L&T: Slow execution, margins mar Q3 show

Infra segment margins decline 140 bps, order inflow forecast cut

The domestic slowdown is beginning to hurt Larsen & Toubro's revenue growth and profitability. After surviving the slowdown for four years, profit margin in its core infrastructure business is coming under pressure, as a recovery remains elusive. While the tepid revenue growth in the standalone business (core of the company) on slower execution is a concern, the decline in the margins is more worrisome. The Street focused on two big disappointments during the company's third quarter - cut in the order forecast and decline in the infrastructure margin in the standalone business.

The company has cut its order inflow growth guidance from 20 per cent to 15-20 per cent, as recovery in the domestic capex cycle is taking longer than anticipated last year. On a cumulative basis, the order inflow for the nine-month period ended December 31, grew 16 per cent over a year to Rs 1,07,785 crore. The order inflow during the nine-month period was predominantly driven by domestic orders. New orders booked by the infrastructure segment grew 26 per cent over a year in the third quarter, driven largely by heavy civil infrastructure, water and renewable energy and buildings & factories. The revival in the domestic market remains lumpy as L&T expects weakness in metallurgy, roads and power will continue to exert pressure on the headline sales.

The performance of the standalone business, which comprises the engineering & construction segments, has disappointed analysts. Revenues of the standalone business grew by a modest 4.2 per cent over a year to Rs 14,995 crore against the Street's estimate of Rs 15,735 crore. Emkay Global believes this is due to slower than expected execution run rate as execution of large orders such as the Doha and Riyadh metro is yet to begin. The standalone business saw net profit decline 14.5 per cent over a year to Rs 1,059 crore. The Street was expecting the standalone business to report a net profit of Rs 1,230 crore. The decline in the profit of the standalone business has been largely driven by lower income from operations and higher depreciation and interest costs. Margin of the infra segment declined 140 basis points to nine per cent in Q3. Finance costs rose to Rs 500 crore in the December quarter from Rs 290 crore a year ago.

The company has disappointed with its consolidated numbers, too. Consolidated sales during the quarter grew 10 per cent year-on-year to Rs 24,033 crore, net profit (consolidated) grew nine per cent to Rs 867 crore.

The hydrocarbon segment continues to be a challenge for the company, reporting negative margins of 4.8 per cent against a positive margin of 1.6 per cent a year ago. While the loss from the subsidiary was expected, analysts believe cost overruns and under-recoveries may hurt for some more months.