L&T: Infra segment gaining momentum

Q1 results, helped by better execution in core infrastructure segment, match expectations

The June quarter (Q1) is critical for L&T because it sets the tone for the rest of the year. In the past few years though, the Q1 results have belied expectations, thus making it tough for the Street to gauge the growth trajectory. Thankfully, the June 2017 quarter wasn’t the same. With revenues at Rs 23,990 crore, growing by 10 per cent year-on-year, and net profit at Rs 1,028 crore, up 50 per cent, these numbers came ahead of expectations. Net profit attributable to shareholders of L&T came at Rs 892 crore, up 46 per cent year-on-year.

The comforting factor is a noteworthy pick-up in revenues of the core infrastructure segment. The infrastructure business, which accounts for 44 per cent of consolidated revenues, posted growth of 16 per cent to Rs 10,728 crore in Q1. This is encouraging, as the segment was marred with single-digit growth for a long period. What is also positive is that growth in Q1 was adequately supported by segments such as the hydrocarbons and electricals and automation segments, which saw 19-21 per cent year-on-year growth in Q1. The other good aspect is an eye-catching reduction in the working capital ratio to 20 per cent from 23 per cent in the March quarter, which is in line with the earlier management guidance and highlights an improvement in funds utilisation.

Nonetheless, the story hereon isn’t as bright. For instance, the power segment remained under pressure in Q1, with revenues staying flat at Rs 1,764 crore, while the heavy engineering segment isn’t showing any signs of respite yet. With these segments yet to catch up, an improvement in operating margins remains elusive. The margins in Q1 remained weak at 8.75 per cent, though a shade higher than 8.65 per cent a year ago.

The order inflow declining by 11 per cent year-on-year to Rs 26,352 crore is another concern. This is the weakest inflow seen in at least three years. Therefore, with little support coming from new orders, the order book remained flat at Rs 2,62,860 crore. Rohit Natarajan of IDBI Capital says that while the staggering of order inflows may not be of much concern yet, a sharp improvement is required, given that the Street is factoring in 25 per cent growth in FY19. “Hence FY18 is crucial in terms of gauging FY19 growth. While Q1 results look positive, we need to see a sharp rise in order flows for the performance to sustain,” he cautions. 

For now, the increasing relevance of infrastructure orders offers hope. The share of infrastructure orders in Q1’s inflows stood at 57 per cent, while its contribution to the order book is 75 per cent. With pockets such as transportation (roadways and bridges), power transmission and distribution, and water and effluent treatment showing signs of improvement, this trend may continue. However, R Shankar Raman, chief financial officer, L&T, states that as the bulk of infrastructure orders (about 70 per cent) is coming from government agencies, the course of execution depends on government priorities. This is why he rolls over the FY17 targets of 12 per cent order book growth and 12–14 per cent revenue growth target for FY18 as well. The core operating margin is expected to increase by 25 basis points. However, whether this will be enough to meet the Street expectation needs to be seen.