L&T's Q4 revenue expected to grow on the back of higher execution

India’s largest engineering and construction (E&C) player, Larsen & Toubro’s (L&T’s) consolidated revenue is expected to witness a double-digit year-on-year growth in the March quarter (Q4), according to most analysts, led by higher execution in a seasonally strong quarter and a low base.

The consolidated revenue growth will be largely led by a healthy 44 per cent year-on-year (YoY) growth in the infra segment, said analysts at CLSA in a report.

Infrastructure accounted for 40 per cent of L&T’s consolidated revenue during the nine months ended December 2020, followed by services (information technology, etc) at 36 per cent and hydrocarbons at 13 per cent.

The company is scheduled to announce its March quarter results on Friday.

Order inflow, an indicator of business visibility, is also expected to improve.

"We expect the company to report strong order inflows led by pick up in infrastructure ordering," said Nomura’s analysts in a report.

With all segments such as road, rail, metro, and water witnessing strong ordering from replacement demand and greenfield expansion, capital goods companies are seen benefiting.

Our channel checks suggest strong demand from infrastructure, retail, and manufacturing, will augur well for L&T among others, HDFC Securities said.

The company’s reported order inflow has been healthy during the quarter and we expect consolidated order inflow of L&T to be around Rs 60,000 – Rs 65,000 crore (25-35 per cent YoY growth) in the period under review, analysts at Anand Rathi noted in their Q4 preview report.

Meanwhile, some brokerages expect L&T’s margins for the March quarter to get impacted due to increased commodity prices, which has pushed up input costs. The price of cement, steel and crude-linked products has increased in the recent months. Steel prices (hot rolled coils), for instance, are at an all-time high of Rs 60,000 per tonne versus about Rs 45,000 in the December quarter.

On a YoY basis, while Anand Rathi expects EBITDA margins to be slightly down by 11 basis points (bp), Motilal Oswal Securities (MOSL) estimates a 36 bp fall, and IIFL a 31 bp decline even as it believes that large EPC players like L&T are better placed to manage sharp commodity headwinds. EBITDA is earnings before interest, taxes, depreciation and amortisation.

However, there are others who share a different view.

While HDFC Securities sees EBITDA margins rising by 32 bp YoY, Kotak Institutional Equities (KIE) estimates it to be higher by 61 bp and Nomura by a huge 300 bp. “We expect core E&C (engineering & construction) business EBITDA margin to improve sequentially to 12.5 per cent in Q4FY21, with improved scale of operations netting off commodity price pressures on the fixed pricing part of its backlog,” notes KIE.

The difference in estimates on margins is one reason for the varying profit after tax (PAT) estimates for Q4. While most brokerages expect a year-on-year growth in L&T’s bottomline, the growth quantum is varying from 37 per cent to low single-digit levels.

Apart from lower EBITDA margins, higher interest expense as well as tax rate are reasons why MOSL is estimating L&T to post a mere 2 per cent YoY increase in adjusted PAT.

On the other hand, CLSA analysts say, any provision for Covid-19 could be a risk to our 37 per cent PAT growth estimate for the March quarter.

Brokerages will also be eyeing L&T’s working capital/debt levels, commodity price inflation and the company’s ability to pass it on to clients.

Near-term concerns over Covid-19 second wave remain, although analysts don’t expect a severe impact as construction work may continue this time with lockdowns expected to remain partial and in select states.

In Q1FY22, execution momentum could slowdown in projects in select states such as Maharashtra where restrictions are rising due to Covid-19 cases, said Nomura.

Against this backdrop, management commentary on order pipeline, input costs and how Covid-19 may reflect on L&T’s businesses in the first half of FY22 will be keenly watched.