L&T Q1 Preview: Due to a disrupted April-June quarter (Q1FY22) amid the second wave of Covid-19, analysts expect India’s largest engineering and construction major Larsen and Toubro’s (L&T’s) net profit to decline up to 60 per cent sequentially. Besides, a slowdown in construction activity would have hit the company’s project execution capabilities, they believe.
“We expect Q1FY22 to be a weak quarter in terms of execution and profitability across the EPC (Engineering procurement and construction) and industrials space, as a sharp spike in Covid-19 cases across India, particularly in April-May, impacted execution levels,” said a report by foreign brokerage Nomura.
It added: Q1FY22 also saw a further rise in commodity prices (especially steel), compared with Q4FY21, leading to further aggravation of pressure on gross margins. Thus, we expect execution to weaken for EPC companies like L&T from the March quarter of FY21 (Q4FY21).
However, the stock price of L&T has seen a strong rally so far in FY22, reflecting the momentum in the order booking and expectation of pick up in project execution going forward. Between April 1 and July 23, the scrip of L&T zoomed nearly 14 per cent on the BSE as against a 7 per cent rally in the benchmark S&P BSE Sensex, ACE Equity data shows. It also hit a record peak of Rs 1,647 apiece on July 22, 2021.
Here’s what leading brokerages expect from Q1 results:
The Japan-based brokerage expects L&T’s Ebitda (earnings before interest, tax, depreciation, and amortization) margin to weaken sequentially due to sharp increases in commodity prices. Besides, as Q4FY21 margins were boosted by claim realizations, which have not been sustainable, the brokerage opines profit margins may be weak.
In absolute terms, Nomura pegs Ebitda margin at 10.26 per cent, down from 13.29 per cent seen in Q4FY21. On a yearly basis, however, it would be up from 7.62 per cent reported in the previous year period.
Analysts here anticipate that core sales, largely driven Infra segment and services revenue, will result in overall sales growth of over 40 per cent year on year at Rs 30,796 crore. In Q1FY21, total revenue stood at Rs 21,260 crore. On a QoQ basis, this would translate into a mid-teen decline from Rs 48,088 crore.
“We build in core Ebitda margin at 7 per cent and non-core margins at 17 per cent, resulting in overall Ebitda expansion of 364 bps YoY to 11 per cent,” they said in an earnings preview report.
The management’s guidance on order inflows and execution would be key monitorables, they added.
At the bottom line level, the brokerage expects L&T’s net profit to decline 56 per cent QoQ to approximately around Rs 1,490 crore, down from Rs 3,293 crore logged in the last quarter of the previous fiscal. However, this would be a 1,987 per cent YoY jump on low base of Rs 135 crore reported in Q1FY21.
Factoring in a 61 per cent YoY improvement in core EPC revenues in Q1FY22, the brokerage expects overall revenue to stand at Rs 30,110 crore. Operationally, Ebitda is seen climbing 115 per cent YoY at Rs 3,480 crore from Rs 1,620.5 crore logged in Q1FY21. Sequentially, this could be a 45.5 per cent decline from Rs 6,389 crore.
“We expect core E&C business Ebitda margin to be marginally below levels seen two year ago. We expect the decline in execution over a two-year basis to be made good by better gross margin. YoY increase is based on our assessment of relatively better availability of labor during the Covid second wave,” it noted.
Net profit, meanwhile, is pegged at Rs 1,433 crore, down 58 per cent QoQ.
L&T has announced Rs 11,000 crore of Ex-services orders in Q1 (assuming average range of new orders). Adjusting for unannounced orders, the brokerage expects ex-services orders for L&T to grow 15 per cent YoY to Rs 15,800 crore. Total order inflows is projected at Rs 27,283.6 crore while order book at the end of Q1FY22 could be at Rs 3.25 trillion.