Larsen and Toubro: Lockdown blues continue

With the country being under the lockdown for most part of the quarter ended June 2020, Larsen and Toubro’s consolidated revenues declined by 28 per cent y-o-y, to ₹21,260 crore.

In addition to the weak revenues, increase in staffing costs (due to Mindtree’s acquisition), higher Covid- related provisions in the financial services business and a spike in interest costs led to a 70 per cent (y-o-y) drop in consolidated net profit, in the recent June quarter.

However, the spike in interest costs (up by 80 per cent y-o-y) was largely an accounting adjustment — with Hyderabad Metro having begun operations, interest costs could no longer be capitalised.

The company ended the June quarter with a net profit of ₹543.9 crore, thanks to an exceptional gain of ₹224.7 core on sale of wealth management business and a tax reversal of ₹307 crore. But for these the company’s profits would have been much lower.

All segments barring the IT and Technology Services (IT&TS) segment, reported a sharp decline in their topline numbers, with a near-complete halt in manufacturing and construction activities, during the quarter. That apart, labour shortages and supply chain disruptions, following the lockdown, further worsened the blow. With difficulties in obtaining clearances for the work completed, the management has estimated a revenue loss of ₹12,500 crore in the quarter gone by.

Infrastructure and Hydrocarbon — the company’s major segments, reported a 53 per cent and 19 per cent y-o-y decline in top line numbers. Even in the IT&TS segment, that saw a 58 per cent uptick in revenues, the growth predominantly came from the consolidation of Mindtree business. Adjusting for this inorganic growth, the IT&TS segment saw a 7 per cent y-o-y growth, in the recent June quarter.

Outlook

With several parts of the country grappling with lockdown, execution continues to be a dampener for L&T. Also, reverse migration of workforce, that is ailing the infrastructure and construction space, continues to haunt the company.

The company’s workforce, even as of last week, has only returned to 75 per cent of pre-covid levels. The management, in the earnings conference call, highlighted that it might take another 40-65 days for the workforce to return to normal levels.

Most economists expect a slump in capex spends, more particularly in the private space. Government spending on infrastructural projects is also expected to be deferred, due to shift in priorities — towards healthcare, etc.

Even amid the gloomy times, the company managed to garner an order intake (consolidated) of ₹23,574 crore in the June quarter. While the consolidated order intake was 39 per cent lower than the year ago period, healthy deal wins from private sector (that constitute about 15 per cent of the order inflows) and international space (38 per cent of order inflows), indicate scope for revival in the coming quarters.

The management of Larsen and Toubro is hopeful of revival in the government funded projects, given the employment generation capacity of the infrastructure sector. Also, with predictions around revival in oil prices, in the coming couple of quarters, the company is hopeful of revival in international demand, particularly from the Middle East region.

However, since uncertainties continue to remain, the management has refrained from giving any guidance for both revenues and order inflows for FY21.

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