(Photo: Priyanka Parashar/Mint)
(Photo: Priyanka Parashar/Mint)

L&T keeps its eye on the ball amid trying conditions

  • L&T has retained guidance in spite of the 12% year-on-year decline in order flows during the quarter
  • Another factor that lifted investor confidence is the 24% year-on-year revenue expansion to 35,700 crore in Q3

Larsen and Toubro Ltd’s (L&T’s) December quarter results were reassuring for investors. Concerns that the conglomerate may cut guidance were doused as L&T committed to achieve the higher end of the 12-15% revenue forecast and order flow growth by 10-12% in FY19. This augurs well given the election-linked uncertainty for government orders and the fact that the company had cut guidance in four of the last six years.

Strangely, it has retained guidance in spite of the 12% year-on-year decline in order flows during the quarter. The management seems confident as the decline was largely from the infrastructure segment, due to bid delays and deferrals in the transportation and civil infrastructure sectors that are bound to see fruition in the forthcoming quarters.

A report by Jefferies India Pvt. Ltd says that the sharp increase in Metro and water spends by the states and the company’s conscious focus on new areas would reduce direct dependence on the country’s central budget. Lavina Quadross, an analyst at the brokerage firm, estimates double-digit growth in overall infrastructure plus capex spends for the next three years.

Larsen and Toubro Ltd’s (L&T’s) December quarter results were reassuring for investors. Concerns that the conglomerate may cut guidance were doused as L&T committed to achieve the higher end of the 12-15% revenue forecast and order flow growth by 10-12% in FY19. This augurs well given the election-linked uncertainty for government orders and the fact that the company had cut guidance in four of the last six years.

Strangely, it has retained guidance in spite of the 12% year-on-year decline in order flows during the quarter. The management seems confident as the decline was largely from the infrastructure segment, due to bid delays and deferrals in the transportation and civil infrastructure sectors that are bound to see fruition in the forthcoming quarters.

A report by Jefferies India Pvt. Ltd says that the sharp increase in Metro and water spends by the states and the company’s conscious focus on new areas would reduce direct dependence on the country’s central budget. Lavina Quadross, an analyst at the brokerage firm, estimates double-digit growth in overall infrastructure plus capex spends for the next three years.

Another factor that lifted investor confidence is the 24% year-on-year revenue expansion to 35,700 crore in Q3, far higher than the Street’s forecasts. Double-digit growth accrued across sub-segments within engineering and construction (E&C), with hydrocarbons and infrastructure leading the way.

In its results analysis, a report by Motilal Oswal Securities Ltd says that the government thrust to complete projects before the elections is evident in L&T’s 42% year-on-year jump in domestic infrastructure revenue. Even the 22% jump in hydrocarbon revenue and 50% growth in heavy engineering were impressive. Only the beleaguered power segment continued to play spoilsport with a revenue drop.

Further, L&T maintained its overall Ebitda margin of 11.3% compared to the year-ago period. Ebitda is earnings before income, tax, depreciation and amortization.

Note that the E&C segment’s provisions towards cost overruns and delays on infrastructure projects, dragged margins down by about 160 basis points. Fortunately, the services sectors, namely financial services and information technology, offset the same through robust profitability.

Strong execution and revenue accretion along with stable profit margins translated into a 27% year-on-year growth in Ebitda that beat poll estimates of 13 brokers on Bloomberg.

The 9% drop in L&T’s shares over the last 12 months underscores the concerns on the Street of low order flows in 2019. However, the consolidated order book of 2.8 trillion assures revenue growth for the next two-three years.

Strong order book combined with timely execution has improved working capital outflows. This is why the stock has been range bound even through challenging times.

The recent dampener was the Securities and Exchange Board of India’s rejection of a proposed buy-back, which works against the company’s plan to improve return on equity. Analysts are sure L&T will find some way to return cash to shareholders. This will perhaps be the next trigger for stock appreciation.

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