L&T Q3 results | Profit, new orders dip but order pipeline remains strong, says CFO

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Larsen & Toubro reported a 17 percent year-on-year decline in net profit for the third quarter of 2021-22 at Rs 2,055 crore, because of a combined effect of lower income from treasury operations in the quarter and higher profits in the corresponding quarter last year that was boosted by gains from divestments, the engineering major said on January 28.

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The company’s consolidated revenues in the December quarter was Rs 39,563 crore, up 11 percent, reflecting an improvement in execution of infrastructure projects and robust growth in its information technology (IT) and services businesses.

The company announced its result after bourses closed for trading. Shares of the company closed at Rs 1898.80 on Friday, down 0.65 percent from the previous close. L&T missed street estimates for earnings. A Moneycontrol poll of five brokerages pegged the company’s consolidated net profit at Rs 2,185 crore on revenues of Rs 39,687 crore for the reported quarter.

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PROFIT DECLINES

L&T’s net other income almost halved from Rs 1,065 crore a year ago to Rs 571 crore in the December quarter.

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Raman said that L&T had raised funds to be prepared for the pandemic on liquidity concerns. This money was parked in treasury instruments where the company made substantial gains. As the concerns around the pandemic’s impact on business eased, the company reduced the debt which in turn reduced the investible surplus and led to a reduction in other income reduced.

He said that the company paid back Rs 10,000 crore of debt in the quarter, most of which was raised a year ago for safeguarding the business in the pandemic.

“From operations, we are ahead of the previous quarter. From treasury operations, there is a dip. Consequently, before extraordinary items and before discontinued business, we have a drop of Rs 200 crore in net profit which is a 9 percent decline,” Raman said.

The decline in profit widened because of the higher base effect. While the significant part of the proceeds from the divestment of its electrical and automation business to Schneider Electric was booked in the second quarter of 2020-21, some part of it had been booked in the third quarter.

“There was a tail effect of that transaction into quarter three which generated Rs 200 crore of profit (in Q3FY21),” Raman said.

ORDER BOOK AND PIPELINE

L&T reported a 31 percent year-on-year decline in new orders in the December quarter at Rs 50,359 crore; attributing it to a high base in the same quarter a year ago as it then bagged its biggest ever engineering, procurement and construction contract for the Mumbai-Ahmedabad High-Speed Rail project.

The share of international orders, primarily from the Middle East, was 40 percent of the total order inflow. L&T’s consolidated order book was at its highest at Rs 340,365 crore as on end-December, of which 24 percent were international orders. The orderbook is executable over the next three-four years.

“We keep refreshing the pipeline every quarter to update it with deletions and additions. Based on the projects in various sectors, the pipeline adds up to close to four lakh crore rupees,” Raman said.

GUIDANCE

While L&T management is upbeat about the visibility of a robust order pipeline, they have concerns over timelines.

“There is always a big question mark about the timing. This is something that is uncontrollable from our end. What we can possibly do is position ourselves competitively, respond to that come up and hope to maintain the strike rate of 15-20 percent that we have historically had,” the CFO said.

In October, while announcing the result of Q2FY22, Raman had said that L&T was confident that it will meet its FY22 guidance of up to a low-to-mid teens growth in orders and revenues.

“There is a reasonable chance that we should still have a fighting chance to move towards the way we thought the year will be at the beginning of the year. We said anywhere in low-to-mid teens, not mid-teens,” he said.

KEY SEGMENT PERFORMANCE

L&T’s core business, its infrastructure segment, recorded third-party revenues of Rs 18,345 crore for the December quarter, up 16 percent on the back of a good pick up in execution momentum of its large value orders. The company managed to increase earnings before interest, tax, depreciation and amortisation (EBIDTA) margin by almost 100 basis points to 7.1 percent due to tapering of certain stressed jobs and overall higher site productivity despite the impact of higher material procurement costs, the company said.

Power segment business remained muted and the company won no new projects as fossil fuel-based power projects continue to lose favour among investors.

Heavy engineering business saw a spurt of orders in refinery and oil and gas business, even as revenue and profit margin on exiting jobs declined.

The defence engineering segment reported a decline in revenue due to tapering of execution of jobs in progress in the shipbuilding business.

The hydrocarbon segment reported revenues of Rs 4,880 crore during the quarter ended December, up 11 percent on year with peaking of execution activities in the onshore domestic vertical, but it won few new orders than the same quarter last year.

Its IT and Technology Services segment, which includes L&T Infotech, L&T Technology Services and Mindtree continued to grow on a surge in demand for more technology focused offerings.

L&T’s financial services business, which includes the listed subsidiary L&T Finance Holdings, reported a decline in revenue attributed to targeted reduction in the overall loan book.

ROAD AHEAD

L&T said that divestments of non-core businesses would continue to be a priority. Raman said that the company is working towards closing the transactions soon despite the macroeconomic uncertainties.

The company will also “aggressively” pursue return ratios to create sustainable long-term returns for shareholders.

“During the quarter the company reaffirmed its commitment to integrate its environmental, social and corporate governance goals with business targets and is working towards becoming a ‘Net Zero’ company,” L&T stated.

L&T aims to achieve carbon neutrality by 2040 and water neutrality by 2035.

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