Demonetisation impact key for L&T Q3 numbers

L&T has a heavy exposure to migrant labour force, which is paid in cash

Demonetisation could be a key element in Larsen & Toubro Ltd (L&T) December quarter financial performance, say analysts. The engineering major will announce its third quarter results on Saturday.

In a Bloomberg poll, 20 analysts estimated the company‘s consolidated revenue at Rs 27,029.9 crore. Of these, 19 analysts expected the consolidated profit to be at Rs 1,076 crore. In the corresponding quarter last year, the company reported revenues from operations at Rs 25,829 crore and a profit after tax of Rs 1,035 crore. “L&T's revenue growth would be driven by infrastructure and hydrocarbon segments (overseas) with weakness likely to be seen in other segments,” according to a Kotak Institutional Equities Research report. 

L&T’s presence in the real estate sector and its large exposure to engineering and construction are expected to show weakness due to the banning of old Rs 1,000 and Rs 500 notes in November. L&T has a heavy exposure to the migrant labour force, which is paid in cash. “Revenue is likely to be lower from the December quarter and EBITDA is expected to be impacted due to demonetisation,” said Pawan Parakh, an analyst at HDFC Securities.

“There would be some impact due to demonetisation on domestic engineering and construction, electrical and automation (E&A) as well as the realty business,” said Renu Baid, vice-president - Research at IIFL Institutional Equities.

The impact is not limited to the December quarter alone, some also expect the company to revise its revenue growth guidance for the entire current financial year. “In terms of guidance, sales growth may be lowered to 10% levels partly be due to demonetisation,” Baid said.

At the beginning of the financial year, the company guided for a 15% year-on-year rise in order inflow and 12% rise in revenue. “What is key to look for is whether the company will revise revenue growth targets to factor in demonetisation or is there enough confidence to make up for it in the fourth quarter,” Parakh said. However, there is a large consensus that the company will lower its order inflow guidance for the current financial year. “L&T likely to mellow FY17 inflow growth guidance to 10-15%. It has disclosed on the exchanges a cumulative order value of only Rs 10,000 crore for the December quarter. This is significantly below the run rate in previous quarters,” according to a JP Morgan report. 

Most analysts added the street has already factored in the possibility of a downward revision in guidance shared.

Baid expects the order inflow guidance to be lowered drastically. “Order inflow guidance may also be revised to 5% as large order finalisation have slipped, which are now likely to show in the early financial year 2017-2018,” she said.