L&T puts up decent results in June quarter amid weak macro environment

While order inflow was healthy led by domestic projects, improved execution in select private sector and power segment supported growth

After delivering three straight quarters of strong revenue and profit growth, expectations were high from the country’s largest infrastructure company Larsen & Toubro (L&T). However, its June quarter (Q1) results missed expectations by some margin.

Revenues at Rs 29,636 crore rose 10 per cent year-on-year (YoY), while net profit grew 21 per cent to Rs 1,472 crore in Q1. A Bloomberg poll had pegged revenues at Rs 31,295 crore and net profit at Rs 1,560 crore. However, given that this is the first quarter after the conclusion of the elections, the results do suggest stable growth.

Elections aren’t considered favourable for order execution and tendering. Yet, L&T’s order inflows (in core infra and engineering business) rose 11 per cent YoY to Rs 38,700 crore.

Q1 was helped by inflows from select private sector players in the cement, airports and data centre segments, and also from the power industry.

Consolidated order book (including services businesses like IT), thus grew 9 per cent to Rs 2.94 trillion. 

A cautious R Shankar Raman, CFO of L&T, said that while selective non-industrial capital expansion plans may flow in, the environment remains subdued for larger private sector participation. To that extent, the rising share of domestic orders — now at 79 per cent against 77 per cent a year ago — and a healthy order book provide decent earnings visibility. 

While 45 per cent of the total orders were for construction projects, the share of power sector orders, too, marginally rose to 17.3 per cent in the quarter.

The flip side, though, could be on the operating profit margins (excluding services segment) front, which remained little changed in Q1 at 9 per cent. However, part of it could be attributed to the lower margin on domestic orders vis-à-vis international ones. While L&T has maintained its earlier guidance of stable operating margins, and guided for 10-12 per cent order inflow growth and 12-15 per cent revenue growth, it needs to be seen if the forthcoming order mix supports in maintaining these targets.

Further, ratio is a monitorable (ratio indicates a company’s ability to meet near-term business obligations), if the firm can ensure no further deterioration to net working capital.  

For Renu Baid of IIFL Institutional Equities, the 200-basis-point slip in working capital position is a concern. Analysts at ICICI Securities note that borrowing (excluding services business) increased by Rs 7,000 crore sequentially to Rs 41,400 crore in Q1. Therefore, any sharper increase in leverage may not go well with the Street.

Trading at about 21 times its FY20 estimated earnings, the room for error is limited.