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Investors lukewarm to L&T’s order wins

Investors lukewarm to L&T’s order wins
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First Published: Wed, Jun 22 2011. 10 03 PM IST
Updated: Wed, Jun 22 2011. 10 03 PM IST
Larsen and Toubro Ltd (L&T) has announced that a unit in its construction division has received new orders worth Rs 4,100 crore since April. It also announced that a subsidiary company has signed a concession agreement worth Rs 2,600 crore with the National Highways Authority of India.
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Both these announcements came during market hours on Wednesday. Still, L&T’s stock hardly budged. By the end of the day’s trading session, it had risen by only 0.7% on the National Stock Exchange.
One could argue that the company’s shares were taking a breather after outperforming the market by around 14% in the past month or so. But over a longer horizon, say from the beginning of the year, returns have been slightly behind those of the broader markets.
L&T shares haven’t benefited much from the string of orders it has announced in the past few months. Normally, investors would have cheered orders of these sizes with much more enthusiasm. Besides, the recent order wins have come in the backdrop of a weak macroeconomic situation and high interest rates. In times such as these, order flow is typically sluggish.
One reason investors have been relatively lukewarm to the company’s order wins is that there are concerns about timely execution. Within the order wins worth Rs 4,100 crore announced on Wednesday, about half were for residential real estate projects. Given the precarious state of the real estate sector, analysts doubt whether these orders would be executed quickly, if at all.
The company had also announced a Rs 3,500 crore order for gas-based power plants last month. Again, with the current shortfall in gas, one wonders how fast this project would move.
While this is not to say that the projects L&T has announced in the past few months will never take off, it does appear that these projects will move rather slowly. As a result, it will be a while before they translate into revenue. As far as the outlook on order inflows is concerned, the recent order wins only reaffirm the company’s guidance of 15-20% growth in order inflows this year. There’s no case yet of a revision in the guidance estimates.
There’s not much reason to get excited about the prospects of the company. While it’s true that L&T is placed much better than its peers to tackle the current difficult phase, it is by no means insulated from the problems in the economy. The company’s shares will reflect this reality.
Graphic by Yogesh Kumar/Mint
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First Published: Wed, Jun 22 2011. 10 03 PM IST