about 8 months ago
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L&T, the bellwether of the Indian capital goods and infra sector did very well for Q3FY21. Does this mean that Indian economy is out of the woods?

Not to rush to a hasty conclusion. We certainly are doing much better than H1FY21 but to say that we are on the upward curve is not right. The results are good and the order intake is fantastic but then we need to look ahead of this – and therein lay the “sustainability” truth.

L&T posted a 5% (YoY) rise in net profit at Rs.2467 crore on a 2% decline in revenues at Rs.35,596 crore. And thanks to the cut in expenditure, EBITDA margin showed an improvement from 11.4% (YoY) to 12.02% and QoQ, it was up from 10.7%.

But the real beauty about the L&T numbers were the uptick in the orders. In Q3, it booked the highest order ever booked in any quarter at Rs.73,233 crore and its 9MFY21 order book stands a Rs.1.24 lakh crore.

Of this total of Rs.73,233 crore, infrastructure sector alone, which was mainly on account of the bullet train contract, contributed Rs.45.574 crore, followed by hydrocarbon at Rs.12,820 crore.

Does this mean that there is a turnaround?

Yes, there is most certainly a turnaround but what we also need to understand is that 90% of these orders are from the Govt. The private sector remains mute. What this in turn means is that the Govt is looking at economic revival with great vigor, shifting its focus from healthcare but at the same time, unless and until the private sector starts spending, we cannot say that things are good, yet.

What really helped the turnaround is:

  • Increased bidding and tendering from Govt
  • Labor returning back
  • Supply constraints getting resolved
  • Strong collections during the quarter.
  • Project execution better on QoQ
  • Many disputes over payments getting settled
  • Reduction in bank guarantee to 3% from 5%
  • Advances being paid without interest

All these measures helped reduce the working capital requirements but is that going to continue onto Q4? The company expects Q4 to remain as good as Q3 and this stems from the fact that L&T is the lowest bidder in projects worth another Rs.27,000 crore.

So, what lay ahead?

  • View will remain cautious on working capital even as topline will show growth as project execution, due to Covid norms will remain moderate
  • The biggest headwind – increasing commodity prices. The margins will improve only if the company is able to pass on the increased costs to the client, especially in the current environment.
  • The private sector will take a quarter or two more to open up their purse strings; till then it will be Govt and PSUs in India and then the Middle East and Africa for L&T.

Having said all this, the fact remains that just as we bank on the Indian economy in the long run, L&T is a long term stock. Every dip in the price should be an opportunity to stock up for the future.

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