Engineering and construction company, Larsen and Toubro Ltd, or L&T, has reported a jump of 90% in new order booking for its core engineering and construction division for the quarter ended September. Till recently,
that news alone would have sent the L&T stock soaring. On Wednesday, L&T shares fell by more than 11%, and one of the reasons was the discomfort with the high rate of new order booking. With liquidity tightening, clients are expected to go slow on order execution, besides which there are concerns about the quality of orders booked during a slowdown. Analysts are now saying it may be more prudent for the company to go slow with new orders.
There were other reasons the stock fell. In the beginning of the year, the company had told analysts that it expects profit margin to improve by 50-100 basis points for the year as a whole. It’s now saying that it would maintain margins at last year’s levels. The snug feeling earlier that 60-70% of the company’s order backlog was in contracts that have some sort of protection against cost inflation is under question. In the September quarter, operating margin fell by more than 100 basis points. L&T had managed to maintain margins in the June quarter.
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Another worry is the sharp increase in debt and interest costs. The company had said at the end of the last fiscal year that its debt stood at Rs3,500 crore. It told analysts during a conference call that its debt burden now stands at Rs4,800 crore. In the first half period, therefore, it has raised about Rs1,300 crore in debt. During this period, the company spent Rs800 crore in capital expenditure (capex) and generated cash profit (net profit plus depreciation) of Rs1,100 crore.
An analyst, who did not want to be named, said that at least some of the capex could have been funded from internal accruals, especially given the current tight liquidity situation and the high cost of borrowing.
Higher interest rates and tight liquidity will hit not only L&T’s funding, but also hurt its clients and project execution is expected to slow. Besides, margins will be under pressure because of a lack of pricing power. It’s no wonder then that the company’s shares have underperformed the market in this downturn.
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