Larsen & Toubro: Profit miss in Q1 a blip

Analysts and the company remain optimistic on FY16

Larsen & Toubro (L&T)’s June quarter performance was a big miss on the profit front. On consolidated basis, while revenues at Rs 20,252 crore came in line with the consensus estimate of Rs 20,251 crore, earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 2,290 crore were lower than Bloomberg estimates of Rs 2,406 crore.

The negative surprise was due to a sharp fall in profits of the metallurgical and material handling, and heavy engineering segments, which on a combined basis fell from Rs 210 crore to Rs 40 crore. Ebitda margins fell 190 basis points to 11.3 per cent. So, net profit at Rs 606 crore was lower than the consensus estimate of Rs 829 crore. Year-on-year, though net profit was down 37.3 per cent, the year-ago figure included divestment gains. Nevertheless, even after excluding the Rs 249-crore exceptional gain last year, profit before tax was up only one per cent versus analysts’ expectations of an 8-10 per cent increase. So, profits were clearly a miss.

New orders at Rs 26,376 crore, including Rs 8,177 crore from abroad, also fell 21 per cent year-on-year. However, the news might not be as much of a negative surprise given that analysts had earlier pointed to the muted order inflows in the quarter.

 

L&T had guided for 15 per cent increase in order inflow,  expected to be back-ended, say analysts. The management remains optimistic from a medium-term perspective. “The business environment remains challenging in the short term, while the prospects in urban infra, transportation infra, power transmission, water renewable energy and defence-manufacturing remains promising in the medium term,” said L&T. The second half should see positive results of various policies and budgetary initiatives. L&T’s order book at Rs 2,38,973 crore was up 22 per cent year-on-year and indicates healthy revenue visibility.

Major orders in the quarter were driven by infrastructure and hydrocarbons. The hydrocarbons sector not only saw revenues surge 42 per cent but also reported an Ebitda profit of Rs 90 crore against losses in the year-ago and previous quarters. This is encouraging, even as segment might take longer to regain completely. All other segment performance remained satisfactory, say Kunal Sheth at Prabhudas Lilladher. While there has been a miss on profit, one cannot draw conclusions as the first quarter is typically weak. Analysts also believe the miss, largely due to losses in  metallurgical and heaving engineering segments, could be due to one-off reasons led by cost over-run/delay in a particular project. Early rains in June also had some impact.

After the profit miss, marginal tweaking of estimates might take place, say analysts, but the medium-term outlook remains intact. However, for the stock, trading at Rs 1,790 and given a Bloomberg consensus (July) target price of Rs 1,901, the upside seems limited.