India's construction and engineering company Larsen &Toubro foresees some headwinds - overcapacity in India's domestic markets, and overseas markets favoring their own local construction and engineering companies to boost job growth.
L&T is consequently expecting its growth to be muted: in January it cut its revenue and order-inflow guidance to 10% each, from 15% earlier for the financial year ending 31 March, due to what is said was delays in project clearances and order payments. Amid weakening markets, L&T is instead betting on infrastructure and defence projects for growth.
Sources of red in the balance sheet: The company is incurring around Rs 6 billion of losses annually from its road assets, and wants to sell them off. It has already begun talks with potential buyers. The company's manufacturing asset Kattupalli yard is seeing Rs. 4 billion of losses per year, a number that will reduce only with new defence orders.
The key metrics for Larsen & Toubro are still strong: Stable revenue (+3.54% YoY in Q3), Improving operating margin (9.6% in Q3) but weaker net profit growth (-6.02% YoY in Q3). Demonetization impact in toll collections and real estate hit company profits for the quarter. The company recently announced new orders in March worth Rs. 2,170 crore.
What is in L&T's favor? The company's track record in engineering and construction makes it the top choice for both public and private infrastructure projects - consequently its revenue growth will largely track GDP and growth optimism. Both of these after the UP elections - which investors see as validation of the government's pro-reform agenda - look bullish. The government's rural electrification program had slowed due to state elections, and should now resume. The company has also said that its order pipeline is worth Rs. 30,000 crore, and expects to land 90% of these orders before the end of March.