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Business News/ Market / Mark-to-market/  L&T’s execution problems overwhelm order inflow pickup
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L&T’s execution problems overwhelm order inflow pickup

For the second straight quarter, robust order inflows for L&T failed to mask Street disappointment at its operating performance

L&T’s revenue growth in the June quarter was disappointing, up only 5% from a year ago, the slowest pace in at least three years. Photo: Priyanka Parashar/Mint (Priyanka Parashar/Mint)Premium
L&T’s revenue growth in the June quarter was disappointing, up only 5% from a year ago, the slowest pace in at least three years. Photo: Priyanka Parashar/Mint
(Priyanka Parashar/Mint)

For the second straight quarter, robust order inflows for Larsen and Toubro Ltd (L&T) failed to mask Street disappointment at its operating performance. The company booked orders worth 25,200 crore, up 28% from a year ago, well ahead of its guidance, but the stock fell 7.46% as investors fear that project execution delays will continue.

Revenue growth in the June quarter was disappointing, up only 5% from a year ago, the slowest pace in at least three years. Worse still, even this paltry growth was driven by the international business. Export sales grew 68% from a year ago. Stripped of this business, domestic revenue slipped 7.7%. Project execution was particularly poor in the power segment, where revenue declined 44%, reflecting the underlying constraints in that segment, especially fuel availability. Revenue from the metals and materials business also fell 17.9%, owing to the familiar problems affecting the mining sector such as land and environment.

With the international business being a lower-margin one, L&T’s overall Ebitda (earnings before interest, taxes, depreciation, and amortization) margins also declined 54 basis points from a year ago to 8.53%, again the lowest in at least 12 quarters. While material costs as a proportion of revenue registered a drop, there was a spike in subcontracting expenses, perhaps owing to wage inflation, and L&T’s own employee costs. The company also attributed the lower margins to capacity underutilization and its job mix. The margin fall was particularly sharp in the hydrocarbon business, down 2.4 percentage points, and in the heavy engineering segment, where it was 17.3 percentage points. However, given that this business sees discontinuous jumps in revenue, a clearer picture will emerge only over the next few quarters.

The lower margins, coupled with a fall in investment income and rising interest expenses, meant that L&T’s net profit fell 12.5%. In yet another reflection of a slowing economy, the company’s net working capital rose to 17.3% of sales in the June quarter, compared with 15.4% in the three months ended March. At a press conference, the management reiterated its revenue growth guidance of 15-17% for this fiscal year, which is predicated on the hope that the international business growth will cushion the domestic slowdown.

The good news is that order inflows are picking up, particularly as the company chases overseas business, but delays in project executions at home are likely to persist. The infrastructure segment (power transmission and distribution, buildings and factories, transportation infrastructure and heavy civil infrastructure, among others), accounts for 68.3% of L&T’s order book and leans towards domestic revenues heavily. That exposes it towards projection execution risk reducing revenue visibility in the medium term.

Moreover, according to Nomura Research estimates, at least a quarter of the company’s order book at the end of March was made up of buildings and factories orders, where the execution cycle sometimes stretches to as long as 60 months, double L&T’s average. It also remains to be seen what proportion of the order book the company itself has classified as slow-moving, after it removed 17,000 crore in the March quarter.

L&T is no doubt best placed in its peer group to benefit from a capex recovery cycle owing to its wide diversification. However, the recovery itself is still on very shaky ground. Operating performance will be the driver of the share price in the medium term and the prognosis is that there will be more pain.

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Published: 22 Jul 2013, 08:16 PM IST
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