L&T Q2 Preview: Lower operating profit, margins, muted ordering to dent earnings

A slowdown in order inflows, delays in the completion of mega and ultra-mega projects, a sharp rise in commodity prices, increase in working capital, and increased competition are a few downside risks for L&T.

India’s largest engineering, procurement, and construction (EPC) company Larsen & Toubro (L&T) is expected to report subdued earnings on October 30 for the quarter ended September 30, 2024. The results are likely to be impacted by lower operating profit and operating margin.

According to a Moneycontrol poll, L&T's net profit is expected to remain flat year-on-year at around Rs 3,182 crore compared to Rs 3,222 crore reported in the year-ago period. Revenue is pegged to grow 12 percent YoY to Rs 57,303 crore, up from Rs 51,024 crore reported in the year-ago period.

The most optimistic estimate by B&K Securities sees L&T's net profit rising 4 percent year-on-year and revenue jumping around 15 percent YoY. But the most pessimistic projection by HDFC Securities suggests that net profit might slip 13 percent YoY but revenue may rise 8 percent.

What factors are driving the earnings?

While government capex/initiatives and ME hydrocarbon ordering shows strong momentum, private capex is yet to show its best, noted Nuvama. FY26 strategic plan for L&T is to focus on making subsidiaries self-sustainable, strong presence into green energy (hydrogen, battery storage etc.) and non-core exits, it said.

"With robust order inflow growth, execution completion of legacy projects, refinancing of Hyderabad metro etc., L&T's margins may see a ramp-up, albeit at a slower pace," the brokerage added.

Core revenue growth: Strong on-year growth in core revenue is expected as domestic execution picks up, with workforce levels stabilizing post-elections and continued project execution in the Middle East, especially in energy.

Order Book: A strong order book is likely to sustain revenue growth along with a revival in domestic orders inflows after the state elections.

Margins: Despite an expected decline in order inflows due to a high base from last year, a slight recovery in core infrastructure margins is anticipated, potentially contributing to overall earnings growth as cost efficiencies and project execution improve across key sectors.

Working capital and margins: Net working capital levels are expected to remain around 15 percent of sales. Meanwhile, modest sales growth and flat margins are expected as the company completes its legacy orders.

What to look out for in the quarterly show?

• The company’s projections on domestic order growth and capex plans in the Middle East will be eyed, as these are expected to be key revenue drivers.
• Any revisions or confirmations of the FY25 guidance, especially regarding revenue and order inflow, will be watched.
• Insights on the reported labor shortage and its impact on project timelines and costs will provide context for current execution challenges.
• Updates on the pace of project execution in Saudi Arabia and overall pipeline trends in the GCC region will be critical.
• Focus will be on the domestic order pipeline, margin performance, and working capital cycle, as these factors directly impact profitability and cash flow stability.

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