L&T exceeds results' expectations

Improved execution helped company post a growth of 19% net profit

In anticipation of a good March quarter results, the stock of Larsen & Toubro (L&T) was up four per cent in Wednesday’s trade. The results, which came after market hours, kept up the promise and were even better than expectation. Growth rates and margins were among the highest in at least six to seven quarters.

Revenues at Rs 33,157 crore grew 18 per cent year-on-year in Q4’FY16 largely due to accelerated pace of order execution beating Bloomberg estimates of Rs 31,416 crore by a good margin. Net profit (Rs 2,454 crore) increased 19 per cent y-o-y, ahead of expectation of Rs 1,897 crore. Even excluding exceptional income of Rs 48 crore in Q4'FY16, net profit was better than anticipated.

Operating profit, under pressure for many quarters, expanded 35 per cent y-o-y to Rs 4,859 crore. Operating margin, consequently, rose from 12.8 per cent in Q4FY15 to 14.7 per cent in Q4FY16. It needs to be seen whether the target set for FY17 can be met.

Even as order inflow for FY16 was down 12 per cent y-o-y, the management guides for 15 per cent rise in order inflow in FY17. R Shankar Raman, financial chief, while being cautious on operating margin (forecast of 10-11 per cent in FY17), says as the environment is a bit investment friendly, 15 per cent order growth should be achievable. But, order flow might be downgraded in FY17 if operating conditions turn tough.

A M Naik, group executive chairman of L&T, pointed out much of domestic order flows is from government spending. As a result, the share of infrastructure segment has improved from 55 per cent of new orders in FY15 to 62 per cent in FY16 and this trend might continue. Also, the share of international orders to order inflow in FY16 rose to 32 per cent from 25 per cent in FY15, while international orders accounted for 28 per cent of the total order book (Rs 2,49,949 crore, up seven per cent y-o-y, after excluding slow-moving orders worth Rs 15,000 crore) versus 26 per cent in FY15.

Revenue of the core infrastructure and power segments saw 19 per cent and 51 per cent growth y-o-y, respectively, in Q4FY16 and is the key take-away, while that of metallurgical and hydrocarbons segment remain muted. Renu Baid of IIFL feels the March quarter numbers were better than expected thanks to improved execution and higher margins earned from completion of pending projects. While the company’s forecast on order inflow seems the only doubtful aspect, analysts believe another quarter of sustained performance could result in re-rating of the L&T’s stock.