L&T Q1 net profit falls 70%; strong cash flow, better than expected results keep brokerages bullish

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Published: July 24, 2020 1:42 PM

Hit by the coronavirus pandemic and the resultant lockdown, Larsen & Toubro (L&T) reported a 69% on-year drop in consolidated net profit to Rs 536 crore.

Although there have been delays in orders, L&T said that ordering activity has continued despite pandemic concerns.

Hit by the coronavirus pandemic and the resultant lockdown, Larsen & Toubro (L&T) reported a 69% on-year drop in consolidated net profit to Rs 536 crore. However, this was above street estimates which were not expecting the strong core performance in the engineering and construction segment. Although the stock slipped close to 2% during Friday’s trading session, brokerage firms see L&T as a stock standing strong in these challenging times while keeping its net cash position intact. L&T share price was down 1.8% on Friday trading at Rs 900 per share on the NSE.

Total income in the April-June quarter Rs 22,037 crore against Rs 30,270 crore in the same period last year. Expenses were down to Rs 21,367 crore, from Rs 27,615 crore from a year ago. Tax expenses were also down significantly to Rs 256 crore. “Losses in L&T Finance Holdings offset the strong show in the IT business,” said brokerage and research firm Motilal Oswal in a note. Labour availability also improved during the quarter which benefited the company. “While challenges related to order inflows, execution, and working capital cannot be completely ruled out yet, L&T has demonstrated a good show in mitigating such risks thus far,” they added.

Although there have been delays in orders, L&T said that ordering activity has continued despite pandemic concerns. Execution, however, does remain a challenge for the firm whilst abiding by the social distancing guidelines. L&T’s net working capital has jumped to 26.8% of sales, nudged by lower sales. Even though results have been better than expected, Emkay Global in a note said that it does not think L&T is out of the woods just yet. “Order inflows, as expected, have been tepid, while overall order prospects are down from usual this year,” the note said. Despite the headwinds, L&T is still expected to emerge stronger having the financial, technical, and managerial capability to sustain and even gain market share, they added.

In the last quarter, L&T managed to control liquidity despite the macros economic challenges. 95% of the 950 operational project sites of L&T are currently active. Improving manpower strength to 190,000 from lows of 70,000 during the lockdown, productivity is expected to remain impacted due to adherence to social distancing norms. In the near term, ICICI Securities believes that L&T’s dependence on large infrastructure projects can cap near-term growth in order intake. 

Motilal Oswal has trimmed its target price for L&T to Rs 1,080 per share, which still translates to an 18% upside from current levels. Emkay Global on the other hand sees a 21% upside with a target price of Rs 1,116 per share as it expects L&T to deliver a 9.6%/10.8% revenue/PAT CAGR over FY20-23. ICICI Securities has brought the target price down a notch to Rs 1,027 factoring in depressed earnings in this fiscal year and near-term headwinds.

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