Here's what analysts make of Larsen & Toubro Q1 results

Construction major Larsen & Toubro (L&T) disappointed the street with first quarter revenue just 5 percent up. According to market analysts the company’s strong order book is the only positive.

Tarang Bhanushali of IIFL believes the company is unlikely to disappoint execution wise on the topline. But concerns on company’s margins remain, so the street may reduce estimates going forward. However, given that this is just the first quarter of the year, HDFC Securities has not changed its revenue estimates much. “We will wait for the management guidance to come in, but will like to see, before we bring in any kind of earning downgrades,” Abhinav Sharma of HDFC Securities said in an interview to CNBC-TV18. He expects the company to clock around 17-18 percent revenue growth for next nine months. Below is the verbatim transcript of their interview on CNBC-TV18 Q: What do you think of the revenue which is up 5 percent, profits lower by about 10-12 percent and earnings before interest, taxes, depreciation, and amortization (EBITDA) margins coming in at 8.5 percent? Bhanushali: The numbers are below our estimate on all fronts, that is topline, EBITDA margin as well as bottomline. We were estimating topline to grow to Rs 13,100 crore the company has reported Rs 12500 crore. We were not expecting such a margin squeeze, we were expecting margins to be around 8.8-8.9 percent, but 8.5 percent is quite low. Order book is the only good part in this result otherwise the results are quite poor.
Q: EBITDA has actually fallen from Rs 1087 crore to Rs 1071 crore, so, flat EBITDA, no growth at all at the EBITDA level. Do you think the stock now gets a fairly serious mark down? Would you have to completely revisit your full year numbers? Bhanushali: The management was guiding at EBITDA margins of 10.5 percent for the year, but with the first quarter reporting 8.5 percent there would be further down cuts in our estimates largely due to the margin front. We believe execution wise on the topline the company won't disappoint much as it has strong order book, but margins is where most of the concerns are and most of the players in the street would reduce their estimates going forward. Q: What are your thoughts on L&T numbers? Sharma: The key disappointment is mainly on the revenue front. We were expecting a 12 percent kind of growth year-on-year and it has come in at 5 percent. So, some kind of pressure was always expected in margins given that exports are now increasing in terms of revenues. But, revenue growth has been a disappointment. Management had guided for 15 percent kind of growth for the full year, which leaves them with a higher asking rate for the coming nine months. On the plus side, order inflows have been fairly okay. So, Rs 25,000 crore of inflows in this environment is creditable. Q: What is the asking rate for the next nine months? Sharma: Around 17-18 percent kind of revenue growth for the next nine months is suggested given the 5 percent they have done this quarter. Q: Given the disappointment on the revenue front is there a case for a valuation de-rating as well? By how much would you lower your earnings per share (EPS)? Sharma: This being the first quarter of the year we won’t be changing our revenue estimates much. We will wait for the management guidance to come in. But we will like to see, before we bring in any kind of earning downgrades. Q: Your synopsis in terms of L&T’s  numbers and what was the key disappointment according to you? A: There were two key disappointments. Firstly, sales, we had estimated around 15 percent growth, but that came in around 5 percent. Second is on the margins, where street was 9.5 percent, we were slightly conservative around 9 percent. L&T has delivered around 8.5 percent. So, these are the two key disappointments from the results. Q: Would you scale down your target price, your earnings per share (EPS) estimates post what you heard from the management whose body language was quite cautious this time around and post the numbers? A: We have an analyst concall today evening, although management has indicated that they will not be revising their FY14 guidance on three parameters which are sales, margin and order inflow. But we will have to work on maybe slightly more details as to what are the key reasons for lower execution in sales and can that pick up in second half of this year. This being engineering, procurement and construction (EPC) company, there would be a bit of lumpiness. So those things need to be factored in and we will take a bit of time before doing that.

Q: A word on the segment performance that you saw this quarter from L&T especially referring to power as well as hydrocarbon and the minerals segment? A: Power has been a weak sector for all. For example, Bharat Heavy Electricals (BHEL), has done pretty bad and power for L&T also has been down year-on-year 40 percent, and same goes for metallurgical part and therefore, power remains a key concern across the sector. In the past one-two years L&T has been a major gainer in terms of amount of orders won in the power sector. So, there could be a bit of sluggishness on the power sector going forward as well.