Fitch Ratings has affirmed the ‘BBB+’ rating with a stable outlook on Larsen & Toubro Ltd after the rating agency emphasized the Company’s solid financial structure and appropriate financial flexibility. The above announcement by the rating agency on Tuesday reflects the strong market position of L&T as a premier global engineering and construction company with above-average profitability and solid revenue visibility.
Strong Market Position
The ratings exemplify L&T’s dominant market position in the global E&C sector. Above-average profitability and revenue visibility on a sustainable basis add to the credit ratings. Fitch Ratings commented that L&T’s robust and consistent margin track record is also supported by its diversified risk management strategies and execution capabilities.
It highlights the potential for diversification into more stable, high-margin IT and technical services businesses. This diversification would, therefore, insulate the Company’s ratings against the inherent risks of E&C.
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Prudent Financial Management
Fitch noted that a stable outlook had been assigned to L&T as leverage would likely remain comfortable over the long term. Confidence in L&T emanates from the fact that growth in terms of EBITDA will continue and that the Company has practised prudent financial management. Even with higher investments in development, the Company’s economic policies are likely to keep sustaining the strength of its credit profile.
The rating agency’s affirmation of the ‘BBB+’ rating for L&T is also based on the sound financial structure of the Company. Fitch said that the sound financial flexibility of L&T is an essential factor while dealing with the cyclical nature of the E&C industry. Credit rating agencies have viewed the ability to generate steady margins and manage risks positively.
High-Margin Business Diversification
Further, the other primary reason most credit rating agencies give strong credit ratings to L&T is its high-margin IT and technology services businesses, which L&T has successfully diversified into. It has encouraged the Company’s profit, offering it a stable income that would compensate for the whip-out in the E&C sector. Concerning this, Fitch Ratings indicated that L&T ‘s diversified business mix enables it to negate the risks arising from the cyclical E&C sector.
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Future Outlook and Growth Investments
In the future, Fitch Ratings will look out to L&T to maintain its growth and financial discipline well. This means the Company is expected to comfortably enjoy higher leverage, even while growth investments are made, under stable outlook conditions. Further improvement in credit profile, from EBITDA growth and financial discipline, should bode well for L&T over the years.
About the Author
Akshita Siddhapura is a Business Analytics student at SCMS-B, passionate about finance and research. She has a keen interest in financial analysis and strategic growth, showing a strong commitment to business and finance.
