News Analysis

Larsen & Toubro: Order book lends confidence for FY

Maulik Madhu BL Research Bureau | Updated on July 29, 2021

EBITDA missed expectations, but performance is expected to improve going ahead

Construction and engineering major Larsen & Toubro (L&T) reported revenue of ₹29,335 crore and EBITDA (earnings before interest, tax and depreciation) of ₹3,172 crore for Q1 FY21. While revenue was largely in line with Bloomberg consensus expectations, the EBITDA was around 5 per cent lower. The stock was largely flat in trade today, in reaction to the earnings which were reported after market close on July 26.

Infrastructure is key

Driven by better execution, revenue from infrastructure projects rose 63 per cent year-on-year (y-on-y) to ₹10,543 crore in the June 2021 quarter, boosting the company’s consolidated revenue. The low base due to the national lockdown last year too helped bump up the latest growth figures. Infrastructure-- which includes buildings and factories, transportation projects, and heavy civil infrastructure, is L&T’s largest business segment. Based on FY21 revenue, infrastructure accounted for 45 per cent of the company’s consolidated revenue.

Growth in the latest June quarter came after a tepid 4.4 per cent growth in the March 2021 quarter, and several preceding quarters of decline (all y-o-y) in the company’s infrastructure revenue. Better job mix and higher recovery of overheads aided in expanding the EBITDA margin from 6.3 per cent a year ago to 7.1 per cent in the June 2021 quarter.

The infrastructure segment secured orders worth ₹11,023 crore (42 per cent of the company’s total order inflow) in the latest quarter, a tad lower than a year ago. The order momentum was impacted by slower tendering and award activity due to pandemic. This should likely improve in the coming quarters. Infrastructure project order book of ₹2.4 lakh crore as of June-end provides revenue visibility. Based on the FY21 revenue for the segment, this implies an impressive order book to sales ratio of close to four times.

Taking all business segments – infrastructure, power, heavy engineering, IT & Technology services, hydrocarbons and others – into account, the company received a total order inflow of ₹26,557 crore during this quarter. While this is 13 per cent higher than that a year ago, it is still lower than that in the past many quarters (not impacted by Covid).

High-margin IT and Tech services

Though a far second in terms of revenue contribution (18 per cent of L&T’s FY21 consolidated revenue) the IT and technology services segment contributed a third of the company’s operating profit in FY21, as this segment has much better margins.

The segment comprises L&T Infotech, L&T Technology Services, and Mindtree, and reported 20 and 43 per cent growth (both y-o-y) in revenue to ₹7,241 crore and in operating profit to ₹1,383 crore in the June 2021 quarter. This was due to the surge in demand for technology-related services in the post-pandemic world. Better manpower utilisation, increased offshoring, and operational efficiency helped the EBITDA margin go up from 20.7 per cent a year ago to 23.1 per cent in the latest June quarter.

As of June end, L&T had an aggregate order book of ₹3.2 lakh crore. This translates into a healthy order book to sales ratio of 2.4 times and provides revenue visibility over the next couple of years. The government’s heightened focus on infrastructure too will work towards ensuring a strong project pipeline for a large player such as L&T.

Published on July 27, 2021

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