L&T reports big profit plunge on low revenue growth, drop in margin

Net down 12.5%, most in 12 quarters; scrip slides 7.5%

Capital goods major Larsen & Toubro on Monday reported 12.5 per cent drop in profits in the quarter ended June, compared with the same period a year ago, mainly on account of lower-than-expected revenue growth and a fall in margins.

This profit decline, a second straight quarterly drop after the 6.9 per cent one in the March quarter, is the biggest for the company in 12 quarters. After announcement of the result, below the Street’s expectations on many parameters, the company’s stock fell 7.49 per cent from its previous close on BSE to end the day at Rs 901.95.

For most of last year, L&T had managed to outperform its peers, backed by strong revenue growth and robust order intake. However, the first quarter of this financial year seemed to be one of disappointment for the Street. While order intake rose 28 per cent year-on-year to Rs 25,159 crore, revenue grew a modest five per cent to Rs 12,555 crore and operating margins fell to 8.5 per cent, from 9.1 per cent in the same quarter the previous year. Other income, which includes dividend and interest income, also dropped. As a result, net profit declined 12.5 per cent to Rs 756 crore, against Rs 864 crore in the year-ago period.

L&T maintained its revenue guidance (15-16 per cent) for the current financial year, Chief Financial Officer R Shankar Raman said. According to him, revenue growth was lower because of a decline in order book in the power and metal sectors, low growth in the product business and non-linear project execution.

The margin fall was largely due to competitive pressure and under-utilisation of plant capacity. Chief Executive Officer & Managing Director K Venkataramanan said L&T had been ramping up its capability and expanding facilities in India and abroad to cater to an assumed eight per cent GDP growth for the country. But a downturn had led to underutilisation.

Another reason for margin pressure was the increasing contribution of international business. Revenue growth from international business and exports rose 68 per cent, while the domestic business declined. Margins in domestic business are typically better.Raman said it would be difficult to quantify underutilisation but the problem was being faced across sectors. The power sector order book shrank from Rs 25,000 crore to Rs 14,000 crore and the company’s foundries, too, were under-utilised. In the first quarter, about Rs 600-crore orders — a majority of those in shipbuilding — were cancelled and there was no change with respect to Rs 5,000-6,000-crore slow-moving orders.

The power sector performance also reflected on the stock of BHEL, too. The scrip fell seven per cent on BSE on Monday.

For L&T, apart from increase in order inflows, the saving grace were the hydrocarbon and infrastructure sectors, which contributed to over 80 per cent of new orders and reported a growth in revenue. L&T also announced completion of restructuring of its engineering and construction segment, which includes infrastructure and hydrocarbon divisions. The company has created separate teams to manage growth better.

Venkataramanan said the situation on ground remained challenging and expected it to continue for another two years. He added the company was expanding its international business and expected it to consolidate in next two-three years. However, many analysts remain positive on L&T for the long term.

Sanjeev Zarbade, vice-president (private client group research), Kotak Securities, said: “L&T numbers are lower than our expectations. However, on a long term basis, we continue to be positive on the company.”