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  • Q4 results: Government spending helps keep L&T's flag flying high

    Publish date: 1st June, 2018

    India’s major infrastructure company – Larsen and Toubro – declared its fourth quarter results for the period January-March 2018. Are you wondering what it means to you as an investor? Here’s a handy guide:

    Positives Negatives What lies ahead
    • Increase in revenue, EBITDA, and        higher profit margins
    • Higher efficiency
    • Decline in international orders
    • Poor spending by private sector
    • Promise of reforms
    • Government spending
    • Optimistic guidance
    • Higher crude oil prices
    Why this matters: Any improvement in revenue, profits or even higher efficiency reflects improved profit-making ability. Why this matters: International orders contributed nearly 1/3rd of L&T's total orders in FY17. Any fall could affect revenues and profits.

    Private sector orders used to contribute 30-70% of total orders over the 2008-2016 period. It's now gone down to sub-20% levels
    Why this matters: Reforms and government spending have the potential to improve future profits. Even higher crude oil prices, however, could increase costs and thus negatively affect profits.

    What worked for L&T in Q4:

    Increase in revenue, net profit, and higher profit margins; higher efficiency

  • Revenue: L&T received most of its business from sectors such as infrastructure, heavy engineering, and hydrocarbons to report a healthy revenue of Rs. 40,678 crore. This was in line with what analysts had estimated.

  • Order inflows: Another highlight was the inflow of orders worth Rs. 49,577 crore in this quarter—the highest ever in the company’s history. For the entire year to March 2018, L&T clocked in order inflows worth more than Rs. 1.5 lakh crore. Experts suggest this could keep the company’s revenue and profits chugging along for the next 2 years.

  • EBIDTA: Many times, a company’s profitability needs to be measured before you take into account factors like tax and interest payments. This reflects the business’ core profit-making ability. This can be seen in EBIDTA – Earnings before Interest, Tax, Depreciation and Amortization. It tracks a company’s cash flow from operations. L&T’s EBIDTA margin for this quarter, a healthy 13.2%, is a good 145 basis points or 1.45% higher than last year. Know why every investor should track EBIDTA | How to read financial statements for EBIDTA

  • Efficiency: Orders worth Rs. 16,000 crore were written off. Should an investor worry? Well, a smart investor would realize that the company is not willing to waste its resources on projects where payments might become a problem.

For example, L&T had taken up several residential real estate projects belonging to reputed builders. Yet, problems could be foreseen as many of these builders had huge debts to pay off and therefore may not have been able to pay L&T on time. Hence, L&T preferred to rather spend its man power and machinery on projects which will not have major payment issues. In any case, once these projects look feasible, L&T is likely to resume working on them and include the receivables in its books. The company also clarified that this won’t have any impact on its revenues.

The sale of assets which are not important for the business—like the sale of their electrical business for Rs. 14,000 crore—could help improve usage of capital.

What has not worked for the company?

Decline in international orders: Share of international orders for the company fell to 23% in FY2017-18 from 29% in FY16-17.

Poor spending by the private sector: The share of private sector orders for 2017-18 dropped to below 20% from the range of 30-70% it held between 2008 and 2016. This may have happened due to the following reasons:

  • There have also been companies in the private space that were expanding till recently but off late have been facing financial stress. Some are even heading to NCLT to resolve disputes. This is likely to have shackled the animal spirits of businesses.

  • Credit offering institutions such as banks are wary of funding new projects due to non-payment of dues and rise in bad loans. Therefore, private firms may not be in a position to borrow and spend heavily on infrastructure.

What next?

In the stock market, what matters more is the future. What’s the future outlook for L&T look like? Let’s read this next here.