L&T Q2 results today; demonetisation could hurt its construction business

Mumbai: Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company, will see some impact of demonetisation on its construction and real estate business in the next quarter, analysts said.

L&T, which is referred to as a corporate proxy for the broader economy, will report results for the second quarter ended 30 September on Tuesday, but all eyes will be on the company’s outlook commentary for the full-year and the impact of demonetisation on its various businesses.

About 10-20% of L&T’s order backlog is in its construction business and its buildings and factories segment, which could be impacted from the effects of demonetisation, said Amar Kedia, an analyst at Nomura.

Construction accounts for 30% of L&T’s infrastructure business, its largest by revenue.

L&T also owns and operates one of the largest portfolio of road assets in the country. An expected decline in road traffic and the exemption of road tolls following the withdrawal of high-value banknotes may pose short-term cash flow concerns for toll road operators, Mint reported on Monday.

“Demonetisation could impact the company’s real estate business in the next quarter; there will not be any impact in the second quarter numbers. But my sense is that their working capital cycle could get stretched to 26-27% from 25% currently, because of the construction and real estate sector,” said Santosh Yellapu, an analyst at Angel Broking Pvt. Ltd.

“Even the funding towards L&T IDPL could slow given the banks’ lending to the infrastructure sector have slowed. Once the effects slow down, pent up demand could be visible in the fourth quarter.”

L&T, which has interests in infrastructure, real estate, power, heavy engineering and hydrocarbon, among others, has forecast order inflow growth of 15% and revenue growth of 12-15% for the full-year fiscal 2017.

An analyst, who said he was not authorised to speak to the media, estimated L&T to have received new orders worth Rs.33,000 crore in the second quarter ended 30 September.

Eighteen analysts polled by Bloomberg are expecting L&T to report consolidated net profit of Rs.783.90 crore on net sales of Rs.24,057.70 crore.

L&T had reported consolidated net profit of Rs.995.9 crore because of higher sales and exceptional items and net sales of Rs.23,393.22 crore in the year-ago quarter.

L&T, which also has interests in finance and information technology sectors, has in recent years been hurt by a slowdown in the investment cycle as over-extended corporate entities struggle to repay debt, putting expansion plans on hold. An analyst Mint spoke to said he is expecting L&T to report net sales of Rs.25,000 crore and net profit of Rs.770 crore.

Of the 46 analysts covering the stock, 30 have a buy rating, 12 have a hold rating while four have a sell rating, Bloomberg data showed.

Up to Monday’s close, L&T’s shares have fallen 1.31% in the past 12 months.