Engineering company Larsen and Toubro Ltd (L&T) reported decent results under the current circumstances, with profit before tax and exceptionals rising by 12.75% in the June quarter. The company’s net profit (adjusted for exceptionals) was marginally ahead of the consensus profit estimate of analysts polled by Bloomberg. But, as the company says, a relatively larger proportion of its projects completed the threshold limit for margin recognition, so one must not read too much into the quarterly results.
The markets, too, were more interested in the company’s order inflows during the quarter rather than the rise in quarterly revenue and profit. The news that fresh order inflows fell by 20% year-on-year and may fall at about the same rate in the September quarter as well came as a negative surprise. In the current situation, it’s commendable that the company has managed to book fresh orders of Rs9,500 crore, but the problem lies in the expectations of the markets.
In April, the company had said that order inflows would grow by 25-35% in the current fiscal year. Although the company missed its order inflow guidance in the previous year, the markets seem to be going with the assumption that the company would meet its guidance this time around. If order inflows drop 20% in the September quarter as well, fresh order booking would have to grow between 70% and 90% in the second half of the year to meet the annual guidance.
L&T’s shares have risen by 145% from its lows in March, on the back of high expectations of infrastructure spending in the country. Sandeep Bhatnagar / Mint
According to the company, it is still confident of meeting its target as there are some large orders in the pipeline and hence the second half could see a spike. It’s expecting a pickup in order inflow from public sector companies such as Oil and Natural Gas Corp. Ltd and NTPC Ltd. Besides, private sector power companies could also place large orders. The government’s thrust on infrastructure is also expected to help.
Still, achieving the guidance now looks like a monumental task, and the markets should be worried, especially given the sharp rise in L&T’s shares in the past few months. In absolute terms, the company would need new order booking ranging between Rs23,000 crore and Rs25,500 crore each in the December and March quarters. Even during the boom, quarterly order inflow was around Rs12,000-13,000 crore. Besides, the international business segment has performed weaker than expected, dragged down by the loss of the Muscat airport contract to a competitor last quarter.
Meanwhile, L&T’s shares have risen by 145% from its lows in March, on the back of high expectations of infrastructure spending in the country. The Nifty has risen by 64% during the same period, which essentially means that there has been a huge expansion in L&T’s valuation premium over the broad market. Adjusted for the valuation of its subsidiaries, L&T trades at 24 times expected earnings for the current year, based on Nomura Research’s estimates. As evidenced by the 3.6% fall in L&T’s shares on Thursday, the reality check on order inflows should cause a correction in valuations.
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