L&T: International orders worth Rs 30,000 cr at risk

Analysts question management commentary, as pain not limited to hydrocarbon subsidiary

This article has been modified. Please see the clarification at the end.

India's largest engineering and construction company, Larsen & Toubro (L&T), began FY15 on a high, with many believing it will be the biggest beneficiary of a revival in the capex cycle. The stock gained 38 per cent between April and July.

With the firm reporting an operating loss of Rs 900 crore in its hydrocarbon subsidiary in the first quarter of the current financial year, analysts believe the pain is not limited to the hydrocarbon orders. The stock has declined 15 per cent since it reported its results on July 28 and conveyed to analysts that the provision of Rs 900 crore in the hydrocarbon subsidiary was due to reversals of profits and foreseeable losses on six contracts in the Gulf.

Though the firm has maintained the worst in the hydrocarbon business will be over in the current financial year, investors and analysts are not convinced the cost overrun is a one-off. Analysts are convinced all hydrocarbon orders the company has won over FY11-13, adding up to Rs 10,000 crore, have seen cost overruns. Analysts believe the losses and cost overruns are not only limited to the hydrocarbon business. According to Espirito Santo Securities, several other subsidiaries engaged in foreign markets have also seen sharp profitability erosions in FY14. This especially holds true for the key engineering and construction subsidiary (L&T Electromech, L&T (Oman), L&T Saudi Arabia), which cumulatively posted a net loss of Rs 150 crore in FY14 (versus Rs 30-110 crore net profit over FY09-13).

While Morgan Stanley believes the provision is unlikely to be repeated in the near future, it remains worried similar challenges could occur in the infrastructure segment over the next 18 months. The firm has clarified only now that bids (across all verticals) has been revised for higher labour from the second half of FY14 only, which implies order inflows worth Rs 30,000 crore are exposed to risk.

The loss of confidence stems from this, which is why many analysts have downgraded the firm's earnings estimates for FY15 and FY16. While the firm has consistently maintained the worst in cost-overruns would be over with the current financial year as most of the pain was in the hydrocarbon business, the losses in other subsidiaries raise doubts. Analysts are not buying the company's commentary as they believe that the company's margins on international infrastructure orders could be lumpy and weaker.

CLARIFICATION
In an earlier version of this article, Larsen & Toubro's operating loss in its hydrocarbon subsidiary in the first quarter of the current financial year was wrongly written as Rs 90 crore. This has been corrected to Rs 900 crore. We regret the error.