Just when it seemed like the improvement in the financial performance of Indian companies was across the board, engineering and construction firmLarsen and Toubro Ltd (L&T) reported revenues that were below expectations.
According to Bloomberg, analysts had estimated revenues of Rs10,167 crore for the December quarter, or a growth of 18% year-on-year (y-o-y). Instead, the firm reported a 6.4% drop to Rs8,139 crore.
That’s a massive difference between expectations and reality. L&T’s shares fell by 6.8%, the largest fall in at least 18 months. According to the firm, revenues fell because of a delay in the financial closure of certain projects. L&T now expects revenue to grow 10% in the current fiscal, compared with its target of a 15% growth given three months ago.
Risks related to timely execution of projects were visible even in the second quarter. In fact, for the same reason—delay in financial closure of certain projects—the firm had lowered its revenue growth target of 15-20% given at the beginning of the year to 15%.
For revenues to grow by 10% for the whole year, growth in the March quarter needs to be as high as 31% y-o-y and 70% quarter-on-quarter. That seems like a tall order but is achievable since revenues tend to be lumpy for engineering firms and are generally high in the fourth quarter.
Also, though revenues have fallen way short of expectations, the firm managed to report profits that were nearly in line with consensus estimates. According to Bloomberg, Street estimates of earnings before interest and tax (Ebit), excluding other income, stood at Rs919.6 crore. The reported Ebit of Rs902.4 crore was less than 2% short of estimates.
Graphic: Yogesh Kumar / Mint
At the pre-tax level, the firm has grown profit by 13.6% in the first three quarters, despite flat revenues, as margins rose by at least 100 basis points. What the firm has lost on account of delay in certain projects, it seems to have gained through savings on material costs. Manufacturing cost has fallen by 250 basis points as a percentage of sales, primarily because of a sharp drop in the cost of materials. One basis point is a hundredth of a percentage point.
The net result of all this is that the company is still well within striking range of street estimates of earnings for the whole year, even though revenues would be far short of original estimates. And as far as the execution delays go, the good news is that there have been no order cancellations, and that these would translate into revenues at some point. Fresh order bookings, too, continue to be robust.
L&T shares have done well in the past year owing to its bulging order book. While the concern about execution delays could weigh on the stock in the near-term, it should continue to do well, as long as the delays in some orders don’t turn into cancellations.
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