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L&T reports stellar Q2 numbers thanks to diversified business

Keerthi Sanagasetti BL Research Bureau | Updated on October 24, 2019 Published on October 24, 2019

With a 13 per cent growth in consolidated revenue and 12.4 per cent EBITDA margin in the first half of FY20, the full-year guidance seems achievable

 

The slowdown in economic activity impacted the performance of most companies in the infrastructure and construction space. L&T also saw a 33 per cent YoY drop in its order inflows during the quarter, in its infrastructure segment. This can predominantly be attributed to the company’s heavy dependence on public sector orders (for this segment) and the huge delays in order awarding by the Centre and several state governments.

However, thanks to the large value order wins in hydrocarbon, buildings & factories and power businesses, the overall order inflows were up by 22 per cent YoY.

This takes the outstanding order book of the company to Rs 3.03-lakh crore, which provides a healthy revenue visibility for the coming quarters as well.

The company’s diversification strategy is not just limited to various segments but also across geographies. International orders now constitute 22 per cent of the outstanding order book. Even within the infrastructure segment, the company saw 20 per cent of order inflows from overseas.

What went well?

The management had, in the last quarter’s earnings call, guided for a revenue growth of 12-15 per cent and expected the EBITDA margin to remain at 10.5 per cent for FY20.

With a 13 per cent growth in consolidated revenue and 12.4 per cent EBITDA margin in the first half of FY20, the guidance seems achievable for FY20.

On segmental basis, infrastructure and hydrocarbon businesses posted healthy margins, led predominantly by good execution progress and realisation of variation claims.

However, the Information Technology and Technological Services (IT&TS) segment saw a drop in EBITDA margin by more than 5 percentage points during the quarter, when it was impacted by Mindtree’s acquisition. While the segment saw a 64 per cent growth in the topline due to the acquisition, additional costs on account of the merger and staffing costs (in Mindtree) acted as an overhang on operational profits.

This, coupled with increased credit costs in its financial services arm, led to a surge in staff costs and sales and administration costs at the group level, of 39 and 30 per cent respectively.

Despite this, the company’s EBITDA grew by 14 per cent YoY. This, combined with a savings in corporate tax rate, helped the PAT spike by 13.3 per cent YoY to Rs 2,527 crore.

Outlook

The company and most of its subsidiaries, excluding its IT&TS business, have opted to pay lower tax at 25.17 per cent. This has led to a one-time reversal of existing MAT credit (of Rs 794 crore) and Deferred Tax Asset (of Rs 490 crore) in the quarter. Excluding these, the PAT could have been higher.

Also, the debt levels of the company spiked to Rs 1,32,900 crore at the end of the September quarter, up 6 per cent from March 2019. Despite the debt-to-equity continuing to remain at 1.8 times, the increase in debt could spike up the finance costs further.

Despite the lull in the domestic macro environment, the company continued to post stellar performance, riding on its strong and diversified order book. Also, with the Centre trying several measures to revive the lacklustre infrastructure space, the future seems promising for this infrastructure giant. This is given its strong track record, healthy balance sheet and sound liquidity position for further bidding.

Also, in the absence of one-time costs like those related to the merger, profitability is only expected to inch up higher, given the healthy progress in order execution.

At Rs 1,440 a piece the stock is currently trading at 22 times PE, versus its three year average PE of 25 times.

 

Published on October 24, 2019
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