L&T Q2 result tops estimates, prepares for the next growth wave

Order inflow increased 11% from an year earlier, led by contracts it got from outside India and largely from the infrastructure and hydrocarbons sectors


Both manufacturing and employee costs were tightly managed and L&T reported a 7.6% growth in operating profit, sustaining the profit margin at the year-ago level of 9.2%.
Both manufacturing and employee costs were tightly managed and L&T reported a 7.6% growth in operating profit, sustaining the profit margin at the year-ago level of 9.2%.

Investors in Larsen and Toubro Ltd (L&T) were jittery and sent the stock down 1.4%, hours before it declared the September quarter earnings on Tuesday. But the company topped analyst estimates on all counts, as it implemented a two-pronged strategy of maintaining momentum in order inflows and tight cost management.

Order inflow increased 11% from an year earlier, led by contracts it got from outside India and largely from the infrastructure and hydrocarbons sectors. In an interaction with reporters, the management said that domestic orders have also started kicking in. This is in contrast to the outlook given after the June quarter earnings. The management was cautious then, and had cited a sluggish economy and higher costs as the reasons. L&T now sits on a Rs2.5 trillion order book, about 2.5 times its revenue for the year ended 31 March.

On the revenue front, the company beat consensus analysts’ estimates by a wide margin. Revenue rose 8% from a year earlier to Rs25,010 crore.

Both manufacturing and employee costs were tightly managed and L&T reported a 7.6% growth in operating profit, sustaining the profit margin at the year-ago level of 9.2%. This includes the write-offs on unsold inventory.

However, the infrastructure segment, which contributes to nearly half the company’s total revenue, posted a subdued 6% growth. Client delays hurt execution on the home ground. That was offset by a strong ramp-up in international markets. The segment’s operating margin narrowed to 7.1% from 9.3% a year earlier.

The key contributors to both revenue and profitability were hydrocarbons, heavy engineering and services segments. The first two segments also brought in good orders and turned operations profitable from losses in the year-ago period. That said, weak demand and low-capacity utilization in industrial segments would continue to hurt growth in the near term.

With its strategy to diversify into new regions and business segments, the conglomerate chose to maintain its order inflow and revenue guidance for fiscal year 2017 at 15% and 12-15%, respectively.

Meanwhile, L&T’s efforts to refinance borrowing at lower rates helped trim finance charges, even as other income from treasury operations rose. The company will also gain as interest rates are expected to decline further.

For the September quarter, net profit (excluding Rs400 crore divestment of its insurance business) rose 41% from a year earlier. Given that the management has a more positive outlook now, investors will hope that the September quarter performance is not a flash in the pan.

At Rs1,329, L&T trades at about 20 times one-year forward earnings. Although this factors in most of the positives, investors must note that any improvement in infrastructure or industrial capital expenditure would boost the valuation of the stock.

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