Engineering conglomerate Larsen & Toubro (L&T) reported a 23 per cent year-on-year rise in its profit after tax for the September 2018 quarter (Q2), helped by reversal of Rs 3 billion worth provisioning for doubtful debt.
The consolidated net profit of Rs 22 billion also beat Bloomberg consensus estimates of Rs 16.5 billion. However, even after excluding the exceptional item mentioned above, the profit was miles ahead of estimates.
For the quarter under review, consolidated revenue from operations was up 21 per cent year-on-year at Rs 321 billion and also beat analysts’ estimates of Rs 292 billion. Revenue growth was primarily led by infrastructure, hydrocarbon, realty and services businesses.
Infrastructure, the largest of all (45 per cent of revenues in the first half of FY19) drove the show with 22 per cent revenue growth. Higher order book and efficient execution of projects led to a stronger 38 per cent revenue growth in hydrocarbons (11 per cent contribution to revenue) while the heavy engineering segment too continued its strong trajectory led by improved execution and orders from refineries, nuclear plants, etc (up 52 per cent). The margins in these individual segments, however, saw some variation but mainly due to the different execution stage and job mix.
Nevertheless, consolidated earnings before interest, taxation, depreciation and ammortisation (Ebitda) at Rs 38 billion, up 27 per cent year-on-year, was ahead of analysts’ estimates of Rs 33.5 billion. L&T’s efforts on cost optimisation and efficiencies are showing results as operating expenses to revenues saw a decline of 100 basis points during the quarter (200 bps during first half of FY19).
The exceptional item, as per management, was related to a write-back of a provisioning made for debt exposure to an account which was resolved at the National Company Law Tribunal (NCLT). The company did not disclose details for the account.
In terms of order inflow, L&T reported new orders worth Rs 419 billion in Q2, a 46 per cent jump from Rs 287 billion worth of new orders reported in the same period a year ago. At the start of FY19, L&T management guided for a 10-12 per cent year-on-year growth in its order inflow, and 12-15 per cent growth in revenue.
As on September 2018, L&T’s total order book was at Rs 2.81 trillion, of which 22 per cent was from international orders. The share of new international orders in the September quarter was at Rs 83 billion, lower from Rs 104 billion reported in the same period a year ago.
R Shankar Raman, chief financial officer for L&T said the guidance for the current financial remains unchanged, ruling out a positive bias to the guidance at present. He added, the current environment continues to face funding, liquidity and government distraction constraints.
“At the beginning of the year, we had anticipated much of the large projects will get orders out in the first nine months of the year and true to that assessment we have seen much of it ordered out, there is still a pipeline which we will have to wait and watch. There are some businesses which will exhaust order potential by January-February 2019, while some will go right up to the code of conduct date,” Shankar Raman said.
In the June quarter, L&T had guided for the current financial year to be a front-ended year in terms of ordering activity due to elections.
L&T management said investment by the private sector remains cautious. “One will wait for capacity utilisation, before creating new capacity. The form in which private capex will come in has changed,” said Shankar Raman noting automobiles and metals and mining as sectors where he expected private investments to pick up.
In terms of execution pick-up, Shankar Raman said, "There has been a general push towards executing orders, more of an accumulation of past pending clearances." He added, one would not know if this trend of clearances will continue or not.
In this backdrop of strong performance and order flows, will L&T end up beating its guidance?
Analysts remain confident of L&T’s earnings growth moving forward and public sector spending is to continue driving performance, they say. The execution will remain healthy with front-ended ordering in FY19, given the upcoming elections.
Ronald Siyoni at Sharekhan said that L&T outperformed on net earnings backed by sustained momentum in execution coupled with improvement in margins. The order inflow and revenue growth guidance remains intact.
One area that analysts will keep a watch on is L&T’s working capital. For the first half of FY19, its net working capital reduced to 19.6 per cent from 20.7 per cent last year. The target for FY19 is 18 per cent, said analysts at Motilal Oswal Securities.