L&T disappoints on many counts

Profit up just 8.8%; order growth guidance lowered to 15-20%, leading to a 6.6% fall in share price

Larsen & Toubro posted an 8.8 per cent rise in consolidated net profit for the third quarter, on the back of revenue growth. However, the results failed to meet the Street expectation. The company also disappointed by lowering its order growth forecast (‘guidance’) to 15-20 per cent from the 20 per cent at the start of the financial year, anticipating delays in order booking.

Net profit was up to Rs 866 crore from Rs 797 crore in the same period the previous year, due to improved performance of its technology and financial services divisions. In its core engineering and construction sectors, revenue and order inflow rose, largely due to increased contribution from the infrastructure and electrical & automation segments. Other business segments such as power, hydrocarbons, heavy engineering and metals & minerals remained weak, reporting a drop in revenue and profit. These segments together accounted for about 30 per cent of revenue and 27 per cent of profit, based on segment-wise performance, for the year ending March 2014.

During the quarter, the company reported consolidated revenue of Rs 23,848 crore, about 9.7 per cent higher than the Rs 21,723 crore in the third quarter of last year. Order inflow was up 19 per cent over a year to Rs 34,580 crore. At the end of nine months in the current financial year, the order book was Rs 225,800 crore, of which 71 per cent was from the infrastructure sector.

However, the Street was disappointed and the stock closed 6.6 per cent lower at Rs 1,573. While L&T's consolidated revenue was higher than the Bloomberg estimate (Rs 23,041), its reported net profit was almost 24 per cent short of the estimate of Rs 1,138 crore.

Amar Ambani, head of research, IIFL, said: “L&T’s results were quite below our estimate, due to slower execution and pressure on margins. In the consolidated entity, the hydrocarbon segment continued to report below par numbers, quite below our estimate. Margins in the infrastructure segment were also under pressure on a year-on-year basis.”

Except for electrical & automation (up 210 basis points) and others (up 1,020 bps), all segments saw Ebitda (operating earnings) margins fall sharply. For instance, the infra segment, largest top line contributor (revenue up 22 per cent), saw margins fall to nine per cent from 10.4 per cent in the year-ago period. Power, that saw revenues fall 30 per cent reported a 250 bps fall to 19.7 per cent. Hydrocarbons saw revenues fall 26 per cent and margins fall to a negative 4.8 per cent from 1.6 per cent in the year-ago quarter.

Lower profits in various core business segments, along with higher depreciation and finance costs, though partly offset by a surge in other income, weighed on the profit in the quarter.

Apart from infra, development projects, financial services and information technology also did well, and offset the profit decline across businesses. Excluding the subsidiaries, Amar Ambani said standalone profits were down 14.5 per cent.

On a standalone basis, sales were Rs 14,995 crore and net profit at Rs 1,060 crore, versus the Bloomberg estimates of Rs 15,735 crore and Rs 1,230 crore, respectively, for the quarter.

Santosh Yellapu at Angel Broking, who remains bullish on L&T’s long-term prospects, said: “The muted revenue growth is owing to lower booking across power, metallurgical & material handling and heavy engineering segments. The disappointment continued further towards the (standalone) Ebitda level; the company reported a 127 bps year-on-year decline in Ebitda margin to 10.5 per cent. This is owing to higher contribution of large-ticket infra projects, which are at the beginning of the execution cycle, and margin compression across all other business segments (excluding electronics & automation).”

L&T’s senior executive president (infrastructure and construction), S N Subrahmanyan, said the company expects margins to remain stable due to easing of commodity prices.

While the company's hydrocarbon business continues to face headwinds, a promising trend has been an increase in domestic order intake. About 82 per cent of the orders bagged in the third quarter were from within the country, a 60 per cent increase over the same period last year.

R Shankar Raman, chief finance officer, expects a slowing in hydrocarbon sector investments in the Gulf following the sharp fall in crude oil prices but the company is not anticipating a negative impact on the infrastructure sector in that region. Additionally, hydrocarbon projects worth $1.8 billion (Rs 11,00 crore) in the region face cost and time overruns and the company expects to raise claims upon completion of the projects in the next two to three quarters.

“At the end of nine months, we have achieved 10 per cent revenue growth. The fourth quarter traditionally earns the highest revenue and we will work hard to ensure 10-15 per cent growth. We are seeing traction in metro (rail), water, renewables, and transmission and distribution projects. We have achieved 16 per cent growth in order inflows and now expect order inflow to be in the range of 15-20 per cent (for the financial year). The pipeline looks strong but it depends on how soon it materialises into orders,” he added.