Q2 Comment. Larsen and Toubro: Signs of recovery visible

With most of its workforce returning to the sites and execution of projects slowly returning to normalcy, Larsen and Toubro reported a 46 per cent sequential growth in consolidated revenues in the September 2020 quarter. However, on a y-o-y basis, the consolidated revenues were down 12 per cent to Rs 31,035 crore.

While the company reported optically higher profit after tax of Rs 5,824 crore – up 110 per cent y-o-y, much of this was on account of gains from the sale of the Electric and Automation division (about Rs 8,100 crore). The company also recorded one-time impairment losses worth Rs 3,372 crore on the Nabha Power Plant, Hydel Power Plant in Uttarakhand, and the funded exposure in the heavy forgings facility (JV).

Excluding these non-recurring gains and losses, L&T reported a 45 per cent y-o-y decline in profits in the September quarter. Aside from the drop in revenue, a y-o-y increase in depreciation and interest expenses — predominantly in the Hyderabad Metro division — led to a 45 per cent decline in the company’s profits to Rs 1,410 crore. EBITDA margins (consolidated) for the quarter dropped by 70 basis points (y-o-y) to 10.7 per cent, due to early stage of project execution.

While the September quarter numbers still reflected the lingering effects of the pandemic-led lockdown (both on domestic and international businesses), revival in order inflows during the quarter could be the tell-tale signs of recovery in the coming quarters.

On a consolidated basis, the company bagged orders worth Rs 28,039 crore during the quarter. What is comforting is that most of the order inflow -- about Rs 14,522 crore -- flowed from the infrastructure segment. This is in line with the management’s commentary in the last quarter’s earnings call, where they were hopeful of a revival in the government funded projects, given the employment generation capacity of the infrastructure sector. Also, despite weakness in state finances, the company managed to pick up healthy intake from multilaterally funded state projects as well.

On the international front, while the inflows from the Hydrocarbons division remained muted (due to benign oil prices), the company bagged orders from the water effluent and treatment vertical, and power transmission and distribution vertical.

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In all, the company’s consolidated order book (outstanding) stood at Rs 2.99 lakh crore at the end of the September quarter- with international orders constituting about 24 per cent.

Outlook

Last week, L&T had emerged as the lowest bidder for the High Speed Rail Corridor, which in itself could result in an order inflow of Rs 25,000 crore in the coming quarter. This, coupled with other open government tenders in the metro, railway and roads and expressway verticals, could result in healthy order wins for the company. That apart, with the stoppage of sporadic regional lockdowns and return of labour force, execution is expected to recover at a faster pace in the coming quarters.

However, the management has refrained from spelling out any guidance numbers in this quarter as well.

The company’s efforts on cash management, too, have been good. Aside from the cash inflow on account of sale of the Electrical and Automation division (about Rs 11,000 crore, net of taxes), the company managed to bring down the outstanding receivables by another Rs 5,000 crore. The management said about Rs 5,600 crore were utilised to bring down the consolidated debt of the company to Rs 1,46,600 crore at the end of the September quarter. However, owing to pent-up billables, the working capital as a percentage of sales remained at 26 per cent even in the September quarter (akin to March and June quarters).

The management plans to utilise the surplus cash to bring down the debt burden further in the coming quarters, apart from reserving cash to fund the inorganic growth in its services businesses.

With surplus cash on their books, the company has declared a special dividend of Rs 18 per share, resulting in an outflow of about Rs 2,527 crore.

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