Home >Markets >Mark To Market >L&T maintains stellar margin performance but FY22 outlook is a dampener

Larsen & Toubro Ltd (L&T) has reported decent March quarter earnings with operating margins being the key positive. Despite input cost pressures, the engineering and infrastructure company’s Q4FY21 consolidated Ebitda rose 170 basis points year-on-year (y-o-y) to 13.3%. This was led by margin expansion in the heavy engineering and defence segments.

Ebitda is earnings before interest, tax, depreciation and amortization. One basis point is 0.01%.

Analysts are, however, not satisfied with its FY22 guidance. L&T’s revenue and order inflows could see low to mid-teen growth in FY22. This is based on the company’s assumption that economic recovery would begin in Q2. This guidance is conservative even after adjusting for FY21’s low base and a sizeable order backlog, said analysts. Moreover, there are downside risks to this already muted outlook.

“This number is lower than Street expectations. The company won a large high-speed railway order in FY21 and meeting the said guidance on a high base means that L&T would have to bid more aggressively, which could lead to pressure on margins. Balancing out steady margins with order inflows growth on a high base is difficult," said Varun Ginodia, an analyst with Ambit Capital Pvt. Ltd.

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In a post-earnings conference call, the management told analysts that its total prospective order opportunity in FY22 is 9.6 trillion versus 8.4 trillion in FY21. This includes 6.6 trillion from domestic businesses. “The stock has corrected in the last two months reacting to the deferment of orders. While the order pipeline prospects remain healthy, there are pandemic-related risks to them getting translated into actual awards as the Centre is focusing on healthcare and social welfare spending," said Umesh Raut, vice president, research, Dolat Capital Market Pvt. Ltd. The management is prepared to mitigate execution concerns, but a ferocious second wave may impact growth momentum, especially in Q1FY22, Raut said.

In Q4FY21, order inflows at 50,651 crore declined by 12% y-o-y because of deferment of awards. For FY21, order inflows fell 6% y-o-y to 1.75 trillion. The consolidated order book at 3.27 trillion in FY21 represents an 8% increase over FY20.

“L&T’s results reflect certain challenges on the ground that could impact the execution of large projects. Project-level liquidity supported by swift government payments is comforting, but a lot would depend on how long the covid-led disruption lasts. Further, the overhang related to sale of non-core assets, the Hyderabad Metro Project, remains," said Amit Mahawar, senior vice president, institutional equities research, Edelweiss Securities.

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