L&T navigates through tough Q1; lack of guidance raises uncertainty
L&T‘s consolidated results managed to post a decent profit, contrary to the consensus estimatesThe firm didn’t offer guidance on revenue, order inflows and margins, citing the ongoing uncertainty
PremiumLarsen and Toubro (L&T) managed to tide over a tough June quarter despite the pandemic-induced headwinds, including shortage of workers and regional lockdowns. Contrary to consensus estimates and expectations of a loss, L&T’s consolidated results managed to show a decent profit. However, its net profit of ₹537 crore was 69% lower year-on-year (y-o-y).
Nevertheless, L&T’s core engineering and construction division’s revenues and margins were also positive.
Order inflows were slow, but the order book managed to increase by about 4% during the quarter to ₹3 trillion.
But that has not been enough to impress the Street. After an initial jump of about 1.5% on Thursday, the stock corrected and ended in the red on a day when the Nifty 50 made good gains.
For the second time, L&T abstained from offering “guidance" on revenue, order inflows and margins, citing the ongoing uncertainty due to regional lockdowns.
At present, a key worry for investors is the pace of execution of orders given the labour shortage, analysts said.
In a post-earnings call, the management said that labour availability has improved from 140,000 in May-June to 190,000 in July, but is still markedly down from the peak of 230,000. Notably, 95% of its sites are now operational and the company does not expect any huge impact on execution due to the less-than-peak workforce.
It is adding around 1,500 workers daily, and the count is likely to be normal in the coming months.
“We believe once normal levels are reached, L&T will have a better grip on the execution trajectory and more likely to give a guidance, perhaps in Q2," Dolat Capital Market Pvt. Ltd analysts said in a note on 23 July.
Analysts also expect investor sentiment for the stock to be constrained in the near term. However, a trigger for the stock could come from its ₹14,000-crore deal with Schneider Electric, which was to be completed in the March quarter of FY20. The coronavirus pandemic and travelling restrictions held the sale back.
The management said that it expects the deal to be concluded shortly after the resumption of international travel. The proceeds are likely to be utilized to retire debt, which would essentially result in a higher (consolidated) profitability ratio, as well as reduce the debt-equity ratio.
The stock has undershot the key benchmark index, the Nifty 50, by a wide margin this calendar year. It dropped 29% versus an 8% fall in the Nifty.
That said, the stock has recovered losses from its recent lows in March. As for valuations, the one-year-forward price-to-earnings multiple is about 14 times, lower than some peers.
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