L&T sees order inflows growing 15% in FY17

L&T posted lower-than-estimated first quarter numbers with a 46 percent rise in consolidated profit to Rs 609.6 crore. Revenues increased 9.1 percent to Rs 21,874 crore. The first two quarters of the current fiscal will be weak, R Shankar Raman, CFO of L&T said. Growth will be visible in second half of FY17, he added.The company expects order inflows to grow by 15 percent of which 30 percent will be international orders. Raman said that 12-15 percent growth on restated revenue of near Rs 3.5 crore is expected in the current fiscal. On changes in accounting standards, Raman said that provisions have been made mostly on non-cash items and will not impact cash flows much. Below is the verbatim transcript of R Shankar Raman's interview to Anisha Jain and Prashant Nair on CNBC-TV18.Prashant: What is your thought on the accounting standard change?A: I thought the change in accounting standard is coming for quite some time now. There have been reports about the shift in the standards. We also had conference calls organise to educate people on the principles of transition, but as is normally the case whenever transition happens, there is an adjustment that is required. So, I think sales have to be reset and that’s what I think people are trying to do and to some extent, I think there has been misunderstanding of the quantum because the comparables they are not readily available. The comparable that we have put out was restricted to a quarter and the business that we run in quarter is not a great indicator of how the year is, so possibly the restricted data that was available lent itself to some misunderstanding, but it is a great opportunity for me to clarify some of those.Prashant: One issue is the provisioning, the ECL related provisioning, the inability to be able to predict that. People are very worried about that, how would you respond to that?A: I think it is a new rule that has come into play. The fact that there will be project receivables is a old story. We always use to make an assessment of the realisability of these receivables and make provision as and when, we find that they are not likely to be realised partially or fully, but going forward what the new accounting standards want us to do is to adopt like what banks do in terms of non-performance asset (NPA) provisioning, use a template which is time linked and run all receivables through those templates.For example if there are some receivables or a certain cut-off date let say 90 days, 180 days, 360 days whatever. The discretion is given to the company to set these cut-offs based on the businesses that they are in, but once you have this cut-off dates then receivable whether in our judgement is good or not good goes through this provisioning, so to an extent there is a non cash accounting charge that gets created, the whole idea is to smoothen the impact should receivable go bad.In project business generally they are time drawn, but never have I come across situation where we are to make big write off like banks do.Prashant: Any guidance that you can give me in terms of actual numbers in terms of provisions.A: I can relate to FY15-16 and maybe first quarter of FY16-17. FY15-16 we had to provide something like Rs 350 crore as additional provision we are using a template that is being now prescribed. When I closed FY15-16 and announced the results to the market this was not the rule. So we had in a sense understated the provision by the extent of Rs 350 crore and that is based on the consistent way in which we used to account for provision.If I were to use the current template to those situation the margins will deplete to the extent of this Rs 350 crore. If you really see if I take a step back and look at the earnings before interest, tax, depreciation and amortization (EBITDA) margins of the core engineering construction segment that we announced in FY16, we announced 10.8 percent and that if I restate based on the new accounting standard for FY15-16 will be something like 9.5 percent it will compress. There is a compression of about 130 basis points. Now this has 3 elements to it and it is important that we understand this element because some of it is recurring, some of it is not.For example all the corporate overhead that we incur in the earlier accounting standard segmental disclosure were not required to be adjusted against this segment income. They were to be kept as corporate overheads and observed accordingly. Mind you what I am speaking about does not make any change in the profit after tax (PAT) of the company overall. It is just that reallocation between segment and corporate.Anisha: One concern from the analyst and the street has from the Q1 numbers is the domestic infrastructure segment, now that has grown by a paltry 5 percent, the order inflows have actually declined on a year to year basis. With West Asia slowdown the strategy was to start looking back to the domestic operations. Now in that context what kind of growth can we expect from the domestic business of the company?A: We do expect overall a 15 percent growth in our order inflow as we speak. We had about Rs 138,000 crore of orders that we picked up in the prior year, for the entire year and we expect that to be excess of Rs 150,000 crore in the current year.The share of international is expected to be about 30 percent and this is not lending itself to quarterly extrapolation because of the nature of the orders and the lumpiness inherent in this business. So we do expect possibly about close to Rs 90,000 to Rs 100,000 crore coming in from domestic market.In the first quarter we have picked up about Rs 15,000 crore of that, so in one sense about 15-16 percent of what we need to do in the domestic market, we have done in Q1. We generally as the company have been more prone for the Q3-Q4, more for Q4 and that’s how the domestic orders get placed and we are helpless in that situation. We would like the order to come in more evenly, but they don’t seem to.So if I look on historical trend and look at the pipeline that we have and the possibilities of we winning the orders, retaining the strike rate we do think a 15-16 percent accretion in the first quarter sets itself on the road to reach that Rs 100,000 crore.Anisha: That’s about the order inflows which hasn’t been a big problem, but what about execution. So the revenue has been up 9 percent, the guidance is for 12-15 percent growth over the year, now this stretch the run rate higher for the coming quarters, would the meeting revenue guidance be a challenge?A: No, I think we did that assessment when we announced our quarterly results last week. Our businesses do confirm that the gradient is scalable, that the revenues will pick up, the first two quarters will be slow historically that has also been the case and much of the construction work which happens outdoor during quarter 2 will have very poor progress. So, what gets ordered out, what gets done on the engineering side is what will add up to revenue, so the first quarter will be weak, but our plan of execution if you are able to stick to it we should be able to see improved revenue in quarter 3 and much improved revenue in quarter 4. So, based on that assessment we do think that 12-15 percent band on the restated revenue of FY16, FY16 we announced the revenue of Rs 103,000 crore that when I restate is something like 1 lakh crore.Prashant: Also is the third quarter and fourth quarter of last year financial year 16 the base is extremely small, so the second half of this year 17 should be spectacular, should be pretty good?A: Yes it should be good.Prashant: But the point my colleague was making is away from seasonality has Q1 been weak operationally in terms of execution.A: If I were to benchmark it to what our internal plans were, I think we are on the plan, we are on budget, we are not lagging behind, so that gives me some hope that the rest of the quarters the business will be able to stick on to the budget and they do 12-15 percent is there as we can see.