May have to give incentives to bring labor back: L&T

Update on the Indian Equity Market:

On Tuesday, NIFTY ended down 120 pts (-1.2%) at 10,047 level amid see-saw trade as traders booked profit in recent gainers like banking shares. Lower opening of European shares also weighed on sentiments.
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Edited excerpts of an interview with Mr. SN Subrahmanyan, Managing Director, Chief Executive Officer, Larsen & Toubro’s L&T with CNBC TV-18 dated 9th June,2020:

• Construction engineering major Larsen & Toubro’s (L&T) Managing Director and CEO, SN Subrahmanyan, on June 8, said that he did not expect any major private investments in India over the next 1-1.5 years. It is maybe a tough statement to make, but that is the way he looks at it. Existing capital expenditure on projects that are already in play will move on, but he doesn’t see any fresh capital induction.
• The company announced a final dividend of Rs 8 per share of the face value of Rs 2 each.
• Mr Subrahmanyan said that the company had seen normalcy come back to some extent in the last three weeks i.e. from Mid-May-2020.
• He also informed that all the factories are back in operation. On the project size, L&T have currently about 950 odd sites and about 90 percent of the sites have started working.
• He, however, said during COVID they had kept around 1,60,000 laborers in labor camps which went down to 70,000 around the month of May-20 and currently the company has only 1,20,000 laborers compared to the 2,20,000 in the pre-COVID period.
• He stated that to get back to normal working L&T needs about 220 thousand laborers. L&T is working on bringing the laborers back to work and expects in another 15-30 days labor availability should be there and it should get back to some kind of normality.
• Normally the laborers go and come back to work 3-4 times during a year for Holi season, Kharif season, marriage season, and Diwali festival season. But this time the situation is different and might be difficult for L&T to bring back the laborers.
• L&T has an app where it has mapped down the names, addresses, phone number and other details of more than 2 mn laborers and are constantly messaging and trying to get in touch with the laborers to get them back.
• Normally Q2 is monsoon season which is relatively low for L&T but this time L&T has put in systems where it can double up the work to compensate the work lost at least partially.
• Mr Subrahmanyan said that fear psychosis and herd mentality had led to labor exodus and further the psychological pressure may hold the workers back. He further added that L&T might have to give some incentives to bring labor back.
• Talking about the impact of COVID-19 on the business, he further added that some billing has taken place in April-20 and May-20 but not to that extent. He expects some recovery in the month of Jun-20.
• He said that overall L&T have backlog of ₹ 15,000 crs of sales, so in the balance 9-10 months of the year L&T needs to catch that up and see how to make it up.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of L&T was ₹ 951/- as of 09-Jun-20. It traded at 18.3x/13.5x the consensus EPS estimate of ₹ 52.5/71.3 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 1160/- implies a PE multiple of 16.3x on FY22E EPS of ₹ 71.3/-.

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