Larsen & Toubro - Q2FY21 First Cut - ICICI Securities

(CMP: Rs. 984, MCap: Rs. 1,38,108 crore)

Larsen & Toubro (L&T) reported reasonable Q2FY21 performance on an operational and order inflow front amid a subdued business environment. Order inflow came in at Rs. 28039 crore at group level, down 42% YoY with significant orders received in the infrastructure segment. Standalone revenues de-grew by 15.8%, YoY, nearly in line with our estimates. The infrastructure segment revenues de-grew by 20.2 % on YoY, with labor at various sites reaching pre-Covid levels. Standalone EBITDA margins declined marginally by 50bps to 7.8% on YoY. While, on the balance sheet side, cash proceeds from E&A business sales and positive cash flow from operations improved the liquidity situation.

Q2FY21 Earnings Summary

- L&T's adj. Standalone revenues (Ex- E&A business) for the quarter de-grew by 15.8% YoY to Rs. 15791.7 crore vs. our estimate of Rs. 15102.3 crore. On standalone basis, infrastructure segment has posted muted performance with revenue decline of 20.4% to Rs. 12451.7 crore on YoY basis. Heavy engineering segment revenue remained flat at Rs. 708.1 crore on YoY basis. While on the other side, Power segment revenues shown some respite growing by 40.1% to Rs. 688.7 crore, defence engineering segment revenue de-grew by 19.7% to Rs. 768.8 crore

- On a consolidated basis, adj. revenues from continuing operations on like to like basis (excluding E&A business and including Mindtree) declined by 12.2% to Rs. 31034.7 crore on YoY basis. On consolidated basis, Infrastructure segment net revenue de-grew by 20.2% YoY to Rs. 13095.7 crore. While Hydrocarbon segment registered a revenue decline of 5.9% to Rs. 4049.7 crore, IT & Technology segment (including Mindtree) grew by 5.0% to Rs. 6199.8 crore, on like to like basis. Financial services segment de-grew by -3.0% to Rs. 3341.9 crore for the quarter while IDPL segment declined by 21.5% to Rs. 1139.6 crore

- For Q2FY21, L&T registered reasonable order inflows at group level worth Rs. 28039 crore, which de-grew by 42% YoY, on account of deferment of award decisions largely caused by pandemic. International orders for Q2FY21 came in at Rs. 10200 crore contributing 36% to order inflows. Overall infrastructure segment secured orders worth 14522 crore (~52% of total inflows) which included international orders in water effluent and power T&D segment, domestic orders for rural water supply etc. L&T's order backlog stands at Rs. 298856 crore down by 1% on YoY basis with international orders constituting 24% of order backlog

- During the quarter, Standalone EBITDA margins declined marginally by 50bps to 7.8% (Vs. our estimates of 8.0%) on YoY basis affected by headwinds in execution due to pandemic. On a consolidated basis, EBITDA margins came in at 10.7% (Vs. 13.1% in Q2FY20). From a segmental perspective, infrastructure segment EBITA margins declined marginally by 80 bps to 6.4% owing to productivity challenges and job mix while higher work force availability led to execution pick up. Power segment EBITDA margin declined by 100bps to 3.1%, Heavy Engineering segment EBITDA margins came in at 5.1% (declined by 200bps YoY), affected by one time warranty provisions. While Hydrocarbon EBITDA margin declined by 400bps to 8.5% on YoY basis due to impact of cost pressures on project margins amid lockdowns

- Consequently, for Q2FY21, standalone Adj. PAT (excluding impairments and E&A proceeds) comes to Rs. 1051.6 crore which de-grew by 40.8% YoY (above our estimates of Rs. 977.7 crore) partly impacted by higher interest expenses. For Q2FY21, other income de-grew by 8.5% to Rs. 935.2 crore on YoY basis while interest expenses has also grown by 17.4% to Rs. 656.4 crore impacting profitability. The consolidated PAT for Q2FY21 came in at Rs. 1410.3 crore (Vs Rs. 2551.7 crore in Q2FY20) impacted by lower revenue, disruption in metro services, higher credit provision in financial service business

- During the quarter, L&T concluded the transfer of its Electrical & Automation (E&A) business by transferring the business to Schneider Electric (SE) on 31st August 2020. Accordingly PAT from discontinued operations includes gain on transfer Rs. 8416.8 crore (net of tax). Also, the company reported exceptional items worth Rs. 2818.7 crore towards a) impairment of funded exposure in heavy forging facility joint venture (Rs. 1403.7 crore) and b) impairment of investment in power development business (Rs. 1415 crore)

- For Q2FY21, the cash generation from operations was robust which was strongly supplemented by cash proceeds from E&A business. The CFO stood at Rs. 2770 crore for Q2FY21 (Vs. Rs. 1410 crore in Q2FY20). CFO for H1FY21 came in at Rs. 3650 crore. The company also declared special dividend of Rs. 18 per share

- Working capital to sale ratio stood at 26.7% for H1FY21 (Vs. 26.8% in Q1FY21) on account of lower revenue booking and company's intent to support vendors in a befitting manner amid tight liquidity situation and challenging business environment. As on Q2FY21 Debt has increased by Rs. 8900 to Rs. 55700 crore compared to Q4FY20 levels on

L&T posted reasonable performance on an operational and order inflow front while the infrastructure segment saw some green shoots of recovery amidst productivity challenges. Also, cash proceeds from sale of E&A business has provided much needed liquidity comfort on the balance sheet front in these challenging times. However, working capital levels continue to be key monitorable in the long term.

We will come up with a detailed report post the conference call.

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.934.6 as compared to the previous close of Rs. 983.65. The total number of shares traded during the day was 526381 in over 29196 trades.

The stock hit an intraday high of Rs. 958.95 and intraday low of 927. The net turnover during the day was Rs. 494800802.

Source : Equity Bulls

Keywords