L&T orders shine, but margins dull
Larsen and Toubro Ltd’s (L&T) September quarter (Q2FY24) was characterized by healthy revenue growth and a stellar order pipeline. But at the same time, concerns lingered about its core business margin. The engineering and capital goods company trimmed its Ebitda margin guidance to 8.5-9.0% for FY24 from the earlier projected 9%. This could partly explain why the stock saw some selling pressure on Wednesday, closing about 1% lower.
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In Q2, the Ebitda margin of L&T’s core business—project and manufacturing—was at 7.4% compared to 8.2% in Q2FY23. Margin was impacted by the execution of weak-margin legacy orders, which were bagged during covid, and because several projects are yet to reach margin threshold stage, said Amit Anwani, analyst, Prabhudas Lilladher. There is an expectation that the core margin will improve gradually from H2FY24.
Within its core business, profitability of the infrastructure business has been a pain point for L&T. Infrastructure projects segment margin contracted by 120 basis points (bps) year-on-year to 5.4% last quarter, primarily due to changes in job mix and execution of older contracts. One basis point is one-hundredth of a percentage point.
On the brighter side, L&T expects to surpass its order inflow target of 10-12% and revenue growth forecast of 12-15% for FY24. Against this backdrop, analysts from Jefferies India raised their FY24 estimated revenue growth to 17% based on the strong growth of 25% year-on-year in the first half of FY24.
At the group level, L&T received orders worth ₹89,153 crore in Q2, representing a 72% year-on-year growth. This was the highest ever quarterly order inflow. What is more, according to the company, the order prospects pipeline as of September stood at ₹8.8 trillion with infrastructure accounting for ₹5.1 trillion, ₹2.9 trillion coming from the hydrocarbon business, and power contributing ₹0.5 trillion and rest from other segments. The prospects improved mainly due to large hydrocarbon opportunities in the Middle East. In the long run, the hydrocarbon business is viewed as one of the growth drivers for L&T. Within infra, transportation and railways, water and factories and building are key drivers. “Growth in hydrocarbons is positive as it has higher Ebitda margin profile than the infrastructure segment, better working capital cycle, and limited competition,” said a report from Elara Securities (India) dated 1 November.
That said, there is some bit of caution regarding a potential decline in capex by the customers amid a geopolitical crisis. Note that the Middle East accounted for 54% of the order inflow in Q2 and this is a variable worth monitoring for investors. L&T’s consolidated order book came in at ₹4.5 trillion as on September end, with international orders having 35% share. Consolidated revenue was up 19% year-on-year to ₹51,024 crore in Q2, primarily led by improved execution of the large order book, and accelerated progress in the projects and manufacturing business. However, owing to geopolitical crisis and upcoming general elections, growth rates could moderate in the second half of FY24. Unsurprisingly, the conglomerate has refrained from revising its FY24 guidance on the back of these uncertainties.
Meanwhile, L&T’s shares have rallied 39% so far in 2023, capturing the optimism related to buyback, robust order inflows and overall euphoria in the broader market. With a 3% correction in Nifty 50 in the past one month, the blue-chip scrip has also fallen 4% during the same period. Investors will be watching for improvements in the infrastructure business margin and continue to weigh in the impact of the Israel-Hamas conflict and upcoming election on L&T.
