L&T orders signal return of private capex

Engineering giant Larsen & Toubro Ltd flashed the first signs of a much-awaited recovery in India's private capital expenditure, reporting a sharp recovery in domestic infrastructure orders in the September quarter.

The company’s infrastructure projects segment received domestic orders worth nearly ₹27,400 crore during the quarter, almost 50% more than a year earlier. Domestic order receipts for this business segment crossed the ₹20,000 crore mark after five fiscal quarters. L&T is India's largest infrastructure developer by a wide margin.

“We find that both private sector capital as well as infrastructure investments have shown an uptick. We do believe that the trend would continue going forward,” said R. Shankar Raman, whole-time director and chief financial officer of L&T. On private sector expenditure, he said that while there was an uptick in order receipts during the second quarter, it remains to be seen whether it turns into a trend.

L&T’s infrastructure segment builds factories, transportation infrastructure, heavy civil infrastructure, power transmission and distribution assets, and renewable energy plants, water and effluent treatment plants and mineral and metal refining plants. The segment booked orders worth ₹52,686 crore during the quarter, with the remainder coming from overseas, mainly the middle-east.

Senior government officials have frequently flagged a slowdown in capital expenditure, and have repeatedly nudged companies to invest and grow.

Analysts acknowledged that L&T’s numbers paint a promising picture, but at least one analyst has cautioned against jumping to conclusions.

“We saw good project finalization during the quarter in the buildings and factory, and metals and mining spaces,” said Amit Anwani, vice-president and lead analyst for capital goods, industrials and defence sectors at Prabhudas Lilladher. However, he said that there was one large order win from the Adani Group for thermal power plants, which he estimates to be worth around ₹20,000 crore. Without this order win, private sector order inflow during the second quarter was normal.

Metro exit, electronics entry

L&T said that it was in advanced discussions with the Telangana state government to divest its stake in Hyderabad Metro, a project that it developed and now operates. The project has been a constant drag on the company’s financials owing to its low ridership. The company has explicitly stated for the past several years that it is looking to divest from the project.

The exit will lead to a leaner balance sheet for L&T and also improve its return on equity, Anwani said. But the company will be taking a significant hit on its investments. Considering an investment of about ₹7,000 crore in the project and a one-time settlement payout of about ₹2,000 crore from the state government, as per media reports, the company would be taking a hit of ₹4,500- ₹5,000 crore on this project, he said.

While the company exits one business, it has confirmed its entry into another. CFO Shankar Raman said L&T was considering entry into electronics manufacturing.

“As a part of our strategy to broadbase revenue streams, we are looking at electronics manufacturing in specific areas,” he said. The company could make equipment for sectors like communications, aerospace, and precision engineering, and it will not make consumer goods, he said.

Robust Q2 earnings

L&T reported a 10% jump in its consolidated revenue to ₹67,984 crore for the September quarter compared to the same period last year. This includes earnings from developing infrastructure, manufacturing, IT outsourcing and lending, among other areas. About 56% of this revenue came from overseas compared to 52% in the same period last year. Profit grew by 16% to ₹3,926 crore.

Earnings before interest, tax, depreciation and amortization (Ebitda) improved by 7% year-on-year to ₹6,806 crore. Ebitda margin narrowed 30 basis points to 7.3%.

L&T received orders worth ₹1.16 trillion at a consolidated level, its highest in any quarter. The order inflow was 44% higher year-on-year, led by significant project wins in West Asia. Its order book now stands at ₹6.67 trillion - another company record.

“The company has reported a well-rounded financial performance across all parameters,” S.N. Subrahmanyan, chairman and managing director, said in a press release. “Our ability to repeatedly secure large orders, across segments and geographies is a true testimony to the company’s leadership position in the EPC domain.”

The company was well-placed to exceed its guidance of its order inflow growing by 10% this financial year compared to FY25, Raman said. The It had received orders worth ₹3.5 trillion last year.

L&T was also on track to meet its guidance of 15% revenue growth this fiscal, he said. Meanwhile, achieving the Ebitda margin guidance of 8.5% was a “work-in-progress.”

The L&T stock lost 0.53% to close at ₹3,951.7 on the BSE on Wednesday, while the benchmark Sensex closed 0.44% higher. The earnings were disclosed after trading hours.

The company on Wednesday announced the appointment of former Niti Aayog chief executive Amitabh Kant and former Saint-Gobain India chairman B. Santhanam as independent directors for five years. Incumbent independent director Preetha Reddy was re-appointed for five years.