L&T: Weak Q3, cut in guidance could hurt sentiment

Its net revenues grew by 1.4% to Rs 26,287 cr, while net profit increased 39% to Rs 972 cr y-o-y

After three promising quarters, Larsen & Toubro (L&T)’s December quarter (Q3) was a let-down for investors. Not only were the numbers lower than anticipated, but also L&T trimmed its annual revenue and order inflow forecast. The twin surprise could shake up its stock price in Monday’s trade.

Its net revenues grew only by 1.4 per cent to Rs 26,287 crore, while net profit increased 39 per cent to Rs 972 crore year-on-year (y-o-y). Both the numbers missed the Bloomberg consensus estimates — revenues of Rs 27,616 crore and net profit of Rs 1,084 crore — by a reasonable margin. Despite this, the improving trend in operating margins, up 140 basis points year-on-year to 9.6 per cent, is the key positive from the results. This iterates that L&T’s measures to improve productivity are yielding the desired results. Consequently, L&T’s working capital to sales ratio has improved from 23 per cent in the June quarter to 21 per cent in the December quarter, and this deserves a mention. 

The other negative surprise is order inflow at Rs 34,900 crore slipped by 10 per cent y-o-y in Q3. Although the order book (pending orders) provides earnings visibility of over two years, it grew at one crawling pace of only a per cent to Rs 2,58,600 crore. The slow growth rate on all aspects perhaps tempted L&T to lower its annual growth targets (revenue as well as order inflow) to 10 per cent. Earlier, the company was confident of growing its order inflows by 15 per cent and its revenues by 12-15 per cent.

But, despite lowering the expectations, March quarter would be an uphill task for L&T, mainly on the order inflow front. On earnings, L&T is confident of meeting its targets, going by its claim that more than six per cent yearly growth has already been achieved, and replicating this show in the March quarter shouldn’t be a challenge. But, whether this optimism holds good for order inflows needs to be seen. It has registered order inflows of Rs 95,700 crore till December 31 (up three per cent y-o-y). Hence, to meet its stated target, it needs to mop up orders of at least Rs 44,000 crore. 

“Domestic growth appears to take longer time, as investment momentum remains weak. Also, with orders from government being unpredictable and getting delayed for clearances, volatility in orders inflows is unavoidable,” R Shankar Raman, chief financial officer, states. 

Any miss on order inflows may put pressure on L&T’s stock and overshadow the positives, such as improving operating margins and working capital position.