Engineering and construction firm Larsen and Toubro Ltd (L&T) sprang a pleasant surprise when it said on Thursday that it expects orders of between Rs65,000 crore and Rs70,000 crore this fiscal year.
This is encouraging, considering that the company booked orders worth Rs52,000 in the fiscal year to 31 March, and Rs42,000 crore in the preceding fiscal year. That the announcement comes in the middle of a challenging economic environment indicates that there are areas of activity that continue to remain robust.
What’s more, analysts expect that the quality of orders will be much better compared with the previous year, thanks to a lower dependence on realty. The bulk is expected from government-owned firms, especially in hydrocarbon, power equipment and railways.
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An analyst with a domestic institutional broker said that state-run Oil and Natural Gas Corp. Ltd released just one major order in 2008-09 and is expected to order many more this fiscal year. Besides, government companies NTPC Ltd and Damodar Valley Corp. are soon expected to invite bids for 11 units of 660MW power plants. L&T’s joint venture with Mitsubishi Heavy Industries Ltd has shown interest in these bids and is expected to garner a few of these orders. This, too, will add to L&T’s order book this year. However, these orders will result in revenues and profit only from fiscal 2011 onwards.
It’s important to note that in a recent research note, Citigroup Research had said it expects orders to grow by 0-5% in fiscal 2010. L&T, however, expects a growth of 25-35%.
Even if the company’s ambitious target is discounted a bit, it does look like inflows will be considerably higher than the fiscal year gone by.
Earlier this week, the overhang on the stock from the bid for Satyam Computer Services Ltd also lifted, adding to investor cheer. Citigroup notes that the company would now be able to use surplus cash to repay debt, and as a result, interest cost would come down.
Of course, the company would still take a hit on its Rs700 crore investment in Satyam, which was made at an average price of about Rs80 per share. Satyam shares now trade at Rs47.
Most L&T investors are interested in the core engineering and construction business, and seem to be willing to overlook the loss in the Satyam trade. From their point of view, it would have been worse if the company had won the race for Satyam.
Meanwhile, thanks to the improvement in market sentiment and the good outlook on order inflows, L&T shares have risen by about 50% from the lows in March.
Graphics by Ahmed Raza Khan / Mint
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