Margin disappointment was led by provisioning under Ind-AS, one-time shipping write down, and close out cost for hydrocarbon project
Larsen & Toubro’s (L&T) Q1 FY17 consolidated performance was substantially below expectations. Revenues of Rs 219 bn (+9% y-o-y) were in line with our estimates of Rs 223 bn. Ebitda at Rs 19 bn (+16.1% y-o-y) was meaningfully below our estimate of Rs 24 bn, driven by provisions under Ind-AS, write-down in the shipbuilding division and close out costs incurred in the hydrocarbon segment. However, adjusted for the same, reported Ebitda was in line with our estimates. Reported PAT at Rs 6.1 bn was below our estimate of R8.1 bn.
Margin disappointment led by provisioning and one-time write-downs: As discussed earlier, Ebitda missed our estimate significantly, primarily due to (i) incremental provisioning of Rs 2.5 bn during the quarter under the newly implemented Ind-AS for expected credit loss (Rs 1.5 bn) and employee performance-linked incentives (Rs 1 bn); (ii) Inventory write-down in shipbuilding (Rs 1 bn); and (iii) close out cost for the hydrocarbon project in the Middle East. Reported margins at 8.7% were 210bp below our estimate of 10.8%.
Order intake below our estimate: In Q1FY17, consolidated intake stood at Rs 297 bn (+14% y-o-y), below our estimates of Rs 350 bn. Unannounced orders were at Rs 48 bn (16% of total order intake), excluding the services business and IDPL. Order inflow was primarily driven by finalisation of large orders in the Heavy Civil Infra, Water (Telangana barrage order) and Hydrocarbons (Hasbah project from Saudi Aramco) segments.
Maintains guidance for FY17: L&T has maintained guidance on orders revenue and margins for FY17: order intake is guided to be up 15% y-o-y and Ebidta margins are being guided to improve 50bp y-o-y to 10.0% (Ind-AS). Revenue growth is guided at 12-15%.
Maintaining Buy; cutting estimates and TP: We cut our estimates for consolidated earnings for FY17/FY18 by 6% /7% to factor in ECL-related provisions. We maintain Buy and pare our SOTP-based TP to Rs 1,660.
Q1FY17 operational performance below estimates
Consolidated E&C sales grew 12% y-o-y with international up 17% y-o-y while domestic sales were up 7% y-o-y. Infrastructure segment witnessed a growth of 9% y-o-y driven by 20% revenue growth in international revenue. Key projects in Middle East are on track and have not faced delays. Ebidta at R19.1 bn was below expectation on account of (i) Incremental provisioning of Rs 2.5 bn under the newly implemented IND-AS for expected credit loss (Rs 1.5 bn) and employee performance linked incentives (R1 bn), (ii) Inventory write down in shipbuilding (R1 bn) and (iii) Close out cost for hydrocarbon project in Middle East. Previously employee performance linked incentives were provided in Q2/Q3 but now will be accrued throughout the year.
Management has guided for 50bp improvement in operating profit margin to 10% in FY17 (under IND AS). Management indicated that implementation of IND AS has led to 50bps operating margins impact (10% vs. 10.5% under Indian GAAP) and another 50bps on corporate overheads being included. PAT at R6.1 bn (+45.5% y-o-y) in Q1FY17 vs. our estimate of R8.1 bn. The miss at the Ebidta percolated to the PAT level.
Consolidated E&C reports robust performance led by pick up in execution of the Infrastructure and power projects: Consolidated E&C sales growth at 12% in Q1FY17 was on account of the strong growth in the international (+17% y-o-y) as well as strong execution in the domestic market (+8% y-o-y). Within the E&C segment, Infrastructure revenues were up 9% as international segment registered 20% jump, whereas domestic Infra sales registered muted growth of 4%. Revenue growth was driven by execution of orders in the civil heavy infrastructure, transportation infrastructure, power transmission and distribution and water & effluent treatment business. International execution picked up as key projects like Riyadh and Doha Metro witnessed smooth execution. International revenue contributed 33% of the infrastructure revenue.
* Power segment sales jumped 59% y-o-y to Rs 17.2 bn on strong execution in both domestic and overseas projects won over the past year (Malwa Chabra and Bangladesh based gas power plants) Overseas revenue contributed 20% of the total power segment sales.
* Hydrocarbon sales stood flat at Rs 21.3 bn on account of the weak order book available for execution. International revenue contributed 51% of the overall hydrocarbon segment sales.
* Services business (IT&TS, Financial Services) continued to witness robust growth. IT &TS sales at Rs 23.5 bn (+15% y-o-y) saw robust growth across its end markets (Insurance, Auto and Aero, Transportation and industrial products sector). International revenue constituted 94% of the total customer revenue. Financial services sales were at Rs 20.9 bn (+17% y-o-y) as L&T benefitted from its continued focus on the B2C segment, Rural and wholesale finance business.
* Developmental projects sales at Rs 11.5 bn (+17% y-o-y) saw strong growth due to (i) Nabha Power operating at 90% PLF, (ii) revenue booking by Hyderabad Metro on account of construction orders awarded.
* Others segment sales at Rs 16.2 bn declined 16% y-o-y led by weak industrial demand and low capacity utilisation levels, decline in realty and shipbuilding sales.