L&T Q3: Strong revenue and orders, but margin pressures weigh on stock

Larsen and Toubro (L&T) announced its quarterly results on Tuesday post market hours. The stock fell by 4.2 per cent on Wednesday on account of EBITDA and net profit missing consensus estimates by 3.7 per cent and 9.2 per cent, respectively. This was mainly driven by standalone segments, including infrastructure, energy and hi-tech manufacturing which comprise around 60 per cent of its total revenue.

The company’s core engineering and consulting revenue grew by 25 per cent year-on-year (y-o-y) to ₹39,300 crore. EBITDA margins declined 80 bps YoY to 7.7 per cent as core EBITDA grew 13 per cent y-o-y to ₹3,000 crore on account of L&T (standalone) witnessing margin pressures in its infrastructure segment (74 per cent of revenues) in Q3 FY24.

While revenue of the segment grew around 27 per cent aided by robust execution momentum, the company reported an EBITDA margin of around 5.5 per cent against 7 per cent reported in Q3 FY23. Margins reflect continuing cost pressures in a few legacy projects which are expected to be completed by FY25. This will continue to remain a monitorable for the company. At ₹43,208 crore, order inflows grew a robust 33 per cent, driven by marquee orders, especially, in power transmission and distribution business.

The hi-tech manufacturing segment, too, saw margins dipping from 17.5 per cent to 16.7 per cent on account of lower margins in defence manufacturing space.

Further, the energy segment saw y-o-y revenue growth of around 24 per cent and margin expansion from around 8.7 per cent to 9.7 per cent, mainly on account of job savings in hydrocarbon and customer claim settlements in the power business.

Strong order inflows

Orders in the energy segment grew 47 per cent, driven by receipt of a mega order in offshore vertical of hydrocarbon business. In the December ended quarter, 35 per cent y-o-y increase in the order inflows into the company’s core segments, driven by infrastructure and energy verticals.

The management had earlier given a guidance of an overall order inflow growth of around 10-12 per cent which it has revised to around 20 per cent due to healthy order pipeline. Further, from the earlier revenue growth guidance of around 12-15 per cent for FY24, it has also been revised to more than 15 per cent which the company now expects to exceed due to stronger execution and healthy order pipeline.

However, while prospects look good, the expectations seem to have already built into the stock. 

Over the last one year, the stock has gained nearly 64 per cent on account of the strong order pipeline, expectation of private capex revival and healthy outlook. Its trailing P/E of around 50 times is around 28 per cent higher than the historical five-year average P/E of around 39 times.

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