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Business News/ Markets / Mark To Market/  L&T shines in Q2, but results reflect slowdown and liquidity crunch
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L&T shines in Q2, but results reflect slowdown and liquidity crunch

L&T’s 20% year-on-year increase in order flow to ₹48,000 crore in July-September was possible due to a 35% rise in international orders
  • The 2% decline in domestic orders reflects the delay and slowdown in the country’s capex activity
  • L&T is riding on a ₹5.2 lakh crore order pipeline (Reuters file)Premium
    L&T is riding on a 5.2 lakh crore order pipeline (Reuters file)

    The second quarter earnings performance of Larsen and Toubro Ltd (L&T) beats analysts’ estimates on all counts. But results of India’s largest construction and engineering company, a proxy for the domestic capital expenditure (capex) cycle, also reflect the emerging impact of an economic slowdown and working capital woes.

    The 20% year-on-year increase in order flow to 48,000 crore in Q2 was possible due to a 35% rise in international orders. In fact, the 2% decline in domestic orders reflects the delay and slowdown in the country’s capex activity. This was also underscored by a 33% drop in infrastructure orders, even as orders from industrial water systems, affordable housing and power distribution pushed up the tally.

    Although the juggernaut is riding on a 5.2 trillion order pipeline, and the company is confident of more hits than misses, the management has expressed concerns over the slowdown in finalizing orders.

    The strong increase in Q2 orders puts L&T on a smooth road to achieving the guided 10-12% growth in FY20 order flow. Analysts are convinced that the target is well within reach, with more than 40% of guided order flow achieved in the first six months, a strong order pipeline and the government’s thrust on improving liquidity.

    Also, L&T seldom disappoints on execution. Net revenue at 35,328 crore rose 15.3% year-on-year on the back of stable execution and a 3 trillion order book.

    However, note that the company’s working capital deterioration to 23% of net sales from 20% a year ago mirrors the liquidity crunch in the economy. In an interview, L&T’s chief financial officer R. Shankar Raman explained that delays in recognition of revenue due to pending clearances at various stages of execution and delays in customer payments led to stretched working capital during the quarter.

    (Graphic: Santosh Sharma/Mint)
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    (Graphic: Santosh Sharma/Mint)

    Analysts do not seem too worried on this count. Umesh Raut, institutional equities analyst at Yes Securities Ltd, said, “The increase in trade payables shows that the company has extended support to vendors to cope with tough liquidity conditions."

    Despite the odds, L&T’s earnings before interest, tax, depreciation and amortization margin at 11.2% was flat year-on-year and met the Street’s forecast.

    In a results analysis note, ICICI Securities Ltd summed up that L&T recorded good performance on execution while maintaining margins and controlling situation on the balance sheet front.

    The L&T stock, which surged after the corporate tax rate cut in September-end, has returned 19% over a year.

    The reported profit for Q2 was about 10% ahead of estimates. Analysts maintain a positive stance and expect a 20-25% upside in the share price from the current level of 1,432.25.

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    Published: 24 Oct 2019, 10:19 AM IST
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