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Larsen & Toubro’s Third Quarter Profit Jumps 39 Percent; Revenue Growth Guidance Pared

L&T continues to see challenging business conditions for the next few quarters.

Inside a L&T Factory (Photographer: Santosh Verma/Bloomberg)
Inside a L&T Factory (Photographer: Santosh Verma/Bloomberg)

Engineering giant Larsen and Toubro Ltd. (L&T), on Saturday, reported a 38.85 percent rise in net profit for the October-December quarter. However, challenging business conditions prompted the company to cut its revenue growth guidance for the year to 10 percent from 15 percent earlier.

We are at about 6 percent at the 9 month level (FY17) in terms of growth. There are a lot of pending orders that the government places in Q4 (of FY17) to exhaust the budget. We do hope Q4 of this year is no different. Factoring that surge in Q4, we do think that we will possibly reach the 10 percent growth.
R Shankar Raman, Chief Financial Officer, Larsen & Toubro

Net profit for the quarter-ended December stood at Rs 972.47 crore, compared to Rs 700.34 crore in the corresponding quarter of the previous financial year, the company said in its stock exchange filing. The consensus of analyst estimates tracked by Bloomberg stood at Rs 1,083.48 crore.

Revenue rose by 1.38 percent to Rs 26,286.98 crore from Rs 25,928.07 crore in the same quarter last year. The Bloomberg poll of analyst estimates had pegged revenue at Rs 27,616.22 crore. The estimates made by analysts excluded other operating income.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) increased 18.65 percent to Rs 2,522.70 crore, compared to Rs 2,126.04 crore year-on-year. EBITDA margins stood at 9.59 percent during the quarter as compared to 8.19 percent in the corresponding quarter last year.

Consolidated order inflow stood at Rs 34,885 crore during the third quarter, 10 percent lower on a year-on-year basis. At Rs 11,865 crore, international orders constituted 34 percent of the total order inflow in the December quarter.

The consolidated order book grew 1.4 percent to more than Rs 2,58,585 crore, 29 percent of which came from international orders.

There are multiple reasons for the growth to not pick up as expected, said R Shankar Raman the chief financial officer at L&T, at the results press conference listing out hurdles like land clearances, right of way and environmental clearances are causing delays in order. The rising non-performing asset (NPA) mess is also not helping the cause as most infrastructure projects are dependent on loan dispensation from the banking system, he added.

Raman said the order book growth at the end of the first 9 months of the financial years stands at around 6 percent, and was hoping that the government ramps up its infrastructure spent over the last three months, for the quantum of order inflows to pick up.

Segmental Performance

  • Revenues in the infrastructure segment grew 6 percent year-on-year to Rs 12,467 crore. The company attributed the delay in execution of orders, especially in the buildings and factories business, to the government’s demonetisation decision. 37 percent of the infrastructure revenue came from the international business. Order book of the infrastructure segment grew 2 percent annually and stood at Rs 1,94,315 crore.
  • Revenue from the power segment declined 23 percent, year-on-year, to Rs 1,633 crore. This despite the segment securing fresh orders worth Rs 297 crore during the quarter gone by.
  • Revenue from the hydrocarbon segment grew 14 percent over a year ago to Rs 2,398 crore. 52 percent of the revenue in this segment came from the international business. Fresh orders worth Rs 2,638 crore during the December quarter. The total order book for the segment grew 57 percent to Rs 20,375 crore.
  • The heavy engineering segment reported revenue of Rs 798 crore, a decline of 8 percent from last year. The segment secured fresh orders worth Rs 601 crore, while the total order book stood at Rs 7,494 crore as of December 31, 2016.

Impact Of Demonetisation

The government’s surprise move and the subsequent pause on toll collection for 23 days, led to a shortfall of Rs 100 crore, but the government promptly reimbursed Rs 20 crore to the infrastructure major.

“I am hopeful that the government which has promised revenue reimbursement (will do so quickly) so please do talk about it and tell (the government) how badly we require it”, said Raman.

Bookings for residential projects also took a dent, added Raman. He did stop short of attributing an exact reason for this drop though.

The Road Ahead

Demonetisation has caused disruption and the impact on business sentiment is yet to be 'conclusively assessed,' the company said in a statement. The company continues to expect challenging business conditions over the next few quarters due to a slow recovery in private investments.

The challenging business conditions are expected to continue in the next few quarters until the government moves to lift growth through infrastructure spend and as tax reforms take effect. The company’s focus will remain on selective pursuit of opportunities, working capital reduction, cost optimization through supply chain efficiencies, and productivity enhancement through digitization initiatives. Aided by these initiatives, the company is hopeful of a satisfactory performance given the current business environment. 
Larsen And Toubro Statement

Budget Expectations

The company is hopeful that budget 2017 will have be a mix of social spend and investor friendly policies.

SN Subrahmnayan, L&T’s deputy managing director said he expects incentives will also be given to sectors such as telecom, manufacturing, automobile in order to boost trade and government’s flagship Make-in-India program.

I may be overtly optimistic, but this budget has to be about setting a sense of direction, has to give a good feel, has to give the feeling that infrastructure and social spend is balanced. Since the last budget was agriculture oriented, this budget should be industry and social oriented.
S N Subrahmanyan, Deputy Managing Director And President, L&T