Larsen and Toubro Ltd’s (L&T) shares had been underperforming the market since July last year, mainly because of concerns about its slowing execution rate of projects. Even though the company’s order book was strong, revenue growth was flat in the first three quarters of fiscal 2009-10. When the company announced results for the third quarter ended December 2009, revenue was significantly below Street estimates and its shares corrected by 6.8%.
The company’s March quarter results have come as an extremely pleasant surprise. Operating revenue grew by 28% to Rs13,585 crore, taking the revenue growth for the whole year to 9.1%. In the first nine months of the year, revenue had risen by just 0.5%, because of a delay in the financial closure of certain projects. In a post-results presentation made to analysts, the company said that the execution environment improved in the March quarter.
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According to an analyst with an institutional brokerage, the company should be able to sustain the growth in revenue in the coming quarters as well. Operating profit jumped 38% in the March quarter, lifting the annual growth in operating profit to 22.8%, from just 13.4% in the first nine months. The company has come back strongly and made up for the lost ground in the first three quarters.
What’s more, fresh order inflows soared by 90.5% to Rs23,843 crore in the March quarter, resulting in a growth of 35% in order inflows for the whole year. The company had started the year with a 20% year-on-year drop in order inflows in the June quarter. And although order inflows had picked up strength in the following two quarters, hardly anyone expected the company to end the year with a 35% growth in fresh orders.
The company had announced project wins worth Rs14,086 crore in the quarter ended March, according to data collated by IIFL Cap. The brokerage also pointed out in a report dated 1 April that the quarterly run rate of orders that are not announced is roughly Rs4,000-4,500 crore. Based on this, the company was expected to announce order inflows of around Rs18,500 crore. The reported order inflow of Rs23,843 crore is way higher than estimates.
The company’s consolidated financials were also impressive, with operating profit growing by 28% on the back of a 9% growth in revenues. In this backdrop, it’s no wonder L&T shares rose by 5.6% in a weak market on Monday. At current prices, the stock trades at 25.6 times consolidated earnings for FY10, and if the company should see a continued improvement in execution, the stock may well start outperforming the market.
Graphic by Paras Jain/Mint