L&T results mirror the poor state of investment demand
The December quarter results of Larsen and Toubro Ltd (L&T), a proxy for the state of India’s investment demand, was disappointing. It was all the more so, as it had turned in a vibrant performance for the September quarter. What is likely to dampen investor sentiment is the management’s decision to lower growth guidance to 8-10% for the full year ending March, from the earlier forecast of 12-15%. And even that appears to be an uphill task for the juggernaut.
The firm’s December quarter results surprised the Street negatively. Net revenue grew 1.4% to Rs26,287 crore from a year ago, which fell short of Bloomberg’s average estimate by a significant 11%. One could blame it on demonetisation, to some extent.
The impact was felt the most in the infrastructure segment, which comprises over three-fourths of L&T’s revenue. The management said in its media release that clearance delays and the abrupt liquidity crunch at the customers’ end hindered work progress.
Meanwhile, toll revenue was down, too. So were real estate sales. Yet, the segment’s revenue grew by 6%, with a robust contribution from its international projects.
That’s not all. L&T’s power segment is battling a dwindling order book. Revenue fell by 23% year-on-year (y-o-y). Also, the other smaller engineering segments and information technology (IT) did little to enthuse investors.
But L&T’s 9.6% operating margin matched investor expectation and was a neat 140 basis points (bps) higher than the year-ago period. One basis point is one-hundredth of a percentage point. Stringent working capital management and cost-cutting exercises did the trick. In this respect, the infrastructure segment delivered a respectable 110 bps y-o-y rise, even as the hydrocarbons, heavy engineering and electrical and automation segments pulled up their socks.
However, both operating profit and net profit fell short of the average brokerage estimates. Yet, the consolidated net profit was about 39% higher y-o-y at Rs972.5 crore, not a bad deal considering the macroeconomic challenges.
The moot question is, will L&T meet its guided revenue and order inflow target?
On the revenue front, the firm will have to ramp up execution in the fourth quarter to match even the watered down 10% growth in annual revenue. Thanks to customer delays after the currency ban, the work at many sites was almost at a standstill. These have to gain traction again. Meanwhile, segments such as IT could clock slower revenue growth.
On order inflows, the challenge is no less. December-quarter order inflow was 10% lower, with a third coming in from overseas. Again, given its run-rate at the end of nine months, the firm has to clock at least Rs50-60,000 crore to meet the guided annual target. Not impossible, given that the fourth quarter is the “lumpiest” on order inflows, but a Herculean task, too.
In fact, L&T’s results convey that all is not well in the economy.
“Domestic growth appears to take a longer time as investment momentum is weak and the banking system is burdened with a debt overhang,” says the company's media release, adding that the challenging business conditions are likely to remain for a few more quarters.
Infrastructure orders from the government are still delayed and private capex is yet to take off.
L&T’s stock trades at Rs1,439 apiece, which discounts its one-year forward estimated earnings by a rich 21 times.
In fact, since demonetisation, the stock, which has been a steady outperformer, has been volatile. Brokerages have trimmed both the expected earnings and valuations over the past few weeks. Only a fillip to revenue or order inflows can make this elephant dance.