News Analysis

Weak performance in Q4; execution challenges persist for L&T

Keerthi Sanagasetti | Updated on June 06, 2020

The management has refrained from providing any guidance for FY21—both on revenues and order inflows

BL Research Bureau

Larsen and Toubro reported a 2 per cent (y-o-y) growth in consolidated revenues to ₹44,245 crore, in the quarter ended March 2020. A 6 per cent (y-o-y) decline in the revenue recorded by the infrastructure segment—which contributes 57 per cent to overall revenues-played its role in pulling down growth. A weak topline growth coupled with a significant rise in staff and administrative costs (in the IT and Financial services business), dented the profits. The net profit for the quarter dipped by 6 per cent (y-o-y), to ₹3,197 crore.

Though the lockdown posed significant challenges for the construction sector, the muted revenue growth for the company was predominantly led by weak economic conditions, which were prevailing much before the lockdown.

Weakness in infrastructure segment

The construction major was already facing execution challenges that affected their revenue accretion for most of FY20. The political instability in Andhra Pradesh, the embargo on construction in NCR regions, public interest litigations in a few other large projects and lower fund allocation by some states, are a few examples of the ground-level challenges, faced by the company. Add to the this, the nationwide lockdown, in the last fortnight of the quarter ended March 2020, led to a complete halt in the construction work. Hence the segment saw a 6 per cent decline in revenue to ₹25,333 crore, and a 120 basis points (bps) drop in the EBITDA margin to 11.1 per cent in the March quarter.


However, the segment recorded healthy order inflows of ₹41,396 crore, up 33 per cent from the corresponding quarter last year, posing good revenue visibility for coming quarters. This is thanks to the healthy deal wins in Solar and water projects.

Spike in costs

Aside from the drop in the consolidated revenues, the company also saw a significant rise in its staffing and sales & administrative costs—up more than 40 per cent y-o-y each, in the March quarter. The spike in staffing costs came predominantly from the IT&TS segment, led by higher on-shoring costs, increased visa charges and investment in new competencies.

The sales and administrative costs reflected an increase, on account of higher credit cost in the Financial Services business, due to additional prudential provisions adopted by the company.

Also, the company saw a 62 per cent (y-o-y) spike in consolidated finance costs, with increased debt levels, during the quarter. The additional debt predominantly was due to the phased commencement of Hyderabad Metro project.


The silver lining for the company, in the March quarter results, was the healthy order inflows—₹57,785 crore, up 5 per cent from the corresponding quarter last year. While this is much below the guided range of ₹66,000 to 69,500 crore (assuming a 10- 12 per cent increase year-on-year in FY20 as guided by the management till the quarter ended in December 2019), the growth in order flows is still healthy, considering the size of the order book.

The company’s consolidated order book stands at ₹3.04 lakh crore, as of March 31, 2020. While this promises healthy revenue visibility for the coming quarters, the management says challenges to execution remain.

In the first quarter of FY21 thus far (April and May 2020), construction work was at a complete halt. Post that, while the 90 per cent of construction sites have begun the work in the last few weeks, the company faces substantial disruption in the supply chain. Despite the gradual lifting of the lockdown, the company is currently witnessing a shortage of labour – only 40 per cent of the workforce is back at the construction sites. However, the management is hopeful of recovering the workforce to reasonable strength in the next 14-30 days, that would help resume operations.

But the onset of monsoons could pose another set of challenges for the company. Amidst such uncertainty, the management has refrained from providing any guidance for FY21—both on revenues and order inflows.

The company also saw a stretch in its liquidity conditions, owing to lower customer advances and a deliberate strategy of prompt payment (to vendors) adopted by the management. Working capital as a percentage of sales inched up to 23 per cent in FY20 from 19 per cent last year.

With a similar stretch expected in both public (Central and State) and private finances, the capex and investment cycle might witness a near term weakness, in the coming quarters. However, the management continues to be hopeful of garnering healthy deal wins as they expect the Governments (both domestic and international) to continue with the basic infrastructural spends (essential projects such as Power, Metro, etc.), despite tight finances. This is because the infrastructural spends could be key determinants for the economic revival in most economies.

The international business, which contributed 32 and 25 per cent respectively to the consolidated revenues and order book in the March quarter, might also witness near term weaknesses. Most countries in West Asia and the Northern and eastern regions of Africa, where the company has significant business flows, are gradually lifting their lockdown restrictions now. Also, since the company had retained most of their workforce at campsites, labour shortage will not be much of a problem there. However, order inflows could see a lull in these regions, due to weak capex on both private (oil marketing companies) and public fronts. Considering the prevailing economic conditions of most countries in Africa, even public projects could be viable only if they were multilaterally funded.

Published on June 06, 2020

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