Helped by better project execution and strong growth in the highly profitable IT and technology services business, Larsen & Toubro’s (L&T) reported revenue in the December 2021 quarter was broadly in line with analyst expectations.

However, impacted by higher input costs and lower other income, the quarterly profit was 14 per cent lower than expected (based on Bloomberg consensus estimates).

Revenue up, profit down 

L&T reported consolidated revenue of ₹39,563 crore, up year-on-year 11 per cent in the latest December quarter. While the quarterly EBITDA (earnings before interest, taxes, and depreciation) at ₹4,530 crore was up 6 per cent, the reported profit after tax at ₹2,055 crore was down 17 per cent compared to the year ago period. 

Higher construction material costs hurt operational profitability.

Material costs as a percentage of sales revenue were up from 17.5 per cent a year ago to 25 per cent in the December 2021 quarter.

The hydrocarbon and the heavy engineering segment that form part of the core ex-services business reported lower EBITDA margins in the latest quarter compared to last year.

However, as more projects progress towards completion and cross the threshold after which the margin on them starts getting recognized, the company’s EBITDA number could likely improve.

The latest quarter net profit growth was impacted by lower other income (down y-o-y 46 per cent) for the period and the fact that the last December quarter numbers included the profit from sale of the company’s electrical and automation business. 

On the positive front, with repayment of debt of ₹10,000 crore, L&T brought down its net debt-to-equity ratio from 1 time as of March-end 2021 to 0.87 times as of December-end 202.

L&T’s current consolidated order book of ₹3.4 lakh crore with an execution cycle of 3-4 years offers ample revenue visibility. The company’s infrastructure segment accounts for close to three-fourths of this order book. 

Key segment performance 

With project execution, which had picked up pace in the preceding two quarters, continuing to remain healthy, revenue from the infrastructure segment grew 16 per cent to ₹18,345 crore and EBITDA 32 per cent to ₹1,298 crore (both y-o-y) in the December 2021 quarter.

According to the company, higher site productivity despite higher cost pressures, helped the EBITDA margin inch up from 6.2 per cent a year ago to 7.1 per cent.

The infrastructure segment is the single largest revenue contributor and accounts for over 40 per cent of the engineering and construction major’s revenue.

While project tendering activity during the quarter was up 30 per cent from year ago, awarding of contracts was tepid. Once the latter picks up, it can translate into additional orders going forward. 

L&T’s IT& Technology Services (TS) business is the single largest profit contributor and accounted for almost 42 per cent of the company’s latest quarter EBITDA.

This segment comprises L&T Infotech, L&T Technology Services, and Mindtree. While a tad lower than year ago due to higher employee cost, the business reported an impressive EBITDA margin of 23.8 per cent for the December 2021 quarter.

Continuing to benefit from the surge in demand for IT and technology-focused offerings, particularly post-pandemic, the IT&TS segment put up a strong show yet again. It recorded 29 per cent growth in revenue to ₹8,397 crore and 21 per cent in EBITDA to ₹2,002 crore (both y-oy) in the December 2021 quarter.

Today at ₹1,899 apiece, the L&T stock discounts its FY23 earnings by 21.6 times, above its 3-year average P/E multiple of 16.6 times. We had recommended a buy call on the stock in August 2021 when it was trading at a forward P/E multiple of 18.9 times (all based on Bloomberg consensus estimates). Long-term investors who had bought the stock then at ₹1,638 apiece can continue holding it.

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