L&T's 4% revenue growth in first half of FY15 disappoints

L&T cuts sales forecast for FY15 as challenges persist in domestic biz

The economy might be on the mend but the second quarter performance of the country's largest engineering and construction company, Larsen & Toubro, suggests the situation on the ground remains challenging.

It is best not to assess an engineering and construction company on the basis of a single quarter, because revenue growth can be lumpy. However, L&T's three per cent growth in the standalone business in the quarter suggests project execution is not happening at the expected pace. In the first quarter, the standalone business (core business) of L&T clocked five per cent revenue growth.

As a result, the firm has cut its FY15 revenue growth expectation to 9-10 per cent from 15 per cent earlier. Amit Mahawar of Edelweiss Securities says: "L&T's H1 revenue growth of four per cent appears to be weak, led by weak on-ground execution in domestic market. Slower-than-expected on-ground improvement has led to a weaker commentary by the management, which now expects the revenues to grow at 10 per cent for FY15 against 15 per cent earlier. Order intake for Q2 grew strongly at 40 per cent led by domestic market.”

L&T did not negatively surprise the Street on the earnings front as margins have remained stable at 10.5 per cent. The standalone business reported a weak revenue growth in the September quarter, as order book in power and other segments continue to get depleted. The power segment's revenues declined 27 per cent to Rs 1,160 crore, while metallurgical and material handling saw revenues fall 23 per cent to Rs 770 crore in the second quarter. The power segment's operating margin declined 10 percentage points to 16 per cent, while that of metallurgical segment fell 500 basis points to 11 per cent. The heavy engineering segment's revenues also declined 13 per cent to Rs 800 crore during the quarter.

On the upside, the infrastructure segment, which accounts for a major part of the standalone revenues, has grown at 23 per cent to Rs 9,590 crore even though the segment's margins declined 91 basis points year-on-year to 10.2 per cent. The segment's margin has dropped mainly due to a change in the job mix and extra claim settlement in the previous year.

The hydrocarbon subsidiary continues to be a cause of concern as the challenging conditions in the international orders continue. The segment's margins continue to be negative at minus 0.1 per cent owing to cost and time overruns. The business continues to report under-recoveries as completion of onerous projects might take another six to nine months.