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Business News/ Companies / News/  Margins to stay stressed for next 3 quarters: L&T

Margins to stay stressed for next 3 quarters: L&T

L&T chief financial officer R. Shankar Raman, in an interview, attributed the decline in profit margin to orders secured in FY21 and FY22, which make up approximately ₹2.31 trillion of L&T’s total order book valued at ₹4 trillion.

R. Shankar Raman, chief financial officer, L&TPremium
R. Shankar Raman, chief financial officer, L&T

NEW DELHI : Profit margins of Larsen and Toubro Ltd (L&T) are set to remain under pressure for the next three quarters as it completes projects awarded earlier at current cost structures, company chief financial officer R. Shankar Raman said in an interview.

The engineering and construction major, on Wednesday, said that its March quarter revenue rose 10% to 58,335 crore from a year earlier. The operating margin for the quarter, however, narrowed to 11.7% from 12.3% the year earlier.

Raman attributed the decline in profit margin to orders secured in FY21 and FY22, which make up approximately 2.31 trillion of L&T’s total order book valued at 4 trillion.

“Now, when we execute them currently, the cost of implementing the project is higher due to disruptions that have happened. As we complete these projects, it is only the new projects that will survive, and these hopefully will not have these pressures, which is why I’ve been saying that I think the worst is behind us. We possibly will see soft margins for two to three more quarters... fourth quarter onwards, we will possibly see margins return to normalcy as these projects move away and new projects that we won last year start contributing to revenue," he said.

He said margins would improve during the next fiscal year as the company seeks compensation from clients after delivering these projects.

“After we complete these projects, we will go back to our clients seeking compensation since there is a provision for it. So FY25 onwards, we could see better times for margin compared to the current period," he added.

Following the results, L&T shares fell 5.29% to hit a low of 2,241 on BSE on Thursday, as the market is concerned over the decline in margins. On Friday, stocks further fell by 0.93% to close at 2,220.90.

On the decline in share value, Raman said that margins in the construction business are not linear.

“See, I think we need to understand margins in an EPC business are not linear. Markets make this misjudgment by saying that if the order book is growing and sales are growing, then the margin should grow. It need not be in project business," he said.

In a sign of the country being able to sustain growth going ahead, Raman said that the private investment in the country has started to return.

“Some bit of his already started, in my opinion, because in FY22. We had the private sector share of projects and manufacturing business in the range of 26-28%. Now, that has moved to 32% in FY23 already," he said. Raman said that L&T’s international business is mainly from the Middle East, where record investments are set to happen.

“Can you believe Saudi Aramco is investing $50 billion? Now, $50 billion would mean at least $5 billion worth of opportunities for companies like us. We have been in that region for close to 25 years now and are one of the leading EPC contractors out of India’s working in Saudi Arabia, for example. So, I think we are pretty confident, at least in the next 2-3 years, context about the Middle East being a very productive market for us. We do believe the mix of international to domestic will continue to be one-third," he predicted.

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Updated: 13 May 2023, 02:08 AM IST
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