Greater execution may drive L&T’S Q4 revenue

India’s largest engineering and construction (E&C) player Larsen & Toubro (L&T) is expected to report double-digit YOY growth in consolidated revenue for the Q4, led by greater execution in a seasonally strong quarter and also because of a low base, according to analysts.

Consolidated revenue growth should be largely led by 44 per cent YOY growth in the infrastructure segment, said analysts at CLSA. Infra accounted for 40 per cent of L&T’S consolidated revenue during the nine months ended December 31, 2020, followed by services (36 per cent) and hydrocarbon (13 per cent).

Order inflow, an indicator of business visibility, is also expected to improve. The company is scheduled to announce its March quarter results on Friday. “We expect the company to report strong order inflows, led by the pick-up in infrastructure ordering,” said Nomura’s analysts in a report.

With segments like road, rail, metro, and water witnessing strong ordering due to replacement demand and greenfield expansion, capital goods companies are seen benefiting. “Our channel checks suggest strong demand from infrastructure, retail, and manufacturing will augur well for L&T, among others,” HDFC Securities said.

The company’s reported order inflow has been healthy during the quarter and “we expect consolidated order inflow of L&T to be around ~60,000-65,000 crore (25-35 per cent YOY growth)”, analysts at Anand Rathi said in a Q4 preview report.

On the other hand, some brokerages expect L&T’S margin for the March quarter to be impacted due to increased commodity prices that have pushed up input costs. Prices of cement, steel, and crude-linked products have increased in recent months. Steel prices (hot rolled coils), for instance, are at an all-time high of ~60,000 per tonne, versus about ~45,000 in the December quarter.

On a YOY basis, while Anand Rathi expects the Ebitda margin to be slightly down by 11 basis points, Motilal Oswal Securities (MOSL) estimates a 36-basis point fall, and IIFL a 31-basis point decline, even as it believes large EPC players like L&T are better placed to manage sharp commodity headwinds.

But there are others who share a different view. While HDFC Securities sees the Ebitda margin rising 32-basis point YOY, Kotak Institutional Equities (KIE) estimates it to be higher by 61 basis points and Nomura by 300 basis points. “We expect the core E&C business Ebitda margin to improve sequentially to 12.5 per cent in Q4FY21, with the improved scale of operations netting off commodity price pressures on the fixed pricing part of its backlog,” noted KIE.