Margins to remain under pressure in next three quarters: L&T

The engineering and construction major said on Wednesday that its revenue rose 10% in the March quarter 58,335 crore from a year ago. However, operating margin for the quarter declined to 11.7% from 12.3% a year ago.

Raman attributed the decline in profit margins to orders secured in FY21 and FY22, which make up approx. L&T’s total order book is valued at Rs 2.31 trillion 4 trillion.

“Now, when we execute them currently, the cost of implementing the project is high because of the disruptions caused. As we complete these projects, it is only the new projects that will survive, and hopefully they will not have these pressures, which is why I am saying that I think the worst is behind us. We’ll likely see softer margins for two to three more quarters … After the fourth quarter, we’ll likely see margins return to normal as these projects go away and new projects that we won last year continue to contribute to revenue. Let’s start,” he said.

Margins will improve during the next financial year as the company seeks compensation from customers after completing these projects, he said.

“After completing these projects, we will go back to our clients seeking compensation as there is a provision for the same. Hence FY25 onwards, we may see better times for margins as compared to the current period,” he added.

After the results, L&T shares fell 5.29% 2,241 on BSE on Thursday, as the market is worried about margin erosion. The stock closed down 0.93% on Friday 2,220.90.

On the decline in share price, Raman said that the margin in the construction business is not linear.

“Look, I think we need to understand that margins in the EPC business are not linear. The markets get it wrong by saying that if the order book is growing and sales are growing, then the margins should grow. This project business I don’t need to be,” he said.

Raman indicated that private investment has started returning to the country, indicating that the country may be able to take the development forward.

“Part of them has already started, in my opinion, because in FY22. We had private sector share in projects and manufacturing business in the range of 26-28%. Now, it has already grown to 32% in FY23,” he said. Raman said L&T’s international business is mainly from the Middle East, where record investments are set to happen.

Can you believe Saudi Aramco is investing $50 billion? Now, $50 billion would mean at least $5 billion worth of opportunity for companies like ours. We have been in that field for close to 25 years and are one of India’s leading EPC contractors working in Saudi Arabia, for example. So, I think we’re quite confident that, at least over the next 2-3 years, the Middle East is a very productive market for us in terms of. We believe the mix of international to domestic will remain at one-third,” he predicted.