CFO Shankar Raman: Investors should see L&T’s profitability holistically, instead of numbers
Financial investors worried about Larsen & Toubro’s guidance of 8.25 percent core earnings before interest, taxes, depreciation, and amortization (EBITDA) margin for the financial year 2024-25 should look at the company’s profitability in a holistic manner, rather than focus on certain parameters, the engineering major’s chief financial officer, R Shankar Raman, on May 10.
“When you see the context of profitability in a holistic manner, according to me, there is not so much to worry about in terms of company (L&T) going through a freefall in terms of profitability,” Shankar Raman told in an interview.
He was answering a question on the stock market being unhappy with the company’s guidance of core EBITDA margins staying in the 8.25 percent range in FY25, down from 8.6 percent in 2022-23.
At mid-day on May 10, the L&T stock was trading at Rs 3,267.70, falling 6 percent from the May 8 close of Rs 3,482.75.
Brokerages CLSA and Kotak also cut the target price on L&T due to weak guidance, risks due to elections, and uncertainty in West Asia.
Shankar Raman added that the fall in L&T’s stock was mostly due to investors’ focus on one element of value creation to the exclusion of others.
“When L&T earned 8.6 percent (core EBITDA) margins in our projects and manufacturing business. Our working capital intensity was much higher at almost 18 percent of revenue. When we are reporting a (core EBITDA) of 8.2 percent for FY 24, the working capital intensity is 12 percent – a very sharp decline from 18 percent. What has gone unnoticed is how much of the resources has the company deployed to earn the profits that it has done,” Raman said.
He added that L&T’s portfolio of international projects has also risen from around 22 percent of its order book earlier to around 40 percent of its orderbook, which has contributed to a slight decline in its core EBITDA margin
“If you adjust for the time value of profits, then the margin of 8.6 percent, compared to 8.2 percent will not look like a deflator but it will actually look a step better than the 8.6 percent that we reported last year,” Shankar Raman said.
L&T reported a rise of 10.3 percent in net profit at Rs 4,396 crore for Q4FY24. The multinational infrastructure conglomerate’s revenue from operations in the quarter rose 15 percent to Rs 67,078.7 crore.
The infrastructure conglomerate has become the sixth private firm from the non-financial sector to report a full-year revenue of at least Rs 2 lakh crore.
The company’s revenues for FY24 increased by 21 percent to Rs 2.21 lakh crore, aided by the execution of a large order book in the projects and manufacturing businesses.
However, many brokerages were disappointed with the margin guidance provided by L&T after declaring its Q4FY24 earnings.
Despite this, the order inflow guidance for FY25 is perceived as better than expected, standing at a projected 10 percent increase, compared to the anticipation of flat orders.
L&T’s net working capital (NWC) has seen a drastic decline from Rs 31,603 crore (24 percent NWC/Revenue) in FY20 to Rs 24,866 crore (12 percent) in FY24 and the infrastructure giant does not see it going beyond 20 percent in the near future.
Net working capital (NWC) is a measure of a company’s liquidity, operational efficiency, and short-term financial health.
In an analyst call after the Q4FY24 results, the L&T management said when the working capital hovered around 24-26 percent, they were concerned because the generated margins weren’t adequate for generating returns.
However, now they believe that the working capital has improved permanently from those levels. “Whether it stabilises at 12 percent or fluctuates within the range of 12 to 15 percent remains to be seen,” the management noted.
The management attributed the decline in working capital to the aggressive pursuit and successful collection of legacy outstanding debts.
Market benchmark Sensex nosedived by almost 546 points to 28,251.31, while Nifty broke below the 8,700-level in the opening trade Read more
At least four analysts who have coverage on Larsen & Toubro Ltd. (L&T) have cut their price targets for the Read more
