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Larsen & Toubro’s electric unit reported revenue of Rs5,038 crore in FY17.
Larsen & Toubro’s electric unit reported revenue of Rs5,038 crore in FY17.

L&T’s dividend is not very special, but its Q2 earnings are impressive

  • L&T’s Q2 results were impressive with a meaningful beat compared to analysts’ estimates
  • Order inflows were at 28,040 crore, ahead of estimates, while international orders stood at 8,900 crore

Larsen & Toubro Ltd’s (L&T) September-quarter results announcement was eagerly awaited, as the company had said it will also announce a special dividend concurrently. In fact, in anticipation, L&T shares had risen over 5%, as some analysts estimated the dividend payout to be around 36 per share.

As it turns out, L&T announced a dividend of 18 apiece, which is at the bottom end of the Street’s expectations. Also, note that this works out to only around 20% of net sale proceeds from its recently-concluded deal with Schneider Electric. Investors will be clearly disappointed, although the company has said that the remainder of the proceeds will be used to de-leverage the balance sheet and also to refinance and restructure the Hyderabad Metro project. The company said in a media conference that it is also looking to use some of the funds for inorganic growth in its services segment, especially the financial services arm; while some will be deployed in the core engineering business as well.

Non-core in focus
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Non-core in focus

The bit about investing in non-core businesses is a tad worrying, as investors have been looking forward to a reduction in exposure to non-core businesses. “The company is taking steps to reduce its focus in non-core business to allay investors’ concerns, but it will take more time for these concerns to completely ease," said an analyst with a multinational brokerage house, requesting anonymity.

Meanwhile, the company’s Q2 results were impressive with a meaningful beat compared to analysts’ estimates. The Ebitda of 3,340 crore was 10% ahead of estimates of analysts at Yes Securities. Margins were aided by operating leverage benefits and cost-rationalization measures.

“Order inflow stood at 28,040 crore, (v/s our 25,000 crore estimates). International orders were at 8,900 crore (36% of the total order inflow)," analysts at the brokerage said in a note.

The company management said orders came largely from the government’s spending on the infrastructure segment. Despite worries on the government’s capital expenditure, orders came from the power transmission and metro segments, among others. However, there wasn’t much order inflow momentum in L&T’s power and hydrocarbon divisions.

Execution at the company’s project sites has improved thanks to better labour availability. The company said labour availability is now at pre-covid levels. However, the decline in its core engineering and construction revenues continued in the second quarter as well, falling by 18% year-on-year.

L&T’s consolidated debt was down to 1.46 trillion at the end of Q2; the plan is to reduce debt using operational cash flows. L&T had set a debt reduction target of 30,000 crore for FY21 by selling assets such as the Nabha power project.

While the results were decent, the fact that the stock had risen in recent trading sessions can result in some downward pressure when trading resumes on Thursday, an analyst said.

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