L&T Q2 net up 16%, company lowers growth forecast for FY16

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Engineering conglomerate Larsen and Toubro Ltd (L&T) posted a 16 percent year-on-year rise in consolidated net profit for the quarter ended September 30, 2015, to Rs 1000 crore, aided by higher revenues and an exceptional gain on sale of investment during the three-month period.The company reported a consolidated net turnover of Rs 23,390 crore during the July-September period, which was 11 percent higher over the year earlier.
 
L&T’s reported turnover and net profit for the September quarter came in below Street expectations. A Bloomberg poll of L&T’s earnings estimates compiled by analysts tracking the sector pegged net profit at Rs 975.2 crore and revenues at Rs 23,229.70 crore. 
 
The firm’s Ebitda (earnings before interest, tax, depreciation and amortisation) margin stood at 11.08 percent during the September 2015 quarter, marginally up from the 11.03 percent margin it reported in the September 2014 quarter. 
 
L&T’s share price lost 4.11 percent on the BSE on Friday to close at Rs 1,411.15 per share. The bourse’s benchmark index, Sensex, lost 0.68 percent to end at 26,656.83 points on the same day.
 
The company, whose performance is intricately linked to the state of the domestic economy, has been facing headwinds over the last few quarters with the pace of infrastructure creation in the country slowing down. L&T’s international business has also been impacted due to the sharp drop in crude oil prices, which has forced global oil and gas producers (the firm caters to this segment with a number of its heavy engineering products and services), especially in West Asia, to go slow on capacity augmentation projects.
 
Consequently, R Shankar Raman, L&T’s chief financial officer and member of the board of directors, lowered the company’s order inflow and revenue growth forecast for the current fiscal 2015-16, from what had been articulated by the company at the beginning of the year.
 
Indian companies had expected economic growth and resultant revival in infrastructure creation, pinning their hopes on a new pro-reforms government that came to power at the Centre in May 2014 with an absolute majority. But while the Narendra Modi-led government has been able to take certain policy decisions to ease bottlenecks such as those in allocation of natural resources and securing approvals to start industrial projects, reforms are yet to touch crucial areas such as land acquisition for industry.
 
At the beginning of the year, L&T had estimated its order book and revenues to grow by 15 percent year-on-year. But basis its performance in the first half of the current fiscal the “best case estimate” for growth in L&T’s order inflow for the year was five to seven percent, and for growth in the company’s revenues was 12 percent, Shankar Raman said on Friday while announcing the company’s September quarter earnings. 
 
Shankar Raman, however, pointed out that traditionally a significant portion of the new orders that L&T wins comes in the second half of the fiscal, which commenced on October 1; and that the second half of 2015-16 may bring an uptake in the orders that the company bags.
 
“At the beginning of the year, we were a little more optimistic about the pace of growth coming back,” SN Subrahmanyan, L&T’s recently appointed deputy managing director and president, said. However, he expressed optimism about the various arms of government, including defence and railways ministries tendering out a number of projects as part of their respective development agenda.
 
“A lot of these tenders haven’t been opened. Though there is competition, if we manage to win some of these projects when the tenders are opened, it may swing our financial performance,” Subrahmanyan said. But it may take a year-and-a-half to two years for new orders to start flowing again in sectors like power and heavy engineering, he cautioned.
 
For the six months ended September 30, L&T’s order inflow stood at Rs 55,000 crore, 25 percent lower than last year. For the July-September quarter, fresh order inflow was down 28 percent to Rs 28,600 crore. The company’s total order book, however, was up 14 percent year-on-year for the financial year till September 30 at Rs 2,44,100 crore. The order book is a combination of fresh order inflows as well as existing orders that are under various stages of execution.
 
As things stand at present, L&T’s international business appears to be doing better than its domestic business as far as growth in turnover is concerned. While the company’s consolidated turnover grew by 11 percent during the quarter, international revenues grew 19 percent year-on-year (albeit, on a lower base) to Rs 7,658 crore and accounted for 32 percent of the company’s revenues during the period. Also, international orders account for 28 percent of L&T’s outstanding order book at present.
 
L&T also benefited from an exceptional gain of Rs 309.57 crore during the quarter on account of sale of five percent of the firm’s holding in its financial services subsidiary L&T Finance Holdings and another vendor firm in which the Mumbai-based engineering firm had invested.
 
The infrastructure segment, which is L&T’s largest business by revenues accounting for nearly half of turnover, saw an 11 percent year-on-year rise in revenues to Rs 10,668 crore, though the business’ Ebitda margin dropped to 8.6 percent during the July-September period, from 10.1 percent a year earlier. This was on account of the “job mix with project at early stage, below the margin recognition threshold”, L&T’s earnings statement said.
 
The engineering firm’s power segment also did well during the quarter with turnover increasing by 21 percent over the corresponding period last year to Rs 1,404 crore. The Ebitda margin for this vertical rose from 12.9 percent a year back to 16.1 percent this year. However, the power business order book fell drastically during the quarter. L&T won fresh orders worth Rs 1,783 crore in the power business as against Rs 7,714 crore in the September 2014 quarter. 
 
L&T’s hydrocarbons segment saw revenues rise by seven percent year-on-year during the quarter to Rs 1,935 crore. But the inflow of fresh order during the quarter vis-à-vis this business declined by 51 percent over the year earlier to Rs 1,244 crore.
 
“Oil prices staying where they are, a number of oil and gas projects in the Middle East have gone into a review mode,” Shankar Raman said. “They haven’t quite been shelved but they are to be re-shaped and that takes some time.”
 
While other business segments like metallurgical and material handling and heavy engineering (the division through which it makes equipment for nuclear power and hydrocarbons exploration) underperformed during the quarter, verticals like information technology, developmental projects and financial services did well.