Infrastructure giant Larsen & Toubro did not revise its order inflow and revenue guidance for the financial year 2023-24, despite witnessing strong order inflow in the first half of the financial year.
"It's never a good idea to shift goalposts... As a company, we do not think it is appropriate for us to keep changing the guidance as it confuses the business," the company's chief financial officer R Shankar Raman said.
Raman added that by looking at the strong momentum of order inflow witnessed during the first half of FY24, it is likely that L&T will surpass its guidance for order inflow and revenue for FY24.
"I can assure you is that looking at the way we are placed at the end of H1, both in terms of order intake and revenue, we are expected to outperform our guidance for FY24," Raman said while speaking at the post-earnings media conference call on October 31.
At the start of 2023-24, L&T's management had said that they expect the engineering major's revenue to grow at 12-15 percent and order intake growth at 10-12 percent in the current financial year.
Analysts had expected that the conglomerate would increase its revenue and order inflow guidance upwards for the rest of the fiscal year.
In April-September 2023-24, L&T saw an order inflow of Rs 154,672 crore which is 65 percent higher when compared to last year when the company had an order inflow of Rs 93,720 crore.
Raman added that L&T is treating FY24 as a nine-month-long year as domestic order inflows are likely to be impacted due to the upcoming general election in India between April and May 2024.
"We will have to be wary of a slowdown in order inflow due to the upcoming general election and plans of the subsequent government that may take over," Raman said.
He also said that order inflow in the company's Hi-Tech Manufacturing segment has been slow in the first half of FY24 due to the delays in the government awarding defence contracts.
"Going forward we expect the government to aggressively come out with defence orders which will help order inflow of our Hi-Tech Manufacturing segment," Raman said.
He also said that so far L&T does not expect the ongoing Israel-Hamas war to impact the company's international order inflow.
"The war in the Middle East is unfortunate but most of our orders are in Saudi Arabia, which has so far steered away from any involvement in the war. It is unlikely that Israel-Hamas have any adverse impact but we will continue to watch it," Raman said.
Operating Margins and Market Expectations
On October 31, L&T reported its financial result for the second quarter of 2023-24 where it exceeded analysts' expectations on the top line and bottom line.
Analysts expected net profit to grow to Rs 2,721 crore, while revenues were expected to rise 17 percent to Rs 50,093 crore in the three months ended September.
Larsen & Toubro (L&T)'s net profit during the second quarter of fiscal year 2023-24 climbed 45 percent year-on-year to Rs 3,223 crore, and the company reported a 19 percent rise in consolidated revenue for Q2FY24 to Rs 51,024 crore.
The company also exceeded the forecast for its Earnings before interest, tax, depreciation, and amortization (EBITDA) margin, as it reported an EBITDA margin of 11 percent, as against expectations of 10.5 percent.
However, the company's EBITDA margin for Q2FY24 fell 40 basis points when compared to the same period last year due to the impact of orders won at aggressive prices in the post-COVID-19, post-Russia-Ukraine (conflict) period in 2022-23.
Raman added that L&T expects its operating margin to start improving from October to December as orders won at aggressive prices in 2022-23 will complete execution and new orders start being carried out.
At the end of June, around 35-40 percent of L&T's then order book of Rs 3,01,159 crore from the infrastructure projects segment was made up of orders that were won at aggressive prices.
L&T has also broken its five-quarter streak of seeing a fall in operating margins in its infrastructure projects segment, as the operating margin of the segment rose to 5.4 percent in Q2FY24 when compared to 5.1 percent in Q1FY24.
When compared on-year, the operating margin of its infrastructure projects segment fell 120 basis points in Q2FY24.
Divestment
Raman added that there has not been any development in the divestment plans of L&T for now.
He added that L&T has availed Rs 900 crore of the Hyderabad metro soft loan approved by the Andhra Pradesh government and has used it to repay the debt of the project.
He added that the daily ridership of Hyderabad Metro has risen to a peak of around 5.5 lakh passengers in the quarter ended September 2023 from 5 lakh daily passengers in the previous quarter.
Semi-conductors
Larsen & Toubro is also foraying into fabless semiconductor chip design by setting up a subsidiary, Raman said.
The company’s board has approved the incorporation of a wholly owned subsidiary to engage in the business of fabless semiconductor chip design and product ownership with an investment of up to Rs 830 crore.
“We will get into design for fabless semiconductor chips. We have decided to stay at the design end because it can be patented and will be most valuable,” Raman said.
He said that the company’s strategy is to focus on the “low investment” part of the supply chain. It does not plan to get into manufacturing given how competitive global manufacturers, especially those in China, are.
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