Labour issues may impact 60-70 per cent execution in Q1 and 30-40 per cent in Q2, say analysts. Any delay in projects will lead to cost over-run.
With just 40 per cent of the required labour available, muted flow of new orders, and payment terms continuing to deteriorate, FY21 will be challenging, says HSBC. L&T is in discussions with vendors and customers to optimise the cost over-run due to the lockdown, say analysts.
Consequently, working capital challenges have emerged. Net working capital was a key concern in Q4, and has risen to 23.7 per cent of sales (YoY increase of 570 bps) — the highest since December 2015 — says Emkay.
Executives said on Friday that the higher ratio was because of support extended to vendors. In addition, “…terms of trade with all our contracts are increasingly become interest-linked when it comes to customer advances. In earlier days, customer advances used to be interest-free; I guess the liquidity squeeze is making people count their pennies. Some of those interest rates are higher than what L&T borrows (at). Therefore, L&T takes contracts without customer advance in case the rate is unreasonable,” said Shankar Raman, whole-time director and CFO.
In a June 8 IIFL note, analysts Renu Baid and Riya Mehta wrote: “Management expects non-availability of funds to give rise to back-ended payment conditions on new orders, incremental retention, or higher deposits. Net working capital requirements for EPC (engineering, procurement and construction) projects have increased in the years and will likely remain at elevated levels of 20 per cent plus sales.”
While the management — in a call with analysts on Saturday — said it was confident there would be no further deterioration in working capital ratios, analysts nevertheless expect some pressure.
L&T’s strong balance sheet, along with Rs 14,000 crore in proceeds from sale of its automation division to Schneider — places it on better ground vis-a-vis smaller peers. It is therefore likely to gain in terms of ability to bid and win new orders.
Further, its services businesses (IT, finance) will support consolidated performance.
Thus, analysts such as Umesh Raut of YES Securities, feel L&T will face near-term headwinds on new orders and execution, but long-term outlook remains strong.