spending on infrastructure. Capacities are being ramped up in Railways, Roads, Ports, Airpor ts and Urban infrastructure to sustain the momentum of double digit growth in the industrial sector. Threats _ Larsen & Toubro faces stiff competition in the international market with construction majors in the Middle East including ABB of Sweden and Bechtel of the US. Stiff competition could erode the company's market share and reduce its profitability. _ Engineering and construction companies such as Larsen & Toubro (L&T) ar e facing pressure on their earnings due to the high interest rates on working capital. L&T's interest costs increased more than three-f old in the first six months of FY2009, which would impact its profit before tax (PBT). Rising interest rates would put pressure on the margins of the company