Mumbai: Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company, is likely to report a rise in fiscal first-quarter order inflows after a decline in three of the four quarters last year, indicating that domestic demand is beginning to pick up.
L&T will announce its earnings for the quarter ended 30 June on Friday, which will set the tone for the rest of the year and indicate how far business prospects have revived for many sectors. Awards of orders in sectors such as power, real estate and hydrocarbons, for example, had so far remained weak.
Fourteen analysts polled by Bloomberg are expecting L&T to report consolidated net profit of Rs.797.4 crore for the June quarter, while a 16 analysts’ poll expects consolidated net sales of Rs.22,520.1 crore. L&T had reported consolidated net profit of Rs.606.19 crore and net sales of Rs.20,252.17 crore in first quarter of fiscal 2016.
For the year to 31 March, analysts expect L&T’s order inflow growth to be 20% or more, faster than the company’s own forecast. L&T in May forecast order inflow growth of 15% and revenue growth of 12-15% for fiscal 2017, pinning hopes on better investment climate in its home market and project awards from new foreign markets.
“In our view, FY17 orders would be driven by the defence, power, hydrocarbons and transportation infra segments; we build in 20% growth in orders to Rs.1.64 trillion in FY17 vs. the company’s guidance of +15%,” Motilal Oswal analysts Ankur Sharma and Ankit Shah wrote in a 14 July report. The analysts expect a pickup in domestic execution and a 12% growth in revenue for the full year.
Axis Capital estimates order inflow growth of 25% for the full-year driven by incremental orders from defence, power, hydrocarbon and transportation infrastructure projects.
L&T, which is often referred to as a proxy for the broader economy with interests in finance and information technology sectors, has been hurt by stalled industrial projects and a private investment cycle that is yet to take off, coupled with slow growth in key overseas markets.
The first quarter is typically a weak one for L&T, with execution and awards getting better by the second half of the year, according to analysts.
“We have to see if the execution, which picked up in fourth quarter last year, is sustained in the first quarter. Execution pace and order inflow will be the most important factors to watch for this quarter, because the company has given a very strong guidance of 15% growth. One needs to see from which sectors they are receiving the orders, and if there is a pickup in the Middle East market,” said Anubhav Gupta, an analyst with Maybank Kim Eng Securities India.
Restating the numbers in accordance with the new Indian Accounting Standards will also likely impact the company’s results in some ways.
As part of its five-year plan, L&T expects to grow revenue at compound annual growth rate (CAGR) of 12-15% and expand margin by 100-120 basis points through fiscal 2021. This year, it wants to reduce working capital to 18% of revenue from 24% in fiscal 2016. The company is also planning to re-enter the build, operate and transfer (BOT) roads sector to benefit from the government’s thrust on awarding higher number of road projects.
Apart order inflows, the most important metric to watch out for in L&T’s outlook on Friday will be their measures around cost structures and definite plans on divestment of road assets, said a brokerage analyst, asking not to be named as he is not authorized to speak to reporters.
“What matters more than order wins is operating fundamentals. One needs to see what L&T does to its overhead cost; the employee cost on an absolute level, because it is a slow growing company and will remain a slow growing company. The scale that they are in, it’s very difficult to grow the domestic contracting business by more than 10%,” he said.
L&T has been working on monetizing its operating assets to improve returns to shareholders – something that had taken a beating in recent years due to misallocation of capital in certain businesses including in subsidiary L&T Infrastructure Development Projects Ltd (L&T IDPL). It has agreed to sell its general insurance business to HDFC ERGO General Insurance Co. Ltd and its Kattupalli Port to Adani Ports and Special Economic Zone Ltd (APSEZ). L&T is also in talks with Canada Pension Plan Investment Board (CPPIB) to monetize its portfolio of road assets under L&T IDPL, Mint reported on 13 July.
“These businesses total losses of Rs.1,000 crore and would add about 2% to RoE (return on equity) once sold,” Sharma and Shah of Motilal Oswal wrote in heir report.
While the overall commentary from L&T’s management during fourth quarter results in May were positive, it needs to be seen if its first quarter numbers reflect a pickup in domestic orders or in the overall economic activity.