L&T continues to suffer from slowdown in India's infrastructure sector

The continued slowdown in India's infrastructure and industrial sector has finally caught up with Larsen & Toubro. It reported net loss on standalone basis for the first time in Q2FY21, excluding the one-time profits from asset sales. At the consolidated or group level, core business of engineering, construction and manufacturing remains a drag and L&T now makes profits from its IT services subsidiaries than its core business.

L&T reported a loss of Rs 1,767 crore from continuing operations on standalone basis during the September quarter against like-to-like net profit of Rs 1,719 crore a year ago and Rs 282 crore in Q1FY21. 

This is first quarterly loss for the company in at least two-decades. Standalone net sales were down 15 per cent year-on-year (YoY) due to a slow recovery in construction activity after the unlock began. 

At consolidated level, L&T reported net profit of Rs 1,410 crore, down 45 per cent YoY, excluding gains from asset sale, while net sales were down 12 per cent YoY. The company attributed it to combined asset impairment of Rs 2,818 crore at its heavy forging and power development business. 

The company was, however, saved blushes, thanks to one-time profit of around Rs 8,100 from the sale of its switchgear business to Schneider Electric during the quarter. Including these gains, L&T reported a record headline net profit of Rs 6,879 crore on a standalone basis during the second quarter.

The company plans to use a part of the proceeds to pay special dividend of Rs 2,500 crore and prepay some of the loans. 

Dalal Street, however, reacted negatively to the quarterly results and L&T was the worst-performing index stock on Thursday and was down 5 per cent against half a per cent decline in Nifty 50 index during the day. 

Analysts aren’t too worried about the net loss on standalone basis, a bigger worry for them is the continued poor profitability at L&T capital intensive infrastructure divisions. 

"Impairment charge was on expected lines and long-overdue. The management used the profits from asset sale to clean-up a part of the balance sheet in the quarter, which was not a bad thing at all," says Shailendra Kumar, chief investment officer, Narnolia Securities. 

L&T’s large exposure to infrastructure projects, how­ever, remains a cause of concern. 

"Nearly half of L&T balance sheet at consolidated level remains stuck-up in poorly performing projects in power, road, and metro projects that pulls down the overall profitability at the consolidated level. This weighs on its valuation and the stock price,” adds Shailendra. 

At the consolidated level, the company is now increasingly depended on its IT and technology services division to drive its revenues and profits growth. At Rs 1,131 crore, at the IT division, PBIT (profit before interest and taxes) in Q2FY21 was nearly twice that of the infrastructure division profits and it was the only major segment to report YoY growth in earnings and revenues. 

The division PBIT was up 30 per cent YoY in the second quarter, against 31 per cent decline in L&T’s consolidated PBIT and 33 per cent YoY decline in the profits of the infrastructure division. The IT division that is housed under its two listed subsidiaries — L&T Infotech and L&T Technology Services — accounted for 40 per cent of L&T’s consolidated PBIT in Q2FY21 against its 21 per cent share a year ago.

The IT division, however, still accounts for just a fifth of L&T’s consolidated revenues and just a tenth of its total assets worth nearly Rs 3 trillion. 

"The profits and dividend from its technology subsidiaries have cushioned the decline in profits from infrastructure division but their impact on L&T’s overall balance sheet and stock valuation is still limited, given the overall size of the company," says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services.

Not surprisingly, L&T has now become one of the biggest laggards on the bourses. Its current stock price of Rs 934 is similar to its stock price six years ago. In the same period, however, the company’s balance sheet on consolidated level has nearly doubled, while revenues are up nearly 50 per cent.