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Informist, Monday, Oct. 21, 2024

 

By Rajesh Gajra

 

MUMBAI – Sluggish execution of domestic contracts, flat-to-declining operating margin, and fall in order inflow are likely to have affected engineering behemoth Larsen & Toubro Ltd. in the quarter ended September, as compared to the same quarter a year ago. The declining trajectory of revenue growth for five consecutive quarters till the June quarter is expected to have continued in Jul-Sept, albeit with a relatively smaller decline.

 

Operating costs of the company are seen slightly higher than the increase in revenue, thereby leading to lower or flat margin growth. Net profit growth is seen at very low single digits due to sluggish top line and profitability, and other non-operating factors.

 

Larsen & Toubro will likely report a consolidated net profit of INR 32.62 billion in the September quarter, up 1.2% on year and 17% sequentially, according to an average of estimates from nine brokers. The estimates for net profit range from a low of INR 27.90 billion to a high of INR 35.90 billion. The net profit growth estimate is considerably lower than 38% jump recorded by the company in the year-ago quarter.

 

The company's consolidated revenue is seen at nearly INR 577 billion, up 13.1% on year and 4.7% on quarter. Estimates for revenue range from a low of INR 551.20 billion to a high of INR 593.17 billion. If the actual revenue number for September quarter is the same as the estimate, then it will be the lowest in six quarters. The consolidated earnings before interest, taxes, depreciation, and amortisation for the quarter is seen in the range of INR 56.20 billion to INR 65.44 billion, and averaging INR 61.41 billion, which is 9.2% down on year and 23% on quarter.

 

L&T likely faced weakness in revenue from execution of domestic orders in its core engineering, procurement, and construction business in the September quarter, but which will have likely got "offset by stronger overseas execution", Kotak Securities' Institutional Equities Research said in its preview report. The brokerage said that half of the core engineering, procurement, and construction business for L&T comes from the Centre and state governments, and central public sector enterprises. Connecting the dots, the domestic execution weakness for L&T will likely have emanated from lower orders from government and government-owned companies.

 

Brokerage Prabhudas Lilladher expects revenue growth of L&T to have been "led by strong execution in Infrastructure and Energy segments, especially in international markets." A similar "overseas order execution" reason behind the revenue growth is cited by brokerage Sharekhan.

 

Profitability estimates for L&T vary among analysts due to different revenue and operating costs projections. "We expect the core E&C (engineering and construction) business EBITDA margin at 7.8%, up 40 bps yoy (on year) on low base of margin," Kotak Securities' Institutional Equities Research said. The brokerage said it did build in any meaningful benefit of correcting steel prices in its profitability projections for the September quarter. It said the fall in steel prices will benefit L&T in the second half of the current financial year.

 

L&T's EBITDA margin will likely contract by 23 bps on year to 11%, Nomura Equity Research said. The company's "margins may see ramping up but at a slower pace," according to Nuvama Wealth Management. EBITDA margin is likely to remain flattish at around 11%, said brokerage Prabhudas Lilladher. Sharekhan sees a 20 bps decline in the margin.

 

The net profit growth in Jul-Sept is seen tracking the EBITDA growth. Sharekhan also expects the other income of L&T to be lower than the year-ago quarter. L&T is also seen as an outlier in the capital goods sector with regard to September quarter performance. Motilal Oswal Financial Services expects L&T to record a 0.6% on year decline in net profit in Jul-Sept. Excluding L&T, the capital goods companies the brokerage tracks are likely to post an average increase of 29%.

 

ORDER INFLOW

While there is certainty among analysts that order inflow for L&T would not be good, not many have ventured to peg the exact estimate on it. Analysts at Nomura Equity Research see core order inflow at INR 400 billion for L&T, 45% lower than the same quarter a year ago.

 

Analysts at other brokerage firms only pointed to the order wins of amount above INR 10 billion that the company discloses in its filings with the stock exchanges. In Jul-Sept, the power transmission and distribution orders gained momentum, according to Nomura Equity Research. A bulk of these orders came from clients in West Asia averaging INR 162 billion, the brokerage said. Prabhudas Lilladher said L&T's order intake during the September quarter was in the range of INR 160 billion to INR 275 billion, led by Infrastructure projects in West Asia.

 

The company will detail its earnings on Oct 30. Post earnings, according to brokerage Prabhudas Lilladher, "management commentary on hydrocarbon order prospects, domestic labour shortages, and performance of Hyderabad Metro will be key monitorables."

 

At 1340 IST, shares of L&T were at INR 3,602.40, up 0.7% over Friday's close on the National Stock Exchange.

 

Following are the Jul-Sept consolidated earnings estimates for Larsen & Toubro based on estimates from nine brokerages: 

 

Brokerage firm	Net sales	Net profit	EBITDA
	------------(In INR million)----------
Antique Stock Broking Ltd	5,76,542	35,045	63,159
Elara Securities (India) Pvt Ltd	5,93,170	31,374	58,756
HDFC Securities Ltd	5,51,200	27,900	56,200
Kotak Institutional Equities	5,75,919	32,569	63,169
Motilal Oswal Financial Services Ltd	5,67,643	32,030	60,310
Nomura Equity Research	5,87,061	34,395	63,428
Nuvama Wealth Management Ltd	5,79,043	32,090	60,799
Prabhudas Lilladher Pvt Ltd	5,91,459	35,902	65,438
Sharekhan Ltd	5,70,940	32,270	---
Average	5,76,997	32,619	61,407

 

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Vandana Hingorani

 

 

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