Engineering and construction major Larsen & Toubro reported a decent set of numbers higher than what the street had estimated, amidst pandemic. Net profit fell 6% YoY to Rs 3,197 crore vs Rs 3,418 crore. Consolidated revenue was up 2% YoY to Rs 44,245 crore from Rs.43,303 crore in March 2019. The quarterly performance was largely driven by the growth in Hydrocarbon (15% YoY), IT & technology services (69% YoY) and Financial Services (6% YoY). The operating profit also fell by 3% to Rs 5,121 crore and Margins narrowed 60 bps to 11.6%.
Order inflows for the quarter were up ~5% YoY to Rs 57,800 crore mainly led by domestic business in the infrastructure segment. However, for FY20 Operating Income was up 9% YoY contributed by international order wins in sectors like IT&TS, Power T&D, and Metallurgical businesses.
Going ahead, management indicated segments like Heavy civil, Power transmission, and water would see a good traction for order inflows. While Hydrocarbon, Buildings, transportation and Construction equipment segments are likely to pick up H2FY21 onward.
While the lockdown had a major impact in April and May, L&T is ramping up and currently has 90% of its sites running. Labor shortage is a challenge though as only 40% of the labor is available. L&T is expecting the situation to normalise within two days.
Despite the Covid-19 related constraints, there is no deferral or push back on any order from clients and L&T is negotiating on the additional lockdown costs incurred by the company with the clients.
The working capital requirement has increased in Q4 due to the increased receivables and extended support to its vendor base. However, working capital requirement is not expected to elevate further. The company has also built ample liquidity buffers by raising Rs 9,000 crore through the NCDs. The company intends to utilise the proceedings to retire existing debt. At a cyclical peak working capital of ~24%, L&T’s net debt to EBITDA at 2.6x is comforting.
L&T’s plan to monetise Hyderabad Metro and Nabha Power projects have postponed with Covid-19 disrupting the proceeds. While monetising of Hyderabad Metro depends on commuting returning to pre Covid levels, Nabha Power has seen little interest from global investors given environmental concerns related to thermal power.
Key Risks:
With economy is expected to see slow and gradual recovery, private investment in India is unlikely to resume soon. The government projects could also face delay in execution as government spending on infra is also likely to face the hurdles.
L&T’s international business also continues to face headwinds with slower execution of projects in middle-east countries. Many projects in international and domestic markets are likely to be renegotiated while private projects runs the risk of project cancellation all together.
Final Thoughts:
With world economy under strain, L&T’s FY21 execution remains impacted. However, new deal win pipeline remained strong in Q4. The huge backlog of orders are also likely to materialise over the next few years.
L&T remains highly diversified presence. With proven execution capabilities and strong balance sheet L&T is expected to consolidate its leadership position further and emerge stronger than its peers to capitalise on the revival in the economy.
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