Lower guidance: L&T has no room for error

Larsen and Toubro Ltd’s management has lowered its expectations for the ongoing financial year, a decision that hasn’t gone down well with investors. Earnings for the March quarter and 2023-24 did have their share of positives, but lower-than-anticipated FY25 margin forecast for the company’s core project and manufacturing business has dampened sentiments.

L&T’s shares plunged 6% on Thursday, steeper than the benchmark Nifty 50 index’s 1.6% fall. The company's FY25 margin guidance at 8.25% marks a steep revision from the 9% target it had set for FY24 at the beginning of the year. It was a letdown for many analysts who were pencilling in a 9-9.5% margin guidance.

The management attributed several factors for the lower-margin guidance, including a changed order book composition with higher contribution of international orders, that tend to have lower margins; high working capital requirement; higher fuel and labour costs, especially in West Asia, as well as deferment of claims.

L&T also cautioned of a possible variance in margin (estimated versus actual) due to these factors. Little wonder, earnings downgrades poured in, and target prices for the L&T stock were slashed by a many brokerages.

Kotak Institutional Equities cut its margin assumptions by 70-100 basis points (bps) for FY25 and by 70 bps for FY26, building in a limited 70 bps rise in profitability over three years.

One basis point is 0.01%.

This overshadowed L&T’s strong close to 2023-24.

The company’s order inflow growth at 31% year-on-year in FY24 was ahead of its 20% growth guidance, offering robust execution visibility.

While order inflow in the March quarter, at ₹56,050 crore, dipped 8% yearon-year, led by a fall in domestic orders due to the Lok Sabha elections, the order book at ₹4.8 trillion was at a record high.

A moderation in domestic order flows due to the ongoing elections could also weigh on L&T’s performance in the first half of this financial year. But its pipeline for FY25 is healthy, at ₹12.1 trillion, rising 24% year-on-year. Consequently, L&T anticipates 10% order inflow growth in FY25. However, FY25 revenue growth guidance of 15% seems be on the lower side considering the FY24 order book.

THE management attributed several factors behind its decision to lower margin guidance

Improving working capital, aided by higher collections and better customer advances helped L&T’s return ratio profile. In FY24, its return on equity (RoE) improved 270 bps to 14.9% as it reduced net working capital by 410 bps to just 12% of sales. For FY25, it expects net working capital to sales at 15%.

The management said it is constantly focussing on improving RoE by reducing

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