L&T Shares Plummet To 2-Month Low Amid Margin Guidance Cut; CFO Plans To Increase Workforce Till FY26

Larsen & Toubro (L&T), one of India's leading civil construction companies, witnessed a significant dip in its shares, hitting a low not seen in over two months. On Thursday, the stock plummeted by 6% on the National Stock Exchange (NSE), reaching Rs 3,290, following the company's announcement of a slashed margin guidance. This downward trend was attributed to several factors including an increased proportion of fixed-price contracts in its order book, supply chain challenges, and prevailing global political uncertainties.

The decline marks a notable shift from the company's recent high, as L&T shares have slid by 15% since touching a record high of Rs 3,859.95 on April 2, 2024. As of 12:40 pm on the National Stock Exchange (NSE), the shares were trading at Rs 3,305.30, reflecting a drop of more than 5%. Despite this setback, L&T has shown healthy growth over the past year, with its stock surging by nearly 50%.

Addressing concerns over the company's performance and future prospects, R Shankar Raman, L&T's Chief Financial Officer, revealed plans for continued expansion. In the fiscal year 2023-24, L&T bolstered its workforce by 10%, adding approximately 8,000 employees. Raman affirmed the company's commitment to further recruitment until 2025-26, citing the necessity to effectively manage its burgeoning order book, valued at Rs 475,809 crore as of March 31, 2024.

Despite experiencing a slowdown in international order inflows during the fourth quarter of 2023-24 and anticipating a similar trend in domestic orders for the first and second quarters of 2024-25, L&T remains undeterred. Raman emphasized the importance of strategic workforce augmentation to ensure the timely execution of existing projects and to fortify the company's footing for future endeavours.

"Since around 38% of L&T's order book is made up of orders from international clients, the company will continue expanding its international employee base," an official stated. The company's proactive stance towards international expansion underscores its focus on adaptability and resilience.

Larsen & Toubro faces a double-edged challenge amidst expansion plans on earnings while navigating through the Reserve Bank of India's (RBI) proposed stringent lending norms. Shankar Raman, the Chief Financial Officer (CFO) of L&T, shed light on these issues, providing insights into the company's financial performance and the evolving regulatory landscape.

Raman revealed that L&T's push to increase its workforce has exerted pressure on its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin for the fiscal year 2023-24. The recruitment drive, particularly the hiring of foreign employees, incurred premiums, denting the company's profitability.

In addition to internal challenges, L&T must contend with the regulatory headwinds stemming from the RBI's draft proposing stricter norms for lending, especially concerning under-construction infrastructure projects. Raman acknowledged the RBI's emphasis on responsible investing, citing the imperative to channel funding towards viable projects amidst limited financial resources in India.

"The regulators and the central bank are aligned in ensuring prudent allocation of capital, prioritizing investments in projects with sustainable returns," remarked Raman, underscoring the collaborative effort to mitigate risks and foster financial stability.

The RBI's draft guidelines, announced on May 3, advocate heightened vigilance and proactive measures by lenders to mitigate risks associated with infrastructure financing. Notably, the proposed norms mandate higher provisions for under-construction projects, reflecting lessons learned from past defaults that strained the banking system.

Against the backdrop of India's renewed push for infrastructure development to stimulate economic growth, the RBI seeks to instil discipline and resilience in the banking sector. The proposed provision of 5% for projects in the construction phase demonstrates the regulator's emphasis on risk management and prudent lending practices.

Moreover, the RBI advocates ongoing monitoring of project stress and prompt initiation of resolution plans to preempt potential defaults, safeguarding the stability of the financial ecosystem. The requirement for consortium lenders to maintain a minimum exposure of 10% underscores the collective responsibility in project financing, ensuring aligned interests and prudent risk-sharing.

Despite these regulatory challenges, L&T continues to demonstrate resilience and financial strength. On May 8, the company reported a consolidated net profit of Rs 4,396 crore for the quarter ended March 2024, marking a 10% increase compared to the same period last year. Its revenue from operations witnessed robust growth, climbing by 15% to Rs 67,079 crore, with international revenues constituting 45% of the total.