L&T’s order flows surprise even as infra business copes with macro challenges

Will investors give a thumbs up to Larsen and Toubro Ltd’s(L&T’s) June quarter performance? The engineering conglomerate reported a surprise 11% year-on-year jump in order flows to 38,700 crore. Note that investors had hammered the stock over the last few trading sessions, expecting a drop in order flows. The increase in order flows came primarily from the domestic market, despite tough conditions.

Although there were hardly any central government orders, public sector units and the private sector compensated.

Therefore, the order book of 2.9 trillion, which was 9% higher than a year ago, should insure the company against near-term slowdown in the economy.

Besides order flows, the Ebitda (earnings before interest, taxes, depreciation and amortization) margin was at 11.2%, or 100 basis points higher year-on-year. It also surpassed Bloomberg’s 14-brokerages’ average by 25 basis points.

However, a slight drag in margins of its core business of infrastructure (engineering and construction) mirrors pressure in long-gestation projects.

That said, L&T’s robust project execution skills played out in its favour despite challenging macroeconomic times. Barring the power segment, which has been languishing for long due to lack of orders, infrastructure, defence, hydrocarbons and heavy engineering segments clocked good revenue growth.

(Graphic: Vipul Sharma/Mint)
(Graphic: Vipul Sharma/Mint)

However, the 10% growth in total revenue to 29,636 crore was lower than Bloomberg’s forecast of 31,360 crore, because of the elimination of the electrical and automation segment, which was sold to Schneider Electric.

Operating leverage and strong execution together translated into 20.6% Ebitda growth.

To be sure, the infrastructure giant’s performance is commendable. But, there are concerns. Although the management has maintained its FY20 order flow and revenue guidance at 10-12% and 12-15%, respectively, it is cautious on the near-term outlook. The liquidity crunch in the system and weak consumption if allowed to fester, will delay economic revival.

According to ICICI Securities Ltd, “On the balance sheet side, borrowings increased a bit leading to higher interest cost while working capital (ratio up 200 bps YoY) and cash flows were impacted negatively.”

In spite of these odds, L&T coped well on the profit front. But the macroeconomic trend in the next two quarters remain crucial to gauge the company’s prospects; not to forget the impact of Mindtree Ltd’s consolidation in the September quarter results.


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