 "New accounting norms spoil L&T's show")
After an exuberant March 2016 quarter, wherein revenues and profits grew by 18-19 per cent each, Larsen & Toubro (L&T)’s performance in the June 2016 quarter (Q1 of FY17) was a bit of disappointing.
Consolidated revenues grew by nine per cent year-on-year (y-o-y) to Rs 21,874 crore in the first quarter against the Bloomberg consensus estimate of Rs 22,515 crore. However, better utilisation of resources helped it post 16 per cent year-on-year growth in operating profit at Rs 1,905 crore. Though blended operating margins at 8.7 per cent rose by 50 basis points year-on-year, it was lower than expectations of 11 per cent. Likewise, net profit, which surged 46 per cent to Rs 610 crore, fell short of estimates of Rs 795 crore.
With changes in accounting standards hurting L&T, analysts are expected to revise their earnings estimates based on the Q1 results. “This may result in downward earnings revision,” an analyst from a domestic brokerage said. Consequently, the Street expects L&T’s stock to come under pressure in the near term. However, Rohit Natarajan of IDBI Capital says reverse calculation of consolidated net profit numbers might not be as bad as these seem. “This is partly because if the reconciliation adjustments are same as Q1FY16, then as per Indian Generally Accepted Accounting Practices, the numbers are only a tad miss.”
Nevertheless, the quarter does offer some decent takeaways. Firstly, Q1 saw healthy order inflow of Rs 29,702 crore — growth of 14 per cent year-on-year with 44 per cent orders coming from international markets. Order inflows for Q1 cover almost 20 per cent of L&T’s requirement to meet its 12-15 per cent order inflow target for FY16 at Rs 1,53,328 crore. For now, the company is betting on order flows from pockets such as dedicated freight corridors in railways, roads and power transmission. The management is also confident of meeting its revenue growth target of 10-12 per cent in FY17. “We have no reasons to revise these targets downwards,” says R Shankar Raman, CFO, L&T.
That apart, operating margins for troubled sectors such as heavy engineering, hydrocarbons, development projects (mainly Nabha Power plant) have risen 200-460 basis points year-on-year. Infrastructure sector (over 40 per cent of revenues) did not see the expected increase in profitability, with segment margins coming in at 9.2 per cent. L&T hopes to push it up towards 10 per cent levels. In this backdrop, it could also meet its FY17 operating margin target of 11-12 per cent.
With these positives in place, depressed domestic demand environment would remain the only major overhang on L&T’s stock, as India still accounts for over 65 per cent of the company’s revenues.
