Larsen & Toubro third quarter results: strong revenue visibility, but watch out for near-term cost pressures

As more projects near completion and cross the margin recognition threshold, profitability may improve

Helped by better project execution and strong growth in the highly profitable IT and technology services business, Larsen & Toubro (L&T) said revenue in the December 2021 quarter was broadly in line with analysts’ expectations.

However, impacted by higher input costs and lower other income, quarterly profit was 14% lower than expected (based on Bloomberg consensus estimates).

Revenue up, profit down

L&T recorded consolidated revenue of ₹39,563 crore, up 11% year on year in the last quarter of December. While quarterly EBITDA (earnings before interest, tax, depreciation and amortization) at ₹4,530 crore was up 6%, reported profit after tax at ₹2,055 crore was down 17% from the period. ‘last year.

Rising construction material costs have hurt operating profitability.

Material costs as a percentage of revenue increased from 17.5% a year ago to 25% in the December 2021 quarter.

The Hydrocarbons and Heavy Engineering segment, which is part of the core non-services business, posted lower EBITDA margins in the last quarter compared to a year ago.

However, as more and more projects move towards completion and cross the threshold after which the margin on them begins to be recognized, the company’s EBITDA number could likely improve.

Net profit growth in the last quarter was impacted by lower other income (down 46% year-on-year) for the period and the fact that December’s last quarter figures included profit from the sale of the electrical business and automation of society.

On the positive front, with the repayment of the ₹10,000 crore debt, L&T reduced its net debt to equity ratio from 1x at the end of March 2021 to 0.87x at the end of December 202.

L&T’s current consolidated backlog of ₹3.4 lakh crore with a 3-4 year fulfillment cycle provides great revenue visibility. The company’s infrastructure segment accounts for almost three-quarters of this backlog.

Performance of key segments

With project execution, which had accelerated in the previous two quarters, continuing to remain healthy, infrastructure segment revenue increased by 16% to ₹18,345 crore and EBITDA by 32% to ₹1,298 crore ₹ (both YoY) in Dec 2021. quarter.

According to the company, higher site productivity despite higher cost pressures helped the EBITDA margin increase to 7.1% from 6.2% a year ago.

The infrastructure segment is the largest revenue contributor and accounts for more than 40% of the major engineering and construction company’s revenue.

While project bidding activity in the quarter increased 30% from a year ago, contract awards were lukewarm. Once the latter resumes, this may result in additional orders in the future.

L&T’s IT& Technology Services (TS) business is the largest contributor to earnings and accounted for nearly 42% of the company’s last quarter EBITDA.

This segment includes L&T Infotech, L&T Technology Services and Mindtree. Although somewhat lower than a year ago due to rising labor costs, the company posted an impressive EBITDA margin of 23.8% for the December 2021 quarter.

Continuing to benefit from the surge in demand for IT and technology offerings, especially post-pandemic, the IT&TS segment once again performed well. It recorded 29% growth in revenue to ₹8,397 crore and 21% growth in EBITDA to ₹2,002 crore (both year-on-year) in the December 2021 quarter.

Today, at ₹1,899 each, L&T stock discounts its FY23 earnings by 21.6x, above its 3-year average P/E multiple of 16.6x. We recommended a buy call on the stock in August 2021 when it traded at a forward P/E multiple of 18.9x (all based on Bloomberg consensus estimates). Long-term investors who had then bought the share at ₹1,638 each can continue to hold it.

Published on

January 31, 2022

Floyd N. Morlan