Capex revival 12-18 months away, says Larsen and Toubro

Larsen and Toubro (L&T) on Tuesday reported a decent set of numbers for the three months to June but indicated that a revival in private sector capex was a good 12-18 months away.

The engineering firm reported a smart 21% year-on-year jump in consolidated net profit to Rs 1,473 crore, though revenues grew at a sedate 10% y-o-y to Rs 29,636 crore. Moreover, fresh orders during the quarter were up a modest 11% y-o-y to Rs 38,700 crore. Nonetheless, it stood by its guidance of a 10-12% growth in order inflows and a 12-15% increase in revenues in 2019-20.

Management commentary was more than cautious, with L&T CFO R Shankar Raman saying order inflows were expected to pick up in the second half of the year. “Though some non-industrial capex from private sector has taken place, large industrial investments will take another 12-18 months as liquidity is a challenge,” Shankar Raman said.

“We are not sure if capital markets are ready to provide money. After the latest tax on capital market participants, liquidity in capital market cannot be taken for granted. The debt market is in a shambles, banks are running scared to take credit decisions. In the current environment, the private sector will think 10 times before it commits capital,” the CFO said.

L&T CEO & MD SN Subrahmanyan pointed out that on the one hand, the government was tightening the fisc while on the other the private sector “is hardly there”. Subrahmanyan said the company was being cautious “about how we move forward”, adding it would take two-three months for the situation to ease.

The engineering major’s profits rose on the back of better operating profit margins which expanded 100 basis points y-o-y to 11.2%. Margins were boosted by cost efficiencies as total operating expenses grew just 9% y-o-y and sales and administration costs fell 12% y-o-y. That helped push up the Ebitda for the quarter by a sharp 20% y-o-y to Rs 3,320 crore.

The orders in Q1FY20 were driven by public sector and some private sector orders. Domestic orders accounted for nearly 77% of the inflows, while international orders made up the rest. “Order wins in infrastructure and power segments were the major contributors to the order inflow during the quarter,” the management said.

The order book as on June 30, 2018, stood at Rs 2.94 lakh crore, up 8% on a y-o-y basis, which he said is robust providing hedge against cyclicality. During the quarter the company had about 2% of its order book as slow moving and took an impairment of Rs 90 crore on account of impairment in a road SPV in Gujarat which is referred to NCLT.

The infrastructure segment recorded customer revenue of Rs 13,865 crore, leading to a y-o-y growth of 14% during the quarter. Growth was contributed by good execution progress across business verticals of the segment. After a long hiatus, the power segment secured orders of Rs 6,700 crore, registering significant growth on receipt of a large value domestic order for a 2×660 MW ultra- supercritical thermal power plant in Buxar, Bihar. Consequently, the order book of the segment grew to Rs 12,933 crore, with the international order book constituting 11% of the total.

On change of management at the recently acquired Mindtree, Subrahmanyan said the company has found the new leadership and will make an announcement soon.