L&T guidance upbeat but risk lies in execution
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Larsen and Toubro Ltd (L&T) missed its revenue and order flow guidance for fiscal year 2017 (FY17). Even then, it has put out a robust guidance of 12-14% in order inflows in FY18, accompanied by a 12% growth in revenues, according to a Mint report. Investors are likely to take this with a pinch of salt, as the company’s downgrade of its FY17 guidance would still be fresh in their minds.
L&T’s consolidated revenue rose by 12% over a year ago in the March quarter, taking its full-year sales growth to 8%, lower than its guidance of 10%. Order inflows grew by 5% in FY17, also lower compared to its expectation of 10% growth. A sharp cut in its international business order flows in the fourth quarter affected growth. Given the situation in markets such as the Middle East, it has been selective in taking up new orders. The bright spot is the domestic market where order flows have risen by 30% during the quarter and the company is hoping this heralds the beginning of the investment cycle.
In comparison to revenue growth, L&T’s Ebitda (earnings before interest, tax, depreciation and amortization) declined in the March quarter by 3.6% over a year ago, pulling down Ebitda margin to 11.8% compared to 13.7% a year ago. The main reason for that was a decline in the margin of its infrastructure business. Its full-year margin also fell, which the company attributed to costs incurred on extended stay and delays in award and commencement of some projects. Order inflows in this segment declined. Among its other segments, power and electrical face rough weather, while the hydrocarbon segment is in better shape.
The muted outlook for its international business means that domestic business will have to do much of the heavy lifting. L&T’s order book position is quite healthy—even with a 5% growth in FY18, it stands at 2.4 times FY17 consolidated revenue.
The challenge really is to move ahead with project execution, so that the company can book revenues as work progresses.
While the company’s Ebitda declined, its net profit rose by 28% in the March quarter, mainly due to its share of profits in its joint ventures/associates, which was Rs83.4 crore compared to a loss of Rs332.8 crore a year ago. Excluding that, profit after tax grew by 10%.
The company’s guidance for FY18 suggests a more confident outlook, giving investors something to look forward to. Since there are several elements to the investment cycle, the risk as usual lies in execution. L&T’s share has run up considerably and already trades at 26 times its estimated FY18 earnings per share, based on a mean of estimates polled by Reuters.